» Posted by Martin Weil on July 09, 2010

Fiscal consolidation should begin only after it is ascertained that funds NOT borrowed by the government will be borrowed and spent by the private sector.

That's Richard Koo, of Nomura Scurities, in a presentation to the Soros Institute reprinted here, arguing against government austerity measures until private sector credit demand resumes. Comparing our situation to that of Japan in the early 1990s, Koo states that with private savings increasing, the government must step in as the borrower of last resort in order to prevent a more debilitating drop in economic output. Koo concludes his convincing argument stating "it took 30 years to normalize interest rates after 1929." Of course, as with Japan, this would likely be accompanied by serious political repercussions.

» Posted by Martin Weil on June 28, 2010

The old pay system (era of John Whitehead): you work at an investment bank for 30 years, have a reasonable draw and cash bonus, build up stock in the firm as most of your bonus, and when you decide to retire you request of the partners their permission to go limited. If they assent, you get to withdraw your money over five years, all the while continuing to expose the balance to the risks of the enterprise.

he new pay system post-Donald Lufkin Jenrette's original I.P.O.: you're a young 29-year-old punk playing with OPM (Other People's Money), taking huge risks for which you get huge bonuses, while the outsiders shoulder the losses on your bets. You make all the money you'll ever need in three years, stay around 15 years to pile up five times as much as you need, and then you retire with your cash hoard, buy a winery in Napa/Sonoma or a huge farm in Connecticut, living above the fray for the rest of your life.

Which system, do you think, makes people consider the downside of their actions?

NY Times business correspondent Floyd Norris pretty much nails the problem.

» Posted by Martin Weil on May 22, 2010

Act two is trickier. Objectively, economic conditions might be improving, but perceptions are everything and a breathing space gives room for a dangerously alienated public to take stock of the brutal interruption of their rising expectations

Simon Schama, writing in the Financial Times (registration required), presents a very foreboding note on the potential for major social upheaval in the aftermath of a financial crisis of this magnitude.

Should governments fail to reassert the integrity of public stewardship, suspicions will emerge that, for all the talk of new beginnings, the perps and new regime are cut from common cloth. Both risk being shredded by popular ire or outbid by more dangerous tribunes of indignation.

Schama is not speaking only of Greece, but directly points to the social unrest bubbling up in the US and the rest of the developed nations.

» Posted by Martin Weil on May 21, 2010

Or so writes Felix Salmon with regard to the just passed Senate bill on financial regulatory reform. An excerpt:

Amazingly, and wonderfully, the Volcker Rule has made it through the Senate, and will surely not be opposed by the House, which never got an opportunity to vote on it. While Treasury might weaken or abolish Blanche Lincoln's amendment forcing banks to spin off their swap desks, it now seems very likely that there will be some kind of legislation attempting to reduce the amount of speculation and gambling that goes on at regulated, too-big-to-fail institutions.

» Posted by Martin Weil on April 24, 2010

"Chris Ware accepted the job because it would be like doing the 1929 issue of the magazine, and he filled the image with tons of satirical imagery, like the U.S. Treasury being raided by Wall Street, China dumping money into the ocean, homes being flooded, homes being foreclosed, and CEOs dancing a jig while society devolves into chaos."

I guess it was not exactly what the magazine had in mind.

From The Big Picture

» Posted by Martin Weil on April 17, 2010

In the wake of the SEC's lawsuit filed this week against Goldman Sachs, it dawned on me that if I, or someone in the independent investment advisory business, were to be found guilty of what GS is charged with, we would lose our license. Intentionally withholding material information from clients about an investment, information that was known to be adverse to their interests is not just malpractice, it is fraud. Something tells me that, though a major fine may be in their future, GS is not going to be barred from the securities business as a consequence of their behavior.

Simon Johnson calls this "Our Pecora Moment," after the 1930's Pecora Commission that exposed the banking practices of JP Morgan and others and led to the creation of the securities regulations that served to protect investors for the next 60 years - until the regulatory infrastructure was progressively dismantled under the guise of deregulation.

» Posted by Martin Weil on April 15, 2010

I suppose it had to happen. The "Broadway" song linked below came about as a result of ProPublica's investigation into Magnetar, a hedge fund that made hundreds of millions of dollars for its investors by betting that the housing market would fail. In so doing, Magnetar had to create additional product pools to make their bets against. This had the effect of increasing the overall system risk and actually made the collapse worse than it would have otherwise been. Ira Glass, at This American Life, commented, "it sounds like The Producers. You should make a broadway musical." Thus the following paean to CDOs was born.

Bet Against The American Dream from Planet Money on Vimeo.

» Posted by Martin Weil on April 05, 2010

Michael Burry, one of the protagonists of Michael Lewis new book on the crisis, The Big Short, writes an Op-Ed in the NY Times, asking just this question. He demands to know why the powers that be, in particular former Fed Chief Alan Greenspan, were so clueless about the crisis waiting to unfold.

in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children's children will suffer terrible financial consequences.

Burry asks good, if difficult, questions. One wishes there were more people (Elizabith Warren comes to mind) in positions of power who were demanding that these questions be publicly answered.

» Posted by Martin Weil on March 17, 2010

The folks at Planet Money do what they do best in this recent podcast and explain an enormously complex topic (in this case toxic assets) simply without being simplistic. In this episode, the team pools its money and sets out to buy a piece of a Mortgage Backed Security (MBS) that is rapidly becoming worthless.

» Posted by Martin Weil on February 24, 2010

I shared the quintessential trait of all young attorneys: unrelenting, paralyzing fear. It overwhelms everything we do and contaminates the first two to three years of our law jobs. ... I know nothing. How the hell did I get this degree? How the hell did I pass the bar? Law school didn't teach me anything. ... How long can I fake this before they figure it out? How come everyone else knows what they're doing? What happens if I get fired or fail? I bet I'll get disbarred! Please, God, don't let me get disbarred."

An epic saga of real estate foreclosure and redemption, and the real-world education of newly-minted lawyer, Wajahit Ali