American Economy To Transfer $5 Trillion To Banker Pay And Bonuses

[finehoe]

The American Economy Will Transfer $5 Trillion To Banker Pay And Bonuses Over The Next 10 Years

For the American economy â€" and for many other developed economies â€" the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion.

Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees.

Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them â€" and in many cases are actually benefiting.

Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees.

Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.

In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.

Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers â€" and to future generations.

Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.

Of course, before being bailed out by governments, banks had never made any return in their history, assuming that their assets are properly marked to market.

Nor should they produce any return in the long run, as their business model remains identical to what it was before, with only cosmetic modifications concerning trading risks.

So the facts are clear. But, as individual taxpayers, we are helpless, because we do not control outcomes, owing to the concerted efforts of lobbyists, or, worse, economic policymakers. Our subsidizing of bank managers and executives is completely involuntary.

But the puzzle represents an even bigger elephant. Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees?

The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns.

Why do portfolio and pension-fund managers hope to receive impunity from their investors? Isn’t it obvious to investors that they are voluntarily transferring their clients’ funds to the pockets of bankers?

Aren’t fund managers violating both fiduciary responsibilities and moral rules? Are they missing the only opportunity we have to discipline the banks and force them to compete for responsible risk-taking?

It is hard to understand why the market mechanism does not eliminate such questions. A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.

One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all?  The answer is the so-called “beta”: banks represent a large share of the S&P 500, and managers need to be invested in them.

We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators â€" constantly creating complex financial products and derivatives that skirt the letter of  the rules. In these circumstances, more complicated regulations merely mean more billable hours for lawyers, more income for regulators switching sides, and more profits for derivatives traders.

Investment managers have a moral and professional responsibility to play their role in bringing some discipline into the banking system. Their first step should be to separate banks according to their compensation criteria.

Investors have used ethical grounds in the past â€" excluding, say, tobacco companies or corporations abetting apartheid in South Africa â€" and have been successful in generating pressure on the underlying stocks.

Investing in banks constitutes a double breach â€" ethical and professional. Investors, and the rest of us, would be much better off if these funds flowed to more productive companies, perhaps with an amount equivalent to what would be transferred to bankers’ bonuses redirected to well-managed charities.

http://www.businessinsider.com/american-bankers-do-not-deserve-22-trillion-in-pay-and-bonuses-2011-9

[buckethead]

Back off the bankers; They're doing God's work, hence deserve our children's future.

If we could just find a way to get more money to the big wigs at the Primary Dealers, the economy would turn.

[ChriswUfGator]

Back off the bankers; They're doing God's work, hence deserve our children's future.

If we could just find a way to get more money to the big wigs at the Primary Dealers, the economy would turn.

Prime dealers at least provide a service. The hedgies are the leech on society, they provide nothing but make all the money.

[BridgeTroll]

I suggest joining a credit union...

[buckethead]

Back off the bankers; They're doing God's work, hence deserve our children's future.

If we could just find a way to get more money to the big wigs at the Primary Dealers, the economy would turn.

Prime dealers at least provide a service. The hedgies are the leech on society, they provide nothing but make all the money.

Back off Soros too.

He's doing the people's work.

[Garden guy]

I say screw the banks...we get nothing but their ability to loose our money and pay us nothing...i'm keeping my cash at home...sounds crazy but until the banking system repairs itself...my own safe is good enough...i watched to banks overpay themselves...as soon as the turn around happened due to  they and thier peers behavior is saw banks letting all kinds of people go...i've been with first guaranty for some of my accounts and i watched them let all of these women who were excellent at their jobs go...they let them go only to hire a huge amount of men...men that couldn't work a calculator if they tried...slow and inaccurate...they'be upped my fees on everything yet their ceo makes a bonus?....i'm getting out of banking...i'll keep the minimum i need but my cash is comeing home.

[Captain Zissou]

This article is ridiculous.

When I was trying to break it down by the numbers to get an average employee annual salary I realized it was impossible.  This article throws around the term 'banker'  with zero clarification.  Does that mean I should hate my teller for stealing my hard earned money??  Customer service reps of banks are raping and pillaging the American economy??

It at one point accused the 'mainstream megabanks', which I will assume is any bank with an investment banking division.  Wells Fargo, JP Morgan, Bank of America, Goldman Sachs, PNC, Citigroup, Morgan Stanley, AIG........  Already you're talking about well over a million employees.  Those are just American based banks.  Credit Suisse, Barclays, Lloyds, Deutsche Bank, RBS, RBC...... There's another half million AMERICAN employees.  Throw in hedge funds, private equity...... Hundreds of thousands more.

So based on those broad numbers..... $2.2T/ 5 years= $440B annually.  $440B/2M employees= $220,000 per employee.  However,  the lions share of that is going to 10,000 or so upper level employees.  That leaves you with at most $100,000 per employee (which is extremely generous).  That (in the best case scenario) is a strong, but middle class wage for millions of American workers.  Seems about fair to me.

[finehoe]

This article throws around the term 'banker'  with zero clarification.  Does that mean I should hate my teller for stealing my hard earned money??  Customer service reps of banks are raping and pillaging the American economy??

Come now, who's being ridiculous.  Have you been in a coma the last 3-4 years that you don't know who the article is referring to?

Maybe these articles will clue you in:

http://www.fool.com/investing/general/2010/01/14/what-you-should-know-about-banker-bonuses.aspx

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

http://money.cnn.com/2010/01/11/news/economy/bank_bonuses/index.htm

[Captain Zissou]

Come now, who's being ridiculous.  Have you been in a coma the last 3-4 years that you don't know who the article is referring to?

I have extensive knowledge on the industry, as I work in it.  My point was the article is crap.  It shouldn't take me less than 3 minutes to discredit it.

[finehoe]

It shouldn't take me less than 3 minutes to discredit it.

Be my guest.

[finehoe]

I suggest joining a credit union...

Here are some other options:  http://bankfree.co/

[finehoe]

View: Gambling Bankers Need a Capital Intervention
By the Editors - Sep 8, 2011

Would you give money to a compulsive gambler who refused to kick the habit? In essence, that’s what the world’s biggest banks are asking taxpayers to do.

Ahead of a meeting of the Group of Seven industrialized nations’ finance ministers in Marseilles this week, bankers have been pushing for a giant bailout to put an end to Europe’s sovereign-debt troubles. To quote Deutsche Bank Chief Executive Officer Josef Ackermann: “Investors are not only asking themselves whether those responsible can summon the necessary willpower … but increasingly also whether enough time remains and whether they have the necessary resources available.”

Unfortunately, he’s right. As Bloomberg View has written, Europe’s leaders -- particularly Germany’s Angela Merkel and France’s Nicolas Sarkozy -- are running out of time to avert disaster. Their least bad option is to exchange the debts of struggling governments for jointly backed euro bonds and recapitalize banks. European banks have invested so heavily in the debt of Greece and other strapped governments, and have borrowed so much from U.S. institutions to do so, that the alternative would probably be the kind of systemic financial failure that could send the global economy back into a deep recession.

At the same time, bankers are campaigning against regulators’ efforts to address a root cause of the problem: Big banks’ addiction to excessive leverage, or to using borrowed money to boost their shareholders’ returns. In a recent flurry of letters to the Basel Committee on Banking Supervision, which is in the process of setting new rules for the largest global institutions, various banking groups warn that higher capital requirements -- tantamount to putting limits on leverage -- will reduce credit availability and stunt the economy’s growth.

Getting It Wrong

Here, the bankers are demonstrably wrong. To fully grasp their position, it helps to understand why they find leverage so attractive. Consider two banks, both with $100,000 in assets. The first got the entire $100,000 from its shareholders, giving it a 100 percent capital ratio. The second raised only $1,000 in equity and borrowed the rest, giving it a 1 percent capital ratio. In the first case, a $1,000 profit on the assets will generate a meager 1 percent return on the shareholders’ $100,000 investment. In the second case, the same $1,000 gain will produce a 100 percent return on equity. The second option also has a steep downside: A loss of only $1,000 can wipe out the shareholders.

No Fear

At a big, systemically important bank, high leverage allows executives to play a heads-I-win-tails-you-lose game with taxpayers. In good times, the leverage makes the bank extremely profitable to shareholders, allowing executives to collect juicy bonuses. In bad times, as the European experience yet again demonstrates, governments have no choice but to step in and bail out the banks, and executives have nothing to fear but a highly remunerative exile. No wonder the average tangible equity as a share of tangible assets -- effectively a simple capital ratio - - at 32 of Europe’s biggest banks is only 4.6 percent, according to data compiled by Bloomberg. Deutsche Bank’s ratio is among the lowest, at 1.9 percent.

Sharply increasing capital levels would make the financial system far more resilient, and would in no way threaten growth. Think about it: If banks don’t get into trouble in bad times, they can keep providing credit just when the economy needs it most. The best available research, led by former Morgan Stanley economist David Miles, suggests that once all the costs and benefits are tallied up, the ideal ratio of equity to assets would be somewhere between 7 percent and 10 percent. That translates, in the bizarre math of bank regulation, into a risk- weighted capital ratio of about 20 percent, or double what the folks in Basel are considering. The researchers also find little risk of erring on the high side. Even risk-weighted capital ratio of 50 percent would be preferable to the status quo.

If Europe’s leaders find the political will for another bailout, they should make sure it’s the last, if only because the dire state of government finances makes it doubtful they can afford any more. Simple, hard-to-circumvent capital rules should be the primary condition of any taxpayer-financed solution to Europe’s financial troubles, and there’s no good reason the required level should be any lower than 20 percent. The only losers would be leverage-obsessed bankers, who might have to go cold turkey and earn a living by finding productive uses for their shareholders’ money. That’s a price society can afford to pay.

http://www.bloomberg.com/news/2011-09-09/european-bankers-hooked-on-gambling-will-need-capital-intervention-view.html

[BridgeTroll]

The true root of the problem... government debt.

European banks have invested so heavily in the debt of Greece and other strapped governments, and have borrowed so much from U.S. institutions to do so, that the alternative would probably be the kind of systemic financial failure that could send the global economy back into a deep recession.

[finehoe]

The true root of the problem... government debt.

No, the true root is banks lending money to entities they know can't pay the money back but not caring because they know the taxpayers will backstop them and pick up the tab.

[finehoe]

The $2 Billion UBS Incident: 'Rogue Trader' My Ass

The news that a "rogue trader" (I hate that term â€" more on that in a moment) has soaked the Swiss banking giant UBS for $2 billion has rocked the international financial community and threatened to drive a stake through any chance Europe had of averting economic disaster. There is much hand-wringing in the financial press today as the UBS incident has reminded the whole world that all of the banks were almost certainly lying their asses off over the last three years, when they all pledged to pull back from risky prop trading. Here’s how the WSJ put it:

The Swiss banking giant has been struggling to rebuild trust after running up vast losses in the original financial crisis. Under Chief Executive Oswald Grubel, the bank claimed to have put in place new risk management practices, pulled back from proprietary trading and focused on a low-risk client-driven model.

All the troubled banks, remember, made similar promises in the wake of the financial crisis. In fact, some of them used the exact same language. Some will recall Goldman’s executive summary from earlier this year in which the bank pledged to respond to a "challenging period" in its history by making changes.

"We reviewed the governance, standards and practices of certain of our firmwide operating committees," the bank wrote, "to ensure their focus on client service, business standards and practices and reputational risk management."

But the reality is, the brains of investment bankers by nature are not wired for "client-based" thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking â€" historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there â€" turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you’re not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you’ve cooked up, then you won’t make it on today’s Wall Street.

Nonetheless, thanks to the Gramm-Leach-Bliley Act passed in 1998 with the help of Bob Rubin, Larry Summers, Bill Clinton, Alan Greenspan, Phil Gramm and a host of other short-sighted politicians, we now have a situation where trillions in federally-insured commercial bank deposits have been wedded at the end of a shotgun to exactly such career investment bankers from places like Salomon Brothers (now part of Citi), Merrill Lynch (Bank of America), Bear Stearns (Chase), and so on.

These marriages have been a disaster. The influx of i-banking types into the once-boring worlds of commercial bank accounts, home mortgages, and consumer credit has helped turn every part of the financial universe into a casino. That’s why I can’t stand the term "rogue trader," which is always tossed out there when some investment-banker asshole loses a billion dollars betting with someone else’s money.

They’re not "rogue" for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys "rogue traders" when they make a billion dollars gambling.

The only thing that differentiates a "rogue" trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG’s Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn’t an investment banker, technically â€" but he was in financial services).

In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

There is a movement in the UK for a thing called “ringfencing” that would separate investment bankers from commercial bankers. Some people think this UBS incident will aid that movement, even though UBS can apparently absorb the loss without necessitating a bailout or endangering client accounts.

The U.S. missed its own chance for ringfencing when a proposal for a full repeal of Gramm-Leach-Bliley was routed during the Dodd-Frank negotiations.

That means we’re probably stuck here in the states with companies like Bank of America, JP Morgan Chase and Citigroup, giant commercial banks in charge of stewarding trillions in client bank accounts and consumer credit accounts who also behave like turbocharged gamblers via their investment banking arms.

Sooner or later, this is going to blow up in our faces, and it won't be one lower-level guy with a $2 billion loss we'll be swallowing. It'll be the CEO of another rogue firm like Lehman Brothers, and it'll cost us trillions, not billions.

http://www.rollingstone.com/politics/blogs/taibblog/the-2-billion-ubs-incident-rogue-trader-my-ass-20110915