Yves Smith on the macro effects of oversized Wall Street pay.
I normally don’t love Paul Krugman, despite his Nobel Prize, since he is too strident and preachy and predictable, but this take on what really separates Right from Left in America is pretty interesting.
John Mearsheimer on American foreign policy and realpolitik.
John Cassidy on whether Wall Street adds value to society. Hint: it doesn’t. This is from the New Yorker, so it won’t be available online forever.
Law professor David Beatty compares American constitutional jurisprudence to how they do it in other countries. I’m no expert, but I found it fascinating.
Posted in Business, Politics, Pop culture, Trends
Tagged ayn rand, bonuses, Business, economics, goldman sachs, GOP, greed, Politics, republicans, Trends, wall street
Just a few links to articles showing how fed up folks are getting with Wall Street.
- The NY Times with a column from a former corporate lawyer calling for a windfall profits tax on Goldman Sachs
- Salon telling Wall Street to “just shut up” and advocating limits to lobbying by financial firms
- A new regulatory manifesto by a fed up investment banker
- And just for fun, an attack on private equity’s quest for capital gains tax treatment
It’s starting to look like enough people are fed up that something might happen. Of course, the financial industry has already spent $350 million this year on lobbying, setting a record, and we know that politicians listen to money more than they listen to voters.
A recent item in the Wall Street Journal talked about how British banks are pushing back against any sort of regulation on pay practices, saying that such regulation “will harm competitiveness, as jobs and tax revenues move to friendlier climates.” Wall Street banks are saying the exact same thing to Washington. My question is: where exactly are they going to move? Is the talent going to run to Bear Stearns or Lehman? Clearly not. After all the recent layoffs, there are fleets of unemployed bankers ready to replace anyone on a trading desk. But maybe the talent will move offshore, to Paris or Zurich or Tokyo – any place that doesn’t limit compensation. Really? They are going to take their kids out of Greenwich Country Day School, quit the country club, and move around the world? Some will, sure, but the majority won’t. The uproar from kids and spouses alone will force most of them to stay put. For those without families, I would think that the concept of living in a social democratic country makes moving a non-starter.
Slate business writer Daniel Gross has another take on Andrew Hall’s bonus, about which I wrote last week. Gross notes that hedge funds primarily exist to make traders rich, and do little for non-employee shareholders. So he questions why Citigroup shareholders would want to retain Hall and his Phibro operation.
Not from me, but from Breakingviews.com, which as a specialized business newsletter has more credibility than I do. Their site is subscription only, but the NY Times reprinted the letter here. The basic gist: hey CEOs, instead of paying obscene bonuses, you should use your current profits to build strong balance sheets so the taxpayers don’t need to bail you out again.
My headline refers to the $100 million bonus that Andrew Hall, the head of Citigroup’s Phibro commodities trading group, is reputedly due this year. This bonus is in addition to the $100 million he was paid last year. Mr. Hall has a profit sharing formula to determine his pay, and his group is very profitable; hence the huge paydays.
When I say that such a large bonus should not exist, I am not referring to the controversy of whether a bank that has received so much taxpayer aid should honor Hall’s contract and pay such a large bonus (although they probably shouldn’t) or whether it is in any way appropriate for a society that pays teachers and firemen $50,000 per year to pay a guy $100 million to speculate in oil futures (duh: it isn’t appropriate, and in fact is obscene).
No, I say that such a bonus shouldn’t exist because economic theory says it shouldn’t. Under classic microeconomics [as I learned in Professor Bresnahan’s Firms and Markets class), if a firm is making outsized profits, other firms will see those profits and enter the market. The competition will reduce returns until profitability is in line with the industry.
If Phibro is repeatedly paying Hall $100 million per year, it’s safe to say that their profits are awesome, and thus outsized. There certainly isn’t a lack of traders and capital on Wall Street, all chasing returns. Hedge funds alone have $1.4 trillion in capital. So why isn’t the competition battering Phibro? I don’t know the answer, but here are a few possibilities:
- There is some sort of barrier to entry. It’s not capital, because plenty of people have that, but maybe there is a regulatory hurdle. Perhaps the few entrants in oil trading have figured out a way to maintain an oligopoly and thereby restrain competition.
- Maybe everyone in the oil trading business is insanely profitable, but only Hall has the sort of contract that pays him such a huge sum. It could be so easy that if I started swapping a few oil futures, I too could make millions.
- Or, it could just be that Hall and the folks at Phibro are really that much better than anyone else in the industry.
Again, I don’t why, but I do know that the only way a person should be able to consistently make that much money is if they are an absolute superstar or if they have figured out a way to restrain trade, which is usually illegal. Given the ways of Wall Street, if I had to pick one of those answers, I’d guess the slimy one.