Tag Archives: greed

Bankers Moving for Higher Pay? Go Ahead!

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 on $100 Million Bonuses

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.

Congress Flies in Private Jets

Please read this Wall Street Journal article about how Congress has appropriated $550 million to buy some new private jets. And not even simple jets,  but the highest end of private: Boeing 737 business jets and Gulfstream Vs. This was an appropriation beyond what the Defense Department asked for. And this is the same Congress that lambasted (rightly) banks and car companies for flying private. This is the hypocrisy that makes citizens hate Congress. Let’s hope that during the August recess our representatives get a full dose of voter anger during town halls and constituent meetings.

Open Letter to Bank CEOs

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.

$100 Million Bonuses Should Not Exist

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:

  1. 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.
  2. 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.
  3. 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.

Greedy Doctors Are The Same As Wall Street Bankers

Given the current legislative efforts to reform health care, it’s not surprising that there are plenty of articles being written on the subject. But I was surprised that in just one day last weekend I managed to read three articles that blamed doctors for a decent chunk of our out of control health care costs. More interesting, not one of these articles was talking about defensive medicine or a focus on high tech care; no, they were all basically saying that too many doctors are greedy for money.

First there was this article in the NY Times, which discussed how the AMA has since 1929 (yes, 80 years ago) fought against systems (such as cooperatives) that would potentially limit doctor incomes by creating a salary structure rather than a fee for service structure. Although some cooperatives were formed, it was over the objections of the AMA. Not coincidentally, the two medical groups that are continually held up as paragons of cost-effective and world-class care, the Mayo Clinic and the Cleveland Clinic, are both cooperatives. At a recent conference on cost-effective care, most doctors and hospital executives agreed that the fee for service system is “archaic and fundamentally at odds” with good practice.

Next was this article by Dr. Atul Gawande in The New Yorker, in which he investigates why health care in McAllen, Texas is so much higher than the national average. In fact, he notes, McAllen’s health expenses are twice as high as El Paso, Texas, which has the exact same demographics. Gawande explores a number of reasons – service quality, technology, legal environment – but ultimately concludes that it comes down to massive overuse of medical care. Doctors in McAllen do far more tests and scans and procedures than average.

But Gawande goes even further. He blames this overuse not on a surfeit of caution, or desire to better treat patients, but on doctor greed. Doctors make more money when they do more procedures, and if they have ownership stake or revenue sharing agreements with imaging centers or labs or hospitals (and many of them do), then they have financial incentive to send patients to those facilities. Interviewing doctors in McAllen, Gawande uncovers a culture of greed, where doctors are in it for the money. Or, as a McAllen cardiac surgeon says, “Medicine has become a pig trough here.”

I sent Gawande’s article to a friend of mine, who is a doctor in a family practice, but who also has a Master’s in Public Health and did a fellowship in preventative medicine. My friend agreed with Gawande’s conclusions, noting that “nobody wants to give up that $500k+ salary, and the AMA is a huge lobby.”

Finally, The New Republic had a piece that sort of summed it all up, noting:

“Given how much of the game of reining in costs hinges on doctors–whether they see themselves as profit-maximizing small businessmen (or, for that matter, large businessmen), or as fundamentally involved in healing patients and receiving fair compensation for that service–I think we have to think about the kinds of people who go into the profession.”

And this is where I get to have my say. Because if someone is going into medicine because they want to make a million dollars, I say they should go to Wall Street instead. As this chart shows, it isn’t exactly like doctors are hurting for money. Practicing medicine isn’t a license to print money, and when a doctor orders an extra $1,000 procedure, while he gets to keep that $1,000, we all have to pay for it through higher insurance premiums. At which point he is no better than the greedy mortgage-backed security trader whose huge bonus ended up being subsidized by taxpayers.

This just in: right before posting, I read this article in the Wall Street Journal about how the AMA and the American College of Surgeons both came out against the idea of a commission setting Medicare payments to doctors. These groups continually lobby against reductions in Medicare payments.

Added bonus links:

  • Slate article describing how a Supreme Court anti-trust decision gave rise to doctor-owned hospitals and other greedy doctor abominations.
  • Denver Post article about a woman who died when a doctor-owned specialty hospital that didn’t have the resources necessary to handle her post-surgery complications.
  • Book review by Harvard Medical School professor Arnold Relman, who attacks the “medical-industrial complex” and the whole concept of profit-driven medicine: “in no other country is medical care marketed and advertised so aggressively, as if it were just another commodity in trade.”
  • New York Times article describing how the greediest hospital in Gawande’s article is one of the largest contributors to Democrats this year as it lobbies “to soften measures that could choke its rapid growth.” This lobbying has been successful, as language limiting physician ownership of hospitals has been stripped out of bills. According to Democrat Pete Stark, the physicians “just thought they could buy their way out of it, and it’s a sad commentary on the Congress.”

Mortgage Broker Slimeballs Stay Slimy

I don’t have a lot to add to this NY Times article about people who were subprime mortgage brokers and have now morphed into “mortgage modification” specialists, charging homeowners $1,000 to $4,000 to help renegotiate their mortgage, but then doing nothing except keeping the money. The FTC is slapping cease and desist orders on them, but it doesn’t seem to be stopping the problem. Are people really that greedy and awful?

Wall Street Has Gone Too Far

In the wake of the financial meltdown there has been continued tension between Main Street and Wall Street; between the working class (and the politicians who represent them) and the financiers (and the lobbyists who represent them). Despite the commentary from populists such as me who have been railing against Wall Streeters continuing to pay themselves huge bonuses, some of this tension has been between legitimate positions of free markets versus genuine concern about greed and income inequality.

But now the financiers have gone too far. First was an article last week saying that some big banks are looking at participating in the government’s PPIP (Public Private Investment Program) in order to buy their own toxic assets. Wait…so they are going to borrow cheap money from US taxpayers, and then use it to buy their own assets, with US Treasury backstopping on their losses? That is appalling without even considering the obvious conflict of interest regarding what price the assets are sold for. You have got to be kidding me.

Then today’s NY Times reports about the extensive lobbying effort that the big NY banks have launched to limit regulation of derivatives. You remember derivatives – the financial “weapons of mass destruction” that were a huge cause of the meltdown? The big banks make a ton of money on derivatives, and they don’t want that gravy train derailed. And since when they lose money, the taxpayers bail them out, they are clearly in support of the status quo. So they formed a lobbying organization and hired a big-name lawyer to lead the charge, paying him over $400,000 for four months of work. Now they are lobbying Congress to water down any sort of regulation of derivatives.

For banks that received taxpayer bailouts to now be spending money lobbying to avoid regulation on the very products that caused them to require bailouts? No way. It is time for Congress, and for the Obama administration to say “Fuck you, Wall Street.” The big banks make billions in profit on unregulated derivatives? Too damn bad. So maybe some traders will only make $2 million per year instead of $10 million. Tough shit. The Treasury Department-Wall Street axis of greed has to stop, and it has to stop now. President Obama, it’s time you step up to the plate on this.

Added bonus links: 1) Paul Krugman on how Reagan-era decisions on deregulation set the stage for financial catastrophe; and 2) a hilarious piece on Harvard Business School students taking a pledge to serve “the greater good” instead of their “narrow ambitions.” The money paragraph is the last one, with a quote about principles from a woman who is taking a job at Goldman Sachs, one of the leaders of the lobbying effort excoriated above. Oh, HBSers, it’s such a shame that you don’t understand irony.

Less Greed, More Patience: The Wisdom of Roald Dahl

This is the last post in my series inspired by President Obama’s inaugural call to “set aside childish things” and start pulling together for the good of the nation. And in this post, I hope to speak less of specific acts of greed and more of a general attitude that has pervaded our society over the past couple of decades. This attitude – one of “I want it all, NOW” – was perhaps not among the childish things of which the president was thinking, but its consumptive nature and its impatience certainly strikes me as childish. In fact, it reminds me of nothing so much as Veruca Salt from Willie Wonka and the Chocolate Factory (the first movie, of course, not the remake), whose constant claim of “Daddy, I want it now!” led to her falling down the garbage chute after being judged a “bad egg.”

I wrote last week about how this attitude played out in spending, with people buying houses and cars and TVs that they couldn’t afford. But it also had a dramatic impact on economic and policy decisions, or often decisions put off. Examples include:

  • Asking for lower taxes while demanding more government services
  • Expecting cutting edge medical treatments while complaining about ever-higher health care costs
  • Unwillingness to invest in infrastructure
  • Refusal to address the impending catastrophes of Social Security and Medicare
  • Managing companies for quarterly earnings instead of for the long term

I could go on and on. But don’t listen to me; the NY Times magazine put it much better a few weeks ago:

“The norms of the last two decades or so – consume before invest; worry about the short term, not the long term – have been more than just a reflection of the economy. They have also affected the economy. Chief executives have fought for paychecks that their predecessors would have considered obscenely large. Technocrats inside Washington’s regulatory agencies, after listening to their bosses talk endlessly about the dangers of overregulation, made quite sure that they weren’t regulating too much. Financial engineering became a more appealing career track than actual engineering or science.”

Frank Rich added his own take, typically overwrought, but still relevant, here. But whether the phenomenon is described by the Times or by me, the process is still the same. When we, the public, all think like Veruca Salt, then our business leaders will think the same way, and we will elect politicians who will implement Veruca Salt policies. So unless we want the whole country to go down the garbage chute, let’s be less Veruca Salt and more Charlie. Instead of wanting it all now, we can aim for getting most of it soon. Remember, Veruca was sent down to the furnace, but Charlie ended up owning the whole factory.

Greed: It’s Not Just For Wall Street

After my last post, full of invective against greed by Wall Street bankers and corporate chiefs, it’s only fair that I mention that we are all guilty of some greed. When President Obama said in his inaugural address that the current financial crisis is a result of “our collective failure to make hard choices and prepare the nation for a new age,” he wasn’t just talking about Wall Street. “Collective” means all of us, and we all share some blame. Or if not actually “all,” at least most of us.

Most of us were on a consumption binge of one sort or another. Some were buying things they didn’t need, others were buying things they couldn’t afford. The most obvious, and painful, example, is in the housing market. Folks bought more house than they could afford, and often more than they needed, seduced by low teaser rates, or by the chance to get a big win by selling it later. Others bought houses purely as investments, planning to flip them, only to be squeezed by rising mortgage payments and falling housing prices. Some refinanced with foolish mortgages, so they could “take money out of the house” and use the tax-subsidized proceeds to buy consumer products.

But it wasn’t just houses. We bought giant flat screen TVs, charging them to our credit cards. We drove around in monstrous Ford Excursions (financed by the geniuses on Wall Street), burning a gallon of gas every 15 miles. We drank bottled water instead of tap, we carried Coach purses, we stayed at 4 Seasons hotels when our income was purely Hamptons Inn.

While the Wall Street big shots may have taken huge bonuses with our tax dollars, they weren’t the only ones looking for the big score. We all wanted some goodies, whatever our income level. Those days are over. The goodies are nice, if they haven’t been repossessed, but we can’t afford them anymore. We couldn’t afford them then, which is the whole point. The days of living beyond our means are over. That doesn’t mean we’re going to be in yurts, heated only by burning cow manure. It just means that maybe we don’t need to have the biggest and newest, all the time.