Tag Archives: Obama

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.

Chrysler Bailout and Contract Law

Conservative commentators have been criticizing how President Obama handled the Chrysler bankruptcy, saying that because the Administration pushed the secured creditors to take less than the UAW, which was unsecured, the basic tenets of contract law were violated. If the Administration had actually forced the secured creditors into this position, by passing some new law or threatening to arrest them, I would completely agree with these commentators. Rule of law is an essential underpinning of the American system.

But Obama did not “force” the creditors to do anything; he simply applied leverage. This is what parties do in contentious business negotiations. Whether it’s a bankruptcy or unwinding a marketing partnership, when it gets ugly the businesspeople start deploying whatever leverage they have. In Obama’s case, he had two levers: 1) the bully pulpit of the presidency; and 2) the fact that without the UAW on board, Chrysler was worthless and the creditors would get nothing.

With his bully pulpit lever, Obama did indeed “browbeat” the creditors. But hey, this is hardball here, and there were billions of dollars at stake. Plus these are vulture funds…they are used to being insulted. With his second lever, Obama simply was playing the game of chicken that is usually played in a bankruptcy, and he won. The creditors were saying “give us what we want or we’ll take over the company” and Obama replied “take what we’re offering or we’ll give you the company.” The creditors blinked first; they knew that if they took over the company it would essentially disintegrate overnight, and they would be left with a bunch of factories nobody would buy.

I’m as big a supporter of the rule of law as anyone – I have long said that exporting law is more important than exporting democracy – but this is not a case of the government ignoring the law. Instead it’s a case of government playing by the same rules as business, but playing better, which is something the right wing ideologues just can’t handle. And lest you think I’m alone in this, here are a law professor and a private equity professional saying similar things.

Which isn’t to say that I am a blanket supporter of the auto bailouts, because I’m not. I would have been perfectly happy to see Chrysler shut down. But any criticism should be on the merits, not based on a spurious claim being advanced for political reasons.

Obama: Greed is “Shameful”

This is the second in a series of posts about the need for Americans to step up and be more responsible. We all knew this need was coming – it has been a theme running through many of my posts – but when President Obama called it out during his inaugural address, I decided to address it more directly. My first entry in this series was about NIMBY attitudes preventing environmental projects from moving forward. Today’s entry is about greed, particularly among corporate executives and Wall Street bankers.

When Obama said during his inauguration that “what is required of us now is a new era of responsibility — a recognition on the part of every American that we have duties to ourselves, our nation and the world,” my guess is that he meant businesspeople too. And yet just three days after the inauguration, the Wall Street Journal ran an article about companies using dicey calculations to boost the value of pension payments they are making to senior executives. I won’t get into the mathematical details, but the basic story is that instead of using IRS rates to discount the value of future pension payments, companies are using their own rates, to generate a higher payment.

For example, one of the executives profiled, John Hammergren of McKesson, is due to receive $84.6 million, rather than the $66.4 million he would be paid using the IRS rate. This man made $38 million in 2008, $25 million in 2007 and over $10 million per year for the last several years. And on top of all this money he gets paid, he is due a pension payment of $66 million. But that isn’t enough…he seems to need even more money, so he monkeys with the numbers to boost that pension by another $20 million.

Merrill Lynch is a steady source of greed. First you have John Thain (am I the only one who thinks he’s a dead ringer for Mitt Romney?)


spending $1 million to redecorate his office. His excuse: the redecoration was done during better times. Dude, if you’re spending $1 million of shareholder money on office decorations, you are being greedy, no matter how well your company is doing. Then there is Thomas Montag, who Thain recruited to Merrill from Goldman Sachs with a guaranteed pay package of $39 million for 2008. Mr. Montag’s debt unit lost $16 billion in Q4 of 2008. Because of those losses, taxpayers have had to invest over $20 billion in Bank of America to support its acquisition of Merrill, and agree to share losses on $118 billion in assets. But has Montag (who, let’s not forget, after 20 years at Goldman is already rich) offered to take less of his bonus? No way. Why? Because he is greedy.

Of course, the ultimate symbol of greed was the recent news that Wall Street bankers paid themselves $18 billion in bonuses while taxpayers bailed out all their companies. It was this act of greed that President Obama called “shameful.” And he was right. For bankers to insist on getting their multi-million dollar performance bonuses, when their companies clearly had not performed, and were taking taxpayer money to survive, is the apex of greed. Companies claimed that they had to pay bonuses to retain employees. Where were those employees going to go? Bear Stearns? Lehman? I don’t think so.

Look, I understand people wanting to make money. I understand the desire to be rich. But rich people grubbing for the last dollar…I have to ask: have you no sense of decency? Responsibility and duty – to the nation, to our neighbors – means sometimes leaving a little money on the table. If we are to “begin again the work of remaking America,” as President Obama encourages us to do, reducing greed is a good place to start. How can we expect to solve problems like Social Security, health care, or global warming if everyone is grabbing as much money as they can? Whether the sacrifice is flying commercial instead of private, or buying a 30″ flat screen instead of 50″, if we are going to build America back up we must all change our attitude from “I want it all now” to “I’d like most of it, but I’m willing to share.” Let’s show a little restraint and try to come together to solve some really difficult challenges.

Saving the Environment – We All Need to Give

President Obama’s inaugural address has gotten me thinking about responsibility and sacrifice. The President said what we have all known for a long time: that Americans are too profligate – spending money we don’t have, burning energy we can’t afford – and that a day of reckoning would come. In fact, the President made clear that the day of reckoning is here: “our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.” As a result, I am planning a series of entries on this topic, on the theme of sacrifice. Today’s item: the environment.

A recent article in the Wall Street Journal (regular readers know I love my WSJ) discussed Cape Wind, which aims to put 130 windmills off the coast of Cape Cod, reducing greenhouse gas emissions an amount equivalent to taking 175,000 cars off the road. A no brainer project, right? Wrong, because the wealthy folks who have their weekend houses on that part of the Cape don’t want their views marred by windmills out on the horizon. They have been protesting the project and putting up legal barriers, enlisting the help of their most powerful neighbor, Teddy Kennedy, whose family has a fabled compound in Hyannisport.

Massachusetts is famously liberal, and based on my two years in Boston, the people who weekend on the Cape would consider themselves environmentalists. They recycle, they install solar power, they drive their Prius to Whole Foods to buy local produce. But when it comes to windmills in their expensive view, suddenly they aren’t so green. This is where they need to listen to our new president and stop protecting their narrow interests. They need to sacrifice a little for the good of the environment.

Broadening the scope of this discussion, if we are going to defeat global warming, everyone is going to have to chip in. The NIMBY (not in my back yard) protests that stall projects like new power lines, or wind farms, are going to have to stop. Of course, nobody wants a giant tower in their back yard, or a windmill right off their front porch. But nobody wants temperatures to go up several degrees either, or ocean levels to rise to a point where Cape Cod weekend houses are under water. Global warming is a major problem that affects everybody, and we are all going to have to sacrifice a little – give up our SUV, or allow windmills near our weekend house – if we are going to solve it. As theologian Sallie McFague put in her new book regarding climate change, “either we will all make it together or none of us will.”

Auto Company Bailout: Make it Hurt

Politicians in Washington are debating whether the government should bail out the Big 3 American automakers: Chrysler, Ford and GM. In addition to the $25 billion in low cost loans the government has already committed to Detroit, the Democrats, including President-elect Obama, are pushing for more aid. I have long been fascinated by the utter incompetence of American car companies, and came out against the $25 billion in loans, so of course I have some thoughts on this push for additional help.

I’m going to ignore ideology (eg. in a free market we should let companies fail) and focus on practical issues. But practically speaking, giving money to the car companies would be rewarding failure. For 30 years the Big 3 have been getting spanked by Japanese, German and now Korean car companies. They have relied on trucks and SUVs to generate profit and have proven themselves completely unable to produce an appealing small car. They have also demonstrated a fantastic inability to retool their processes to compete with the imports.

NYU business professor David Yermack calculates that GM and Ford alone have invested $465 billion in capital since 1998 and have seen their combined market capitalizations drop from $117 billion to $6 billion today. These are not companies that spend money well, so why should the taxpayers give them any more? And let’s not forget that GM CEO Rick Wagoner made $3.3 million last year while Ford CFO Lewis Boothe made $3.1 million (I’m letting Ford’s CEO off the hook for his $9 million because he’s new and they had to pay up to recruit him from Boeing). Why should our money go to support multi-million dollar salaries for guys who are screwing up?

Conservative commentators (hello Wall Street Journal) blame much of Detroit’s problems on expensive union contracts and hefty benefits paid to retirees. The usual estimate is that retiree legacy payments add $1,500 to the cost of each vehicle. But even if you could take $1,500 off the price of American cars, they would still lose market share because the cars suck. A comparable Toyota is worth $1,500 more because it is better made and will last forever. Also, I should note that it was the executives of the car companies who signed those rich union contracts. That being said, the UAW is way out of line with the overall labor market. Gold-plated health benefits, ridiculous work rules and no-layoff clauses are no way to help your company beat the competition.

So the main argument against bailing out the Big 3 is that it would be throwing good money (OUR money) after bad. What are the reasons to support a bailout? It turns out that there are 3 million of them; that’s the number of jobs that analysts have tied to the auto industry. And the theory is that if we let the Big 3 fail, all those jobs will go away. The car companies are saying that nobody will buy cars from a bankrupt company. I don’t totally believe that – I think that Americans have flown enough airlines that were in bankruptcy to understand that a bankrupt GM doesn’t really go away – but nor do I agree with Yermack that Toyota and Honda can just take up the slack. Realistically, it will take years for the foreign car companies to ramp up production to take over for a failed Detroit company. There is also the argument that the auto industry drives America’s sophisticated manufacturing industry, which is essential for both national security and future economic growth. I don’t know enough about that to comment intelligently, but it makes some sense on its face. Finally, there are all those retirees with health insurance and pensions. If the Big 3 fail, the obligations to support all those people will fall on taxpayers anyway.

So maybe, on balance, some sort of bailout is a good idea. If even 500,000 jobs were lost and the Big 3 pensions put onto the taxpayers, that would not be good for the economy. But good idea or bad idea, the bailout is still going to happen; the Democratic leaders (Nancy Pelosi and Harry Reid) are pushing for it, and Barack Obama owes the unions big time for getting out the vote. And if it’s going to happen anyway, let’s at least push for it to be done the right way.

Any federal bailout of the Detroit automakers needs to A) be onerous to shareholders and executives, and B) force restructuring on the industry to make it competitive. Paul Ingrassia, who won a Pulitzer Prize for his Wall Street Journal coverage of the auto industry, argued for removing current management, wiping out shareholders and restructuring contracts. He is absolutely right. And wiping out shareholders has to include the Ford family, who continue to dominate Ford Motor Company. Michael Levine, a lecturer at NYU School of Law, adds that the dealer networks have to be restructured. It has long been known that the Big 3 have far too many brands and dealers relative to the cars they sell (GM has 7,000 dealers while Toyota has 1,500) but state laws protect dealers from being closed. These state laws exist because dealers are big players in local economies; unfortunately, they are not big players at the national scale, and these state laws need to be trumped by national concerns.

All of these objectives can be realized through a packaged bankruptcy, which was suggested by Edward Altman, a business professor at NYU (lots of NYU references in this post). Packaged Chapter 11 bankruptcies, in which the financing that takes you out of bankruptcy is pre-negotiated, are pretty common. The government would provide the financing, and that would address the concern that consumers won’t buy cars from a bankrupt manufacturer. In fact, a packaged bankruptcy is the only route I can see that achieves all important goals:

  • Management removed and compensation limits implemented
  • Current shareholders wiped out
  • Union contracts renegotiated
  • Dealer contracts renegotiated and state laws changed.

So please, politicians, I implore you: don’t give in to corporate and union lobbying and just hand the car companies money. Use this opportunity to force on the car companies the changes that they need.

An interesting side note is that this is another case of the metaphysical phenomenon of current actions sowing the seeds of one’s eventual destruction. For decades the Big 3 have fought against fuel efficiency, spending gajillions of dollars lobbying against the CAFE fuel economy standards instead of just building better cars. And now, because they can’t build a good small car, the Big 3 are begging for help. In the same way, Republicans have for years been resisting any legislative efforts to push fuel economy, and look what just happened to them. Congressman John Dingell of Detroit, although a Democrat, has been the Big 3’s biggest supporter in DC (his wife is an executive at GM), and now Henry Waxman is trying to take away Dingell’s precious chairmanship of the Energy and Commerce Committee. In all these cases, we are seeing people and groups being beaten by that against which they fought the hardest. Very Jungian, don’t you think?

Shock & Awe – The Good Kind

Last night’s results created the type of shock and awe that we can all use. Not so much shock for me, since I’ve been confident of an Obama win for about a week, but definitely awe.

I was watching the results last night with about 20 friends, and we are generally a boisterous crowd. But when Obama gave his acceptance speech, we were utterly silent. That silence was not because we wanted to hear Obama’s dulcet tones; it was because we were struck speechless by the import of the moment.

America’s first black president. Think about it. We did; in mute awe my friends and I contemplated the greatness of that achievement. None of us are black, but we all recognized how important this was. Obama’s election probably won’t solve all the country’s race problems, but it sure feels like a big step. How can you not love a country where a black man named Barack Hussein Obama can rise from modest means to become president?

Yet our awed silence transcended Obama’s race, for there was a sense that his election represented a transformation of American politics. Votes for Obama were votes against divisiveness and for unity. They were votes against dishonesty and for solutions, against paralysis and for progress. They were votes that swept aside the past eight years, years of Bush and DeLay, of crony capitalism and Terri Schiavo. We were silent because Obama’s victory justified – wait for it – the audacity of our hope, our hope for change.

Thoughts on Sarah Palin

Everyone else has commented on Sarah Palin, the surprise VP pick of John McCain, so I might as well throw down my thoughts.

In several ways, she is a very clever tactical pick for him:

  • The Republican base loves her
  • Picking a woman reestablishes McCain’s maverick reputation
  • And makes a blatant play for the disaffected Hillary Clinton supporters
  • She is a fresh new face, a Washington outsider, so McCain can play the change card

On the other hand, her selection completely eviscerates the McCain argument against Obama that seemed to be working best: that he is too inexperienced to be president. Palin’s dearth of experience makes Obama seem like a wizened old man. Mayor of Wasilla, Alaska, population 8,471, leading to a couple of years as governor of a state with population: grizzly bears. Seriously, Alaska has a population of 670,000, which is smaller than San Francisco, where I live, and nobody is suggesting that our mayor Gavin Newsom is qualified to be president (and that’s not just because he is a marginally competent pretty-boy tool).

Republican supporters are talking up Palin’s “executive experience,” but that is as moronic as Fox News’ claim that she has international experience because Alaska is near Russia. Does anybody really think that being an “executive” is that much different than running a Senate office? That’s like saying your marketing VP isn’t qualified to be CEO because she hasn’t run a whole company even though VPs of marketing make great CEOs all the time.

Most Hillary Clinton supporters I have seen interviewed have been insulted by the concept that they will get behind Palin just because she is a woman. However, the hard core PUMAs, who I have queried before, seem mixed. Which is moderately crazy, given that Palin supports none of the causes that Hillary does, and is especially conservative on the traditionally feminist causes.

Finally, I reckon I should comment on the new controversy, about whether Palin will have time to be VP and to be a good mother, and whether it’s sexist to even bring it up. She is the one who positioned herself as a “family values” candidate, so I feel like her family values are fair game. I should also note that having five kids, one an infant with Down’s syndrome, is a lot of work, for both the mother and the father. As I told my friend Catalina, when feminists say “nobody questions whether Obama can manage being president and being a father,” I have to reply that Obama has only two children, both healthy. That being said, there is no question that our society has higher expectations of mothers than of fathers, and it’s entirely likely that if Todd Palin were the VP candidate, nobody would be questioning his ability to manage.