Wednesday, March 2, 2011

Financial meltdowns and the Shame of Financial CEOs

Two recent documentaries have shed renewed light on the financial meltdown of 2008 that brought the world perilously close to a second Great Depression. "Inside Job," Charles Ferguson's look at the wheelings and dealings of the board of Goldman Sachs, won the Oscar for Best Documentary on Sunday, while Alex Gibney's "Client 9," an examination of Elliot Spitzer's rise and fall, was nominated for the Satellite Award.  These films point to the fact that not enough reform has taken place to insure that small investors do not become the victims of Wall Street sharks who chase after short-term profits and bonus packages.

The narrative of the meltdown is now familiar. Risky mortgages were extended to families making $50k for $500k houses. With raising interest rates, these mortgages were unsustainable and people began to default. The world banking system had believed that it had minimized risk by spreading the burden of handling these riskier mortgages across the system in a series of new financial tools called Collteralized Debt Obligations and Credit Default Swaps. However, these CDOs implicated the entire system when the house of cards began to fall. Banks, over the course of the 90's and 00's, had lowered the amount of capital they had to keep in reserve and raised how much leverage they could take on. It was a painfully dumb equation.

With hindsight, it seems obvious that there was a housing bubble. Like other historical bubbles, from tulipomania in 17th-century Amsterdam, to the South Seas Bubble and simultaneous John Law Mississippi Land Bubble of 1720, the housing bubble of the 2000's saw housing prices rise far faster than it was justified thanks to the push of financial advisors and banks in creating more untapped markets for homebuyers. Unfortunately, many of these people could not afford a house in the first place.

The reason behind the push for more risk was that it resulted in high short-term profits. In order to create more profits, companies cooked books (much like Arthur Anderson did for Enron in the early 2000's) and took on high levels of risk. The Glass-Steagall Act (one of FDR's acts of his first hundred days) was designed to control speculation, but Clinton and Fed Reserve Chairman Alan Greenspan believed it would be best to repeal parts of the bill that curtailed bank profits. By taking on higher risk, a bank could create a huge boon to their profits at a quarterly rate thus driving up stock prices, in term adding more to the bonus packages for the top executives of the company.

Many of the CEOs of Wall Street had (and still have) salaries of exorbitant sums. Thomas Montag of Bank of America receives a yearly wage of $30 million dollars, while Jamie Dimon of Chase receives approximately $16 million. And these are their salaries of 2009.

Angelo Mozilo, who headed Countrywide before its collapse in 2008, sold much of his Countrywide stock between 2006 and 2007, making $139 million before the company went bankrupt and the stock was worthless at the end of 2008. In October of 2010, he agreed to pay $65 million in fines to the SEC in order to avoid formal charges of insider trading.

Richard Fuld, the former CEO of Lehman Brothers, made $457 million dollars in his last year at the investment bank that closed its doors during the meltdown. How could someone who headed a company that went bankrupt make as much as the GDP of some small foreign countries? If any of us were involved in a company that went bankrupt our $10 an hour would be snapped away, but yet if you as CEO ordered your firm to take on added leverage and more and more risk, you are exonerated from blame and instead rewarded?

No CEO or bank executive has faced any formal charges or jail time for their decisions in this regard. Even Moody's and Standard and Poor, two of the most important rating institutions in the world, have received no prosecutorial paperwork for lying about the riskiness of certain banks' holdings. Their defense? "It was our opinion." And how wrong it was, dear sirs.

What has Obama done to regulate the practices of Wall Street? Well, he has created a Consumer Protection Agency, which, if headed by Elizabeth Warren, could be one of the great federal innovations of the past twenty years. But little else has been done to significantly regulate these practices. The SEC has not been granted any wide-ranging powers and, unlike the EU, no bill has been passed to regulate compensation packages for banking CEOs.

Why hasn't further reform taken place? Unfortunately, Obama has hired as his economic team many of the same players that helped engineer the downfall in the first place. Timothy Geithner, the Secretary of the Treasury, was a former staff member of Goldman Sachs. Larry Summers, before he spouted racist and sexist adages as Harvard President, had advised Clinton to take apart the Glass-Steagall Act.

Elliot Spitzer, who as Attorney General of New York, prosecuted many Wall Street firms for unfair trading saw his career come to a dead halt after patronizing a prostitute. In Gibney's film, the director argues that the enemies he made at AIG and within Republican ranks aired his dirty laundry in order to force his resignation. Yet David Vitter, junior Senator from Louisiana has had two identical scandals, and remains a Senator.

And somehow, when a bill is brought to the house floor to raise taxes of the richest 1% to the levels under Clinton, there is an uproar! Somehow these CEOs who depleted the life savings of thousands of Americans, should be able to keep every penny that they "earn." But seniors and working-class families who have seen their ability to send their children to college thrown out the window should suffer the indignities of a system that rewards the richest for the poorest behavior.

Here are some of the books and films that should be watched and read for more information:

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