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Friday, August 26, 2011

Banking on Buffett’s Bank

Beyond wondering what could Ken Lewis have been thinking when he ok’d Bank of America’s purchase of Countrywide, it might be worth pondering why the Dodd-Frank Financial Reform Law of 2010 did not mandate splitting up banks such as Bank of America, which with over $1 trillion in assets are too big to fail. In other words, is simply increasing their reserve requirements tantamount to gambling with the financial system in a reckless manner? Should the elected representatives of the people and the states in the U.S. House and U.S. Senate, respectively, have displayed more fortitude in resisting the banking lobbyists even when that industry was known to have been culpable in the 2008 credit crisis?

The risk still remaining in August 2011 was evident when Bank of America’s stock price went down to $6. According to the New York Times, “the speed of the descent and the surge in the cost of insuring the company’s debt awakened memories of the financial crisis, when companies like Bear Stearns and Lehman Brothers found themselves short of capital.” To be sure, BOA’s capital held at $218 billion at the end of June 2011 by one key measure, though some investors did not trust the bank’s numbers. Of course, when there is a run on a bank, a capital figure is almost irrelevant, as are claims that additional capital are not necessary. Fortunately, Warren Buffett ignored such an asseveration from Brian Moynihan, the bank’s $9 billion loss over the previous 18 months, and the bank’s increased reserves ($18 billion from $4billion in January 2010) for investors of soured CDOs. Not wasting time scheduling a meeting with Moynihan, Buffett went to the board and soon had a deal wherein the investor would put down $5 billion in exchange for preferred stock paying a guaranteed 6% annual dividend and warrants good for ten years for 700 million shares. Like Buffett’s $5 billion deal with Goldman Sachs, which netted the investor over $1 billion as of mid-2011, the BOA deal looks like a money-maker for him. In exchange, the bank gets a huge vote of confidence, which regardless of any capital needs, was of great value to the bank (as the other deal had been to Goldman even though that bank had not yet needed $5 billion in additional capital).

Tossing around $5 billion to Goldman (and $3 billion to GE, which had been relying on the repo market) and $5 billion more three years later—in both cases to buttress a bank too big to fail—ought to make clear to the rest of us that merely allowing the $1 trillion club of banks to continue to exist is itself of such systemic risk that high stakes gambling is necessary to avoid catastrophe. My point is that through our elected representatives, the American electorate has a choice; we need not accept the presupposition that economic liberty requires that even banks whose very existence represents systemic risk have a right to continue to operate as going concerns. To put it differently, Warren Buffett was 80 years old when he put together the BOA deal.

Isn’t there something precarious about an empire the size of the U.S. relying on an old man to keep a major bank from imploding due to the financial fallout stemming from a stupid decision to acquire a mortgage servicer on steroids? Had anyone from BOA bothered to do what Larry McDonald did while he was at Lehman—Dick Fuld’s Lehman for Christ’s Sake!—namely, simply going a restaurant near Countrywide’s headquarters in California to chat at lunchtime with a few of the many brainless salesmen wearing gold watches and driving new sports cars bought from the double commissions on the known-to-be junk mortgages—BOA’s managers and board would (hopefully) never have agreed to ingest the leprosy, let alone play with it and touch it. Strangely, Ken Lewis had a reputation at the time as an expert on M&A; after all, that is how he had expanded BOA. Nevertheless, Lewis on Countrywide seems a lot to me like Lee at Gettysburg (what could possibly been in the confederate general’s head as he disregarded Longstreet’s objections to Pickett’s charge?—Lee might as well have used a firing squad on the division and saved the Union army the trouble). I think we are too enamored with authority that comes with position, whether in corporations, government or religion.

In summary, relying on one rich old man to prevent the financial system from imploding from the demise of a bloated, misguided bank like BOA does not sound very prudent to me. We might as well make every American city into Las Vegas and paint the towns red. Forgive me but I have to ask, Do we really know what we’re doing, folks? Minding the store might mean slapping some hands (or worse) when our elected representatives get to playing too much with the self-absorbed banking lobby.


Nelson D. Schwartz, “Buffett to Invest $5 Billion in Shaky Bank of America,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/business/buffett-to-invest-5-billion-in-shaky-bank-of-america.html

Ben Protess and Susanne Craig, “Buffett’s Bank of America Stake Viewed as a Seal of Approval,” New York Times, August 26, 2011.

Political Psychology: Syrian Human-Rights Abuses

According to the New York Times, “masked gunmen severely beat Syria’s best-known political cartoonist,” Ali Farzat, on August 25, 2011. The attack came days after he had published a cartoon showing Bashar Assad hitching a ride out of town with Qaddafi. To be sure, it seems foolhardy for the cartoonist to have published such a cartoon in Syria unless he meant it as an act of non-violent civil disobedience. If the latter, willingly taking the beating without hitting back would be of such moral fortitude that the injustice of the regime would be made transparent and discredited. How moral strength can overcome physical force is a point on which Gandhi had much faith.

Mr. Farzat suffered two broken fingers on his left hand, a fractured right arm, and a bruised eye. He was thrown out of a car after being beaten severely. The American Embassy in Damascus called the beating “ a government-sponsored, targeted, brutal attack.” A Syrian activist from Homs told a reporter that the beating scared the activists there. “But it’s only a proof of how desperate the regime is. It shows how frightened they are and proves that they are losing control.”  I want to focus on the two words, scared and frightened.

It is easy to understand why the beating would cause Syrian activists to be scared, for similar abuses could be done to them. It is less clear to me that a regime can be frightened. To government officials, dealing with political opposition must surely be part of their jobs. It is difficult for me to believe that individual officials would actually feel the emotion of fear due to protests unless a crowd were outside about to break in and physically attack the government officials. Even a fear of being arrested and sent to the ICC would not be as immediate as the fear of an imminent physical attack. Similarly, it does not follow that gunmen hired by a government official to beat a person would necessarily be angry. Of course, were the gunmen admirers of Assad and felt anger in looking at the cartoon, some of that anger could have been felt in attacking Farzat. However, even such anger would not be on the level of rage that one would expect in carrying out such a beating. So I wonder whether government operations involving beating (which I would argue is a category mistake—beating as a political tactic) are done more matter-of-factly than out of emotion such as activists feel. In other words, activists and others may project emotions that they feel onto people hired by government officials (and those officials themselves, unless directly insulted).

This is not to imply that government policy cannot (or should not) be motivated by emotion. For instance, rather than simply have its embassy link the government to the attack, the U.S. Government could have been motivated to appeal to the U.N. and/or N.A.T.O. to do more to protect civilians such as Mr. Farzat in Syria from the government charged with protecting them. This, after all, was the justification by which the U.N. Security Council passed the resolution permitting member nations to enforce a no-fly-zone in Libya.

In short, we ought to distinguish the psychology of government officials and their hired guns from that of protesters and activists. Doing so will add to our understanding of the actual dynamic that is at play when a regime turns against its own people rather than protects them.


Nada Bakri, “Political Cartoonist Whose Work Skewered Assad Is Brutally Beaten in Syria,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/world/middleeast/26syria.html

The Payroll Tax Cut: A Luxury?

Rep. Eric Cantor (R-Va) opposes continuing a tax cut. It is not that which was enacted under George W. Bush that disproportionately benefits the top brackets. That tax cut is good, presumably because it supports the growth of jobs. The tax cut opposed by the U.S. House Majority Leader pertains to the payroll tax. Workers’ contributions to social security were cut from 6.2% to 4.2% until the end of December 2011. A spokesman for the Majority Leader argues that if “the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.” However, it could be argued that whereas the tax cuts at the upper income brackets tend to be saved because the wealthy already have the means to purchase what they want, workers tend to spend any extra disposable income precisely because they don’t have the means to buy even all that they need, particularly in the case of families. Moreover, workers would feel the end of a tax cut more than a rich person would.

It does appear that the Republican party’s support of tax cuts hinges on the financial interest of the rich—tax cuts are not created equal. This asymmetry eclipses the party’s ideological goal of smaller government, for otherwise any tax cut would be sought because it would mean less government taking as well as the possibility of starving government spending. Furthermore, the asymmetry trumps a priority on reducing a deficit that was in 2010 over $1 trillion—that’s the annual addition to the U.S. Government’s debt (which was around $14 trillion at the start of 2011). On the heels of S&P downgrading that debt to AA, continuing any tax-cut, even to prop up the economy, is foolhardy. Only a fool disregards tomorrow for today.

It is possible that Freddie Mac and Fannie Mae could have done more for the economy by allowing homeowners in trouble to refinance to the lower interest rates in 2010 and 2011 than would have been lost from ending the tax cuts. If so, it could be that we could do better in lowering deficits while stimulating the economy. Even with some drag on the economy, the numbers on the baby boomers retiring suggests that the social security fund cannot afford the payroll tax cut in 2012. In fact, it could be that the fiscal impacts of government policy are less significant on the overall economy than on the deficits and debt, which are more immediate to the government (being of the government). The obsession on “revenue,” or whether to continue tax cuts, may itself be excessive with respect to economic growth (and even jobs), while the lack of attention to public debt as a priority may be woefully negligent and irresponsible, whether by Congress, the media, or the citizenry itself.


Jennifer Steinhauer, “For Some in G.O.P., a Tax Cut Not Worth Embracing,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/us/politics/26dems.html

Social Media in Protests and Criminal Activity

Officials from the E.U. state of Britain met with representatives of Twitter, Facebook and Blackberry on August 26, 2011 “to discuss voluntary ways to limit or restrict the use of social media to combat crime and periods of civil unrest.” Theresa May, the state’s home minister, said the aim of the meeting was to “crack down on the networks being used for criminal behavior.” However, reducing the protests, rioting, and looting to such behavior ignores the point that civil unrest can include political protest. So it may be disturbing to some that the discussion, according to some who were present, “was still aimed at reeling in social media and strengthening the hand of law enforcement in gathering information.” What would stop the police from gathering information on people taking part in a political protest against police brutality, for example? It would be convenient for a police department to classify a march as “criminial behavior” in breaching the peace, or simply collect information without any subterfuge.

Jo Glanville, the editor of Index on Censorship, observed, “You do not want to be on a list with the countries that have cracked down on social media during the Arab Spring.” Indeed, Iran sent a human rights delegation to Britain to study human rights violations.” It is worth pointing out that the E.U., of which Britain is a state, has a charter of human rights. Yet as Gordon Scobbie, a senior police employee pointed out, the police’s duty to protect people from being harmed by others should be balanced with human rights rather than simply disregarded. Innocent people in Britain were afraid for their housing and lives during the riots, and it would surely be moral for the police to have protected them. The decisive question is perhaps whether officials’ special access to social media could effectively be limited to this moral purpose, which is delimited by criminal rather than political behavior.

As Lord Acton said, absolute power corrupts absolutely. If the state gains too much control over individual citizens, that alone can act as a pressure-cooker that could explode in political violence and even revolution. What would stop a government from using its inroads in social media to defend itself from the political opposition? Furthermore, to the extent that social interaction and liberty are things that should be valued in a society (and republic), might decreased privacy, such as is already the case on Facebook, be counterproductive in the long run? Might even the potential invasiveness lead people to feel less secure, and thus more susceptible to joining efforts to topple the regime itself? In other words, too much institutional control of individuals can backfire and give rise to a self-fulfilling prophesy.


Ravi Somaiya, “In Britain, A Meeting on Limiting Social Media,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/world/europe/26social.html

Thursday, August 25, 2011

CEO Pay: American and European Values

To what extent do inequalities in wealth accrue based on structural elements, such as tax deductions that only wealthy people can use, as distinct from factors pertaining to individuals, such as talent, sacrifice, and effort? The two clusters can build on each other, as people who have become rich primarily by exercising a talent and working hard use some of their accrued power to “reform” the system to their advantage at the expense of the poor and middle class. Such structural reforms in turn can make it easier for wealthy people to become even richer. In the context of a society in progress, structural and idiosyncratic factors doubtlessly interact—the trend being of an increasing chasm between the rich and poor. 
For example, as the graph above indicates, CEO compensation in the U.S. increased at a higher percentage rate than did corporate profits and factory worker pay every year from 1990 to 2005. In 2010, CEO compensation increased 27% while workers saw their compensation increase just 2.1 percent. Meanwhile, the poverty rate increased from 12% to 14%. CEOs in the E.U. were making comparably less. Foreign Policy in Focus reports that in 2006, for example, “the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms.” I suspect that societal values have a lot to do with the difference, though changes in the make-up of American executive compensation should not be ignored.

Specifically, the ratio of pay between an American CEO and factory worker has been increasing in part to the growing proportion of executive compensation in the form of stock options. However, it is also true that Americans are relatively accepting of very high incomes (and inequality). A European is more likely to say, Enough is enough once a CEO has made far more than he or she could ever use. Politically, this is reflected in the fact that the Green Party and the Party of the Left are more powerful (and represented) in Europe than in America. Although the American two-party system acts to cut off the “extremes,” I suspect that the proportion of Americans who would agree with a European far-left party is less than in the E.U.

According to Foreign Policy in Focus, “In the United States, only 32 percent of the public [in 2007 supported] an outright pay cap on executive earnings. But average Americans [appeared] to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans [said that] corporate executives "earn too much.” This disconnect, which I submit does not exist in Europe, reflects the American value on economic freedom and the association of freedom with putting up with someone else’s objectionable views or conduct.

In Europe, during and after the recession of 2008, “the idea of raising taxes on high-income earners” gained currency. New E.U. and state taxes were proposed, including a tax on financial transactions (E.U.) and a one-time levy on high-income individuals. In the state of Britain, the tax rate on the highest segment was increased from 40% to 50%, and in the state of Italy the government was considering in 2011 an additional 5% tax on annual incomes above 90,000 euros and a 10% on incomes over 150,000 euros. Considering the increasing fiscal demands being put on the E.U. Government and the pressing debt situations in many states, the recessionary risk of increasing tax on the rich may well be worthwhile. Indeed, Liliane Bettencourt and fifteen other billionaires made an open plea for a special tax on the European rich. Recognizing that they had benefitted financially from the European “structure,” they wanted to help preserve it.

As valuable as closing budget-gaps by revenue and spending reforms at the state and E.U. levels is, the matter of addressing a cycle of increasing economic inequality remains unanswered. If a given societal structure acts as a multiplier effect on a given inequality—exacerbating it, in effect—then something more than a new tax may be needed. In other words, any bias in the system that increases the inequality can be neutralized by the addition of a countervailing structure. For example, placing a strict limit, such as $1 million, on what an individual can inherit—with the rest going back to society via the state—would act to counter the “snowball effect” of “old wealth.” At least as of 2011, a person can live comfortably on $1 million; the surplus, being essentially surfeit with respect to what  person is apt to consume, would be better used as a corrective of the tendency of wealth to further accumulate among the rich. In other words, just as banks with assets over $1 trillion are too big to fail, a billionaire getting richer may not be worth the “cost” to society in terms of the increased inequality—to say nothing of the probable compromise to a republic form of government (which can often be too easily bought).

In short, income and even accumulated wealth can reasonably be considered as applying generally to one’s life (and those of one’s kids and grandchildren) and more particularly to being used (i.e., spent). If one’s wealth vastly exceeds what can be spent on things one can consume, this might be an indication that the concentration has gotten out of hand, at the expense of society itself. In other words, if you have a bank account with a balance of $15 billion, do you really need $5 billion more?  Will you ever use it? There is an opportunity cost—part of which being contributing back to society and reducing the economic inequality. Even so, this way of thinking reflects a value on solidarity that is much more European than American, at least in terms of being valued. In other words, the typical American would be more likely to object to any limitation on economic freedom, even if the playing field is tilted in the direction of the wealthy being able to take disproportionate advantage of that freedom, irrespective of whether the additional wealth is usable.  


David Gauthier-Villars, “Wealthy French Push for Extra Tax,” Wall Street Journal, August 24, 2011. http://online.wsj.com/article/SB10001424053111904279004576526712217102264.html

Matt Krantz and Barbara Hansen, “CEO Pay Sours While Workers’ Pay Stalls,” USA Today, April 4, 2011. http://www.usatoday.com/money/companies/management/story/CEO-pay-2010/45634384/1

Sarah Anderson, “Executive Pay Debate Raging in Europe and the United States,” Foreign Policy in Focus, August 28, 2007. http://www.fpif.org/articles/executive_pay_debate_raging_in_europe_and_the_united_states

Refinancing Mortgages: Only for the Rich?

According to the U.S. Government, prices of homes with government-backed mortgages fell 5.9% in the second quarter of 2011 from a year earlier. This was the biggest decline since 2009, which was on the heels of the credit crisis of late 2008. In 2011, more than one in five homeowners with mortgages owed more than their homes are worth. That translates to at least 10.9 million families, almost none of whom could refinance. While the Treasury Department and Federal Reserve were able to pump hundreds of billions of dollars into American banks, federal programs to assist homeowners have been regarded as ineffective, according to the New York Times. Out of the $45.6 billion in TARP funds (the total being $800 billion) set aside to help struggling homeowners, only $22.9 billion had been spent by August 2011. Fewer than 1.7 million loans had been modified under federal programs as of 2011. Just over 760,000 permanent mortgage modifications had been initiated under the government programs while at least 5.5 million mortgages were in delinquency or foreclosure. Andrea Risotto, a spokesperson at Treasury, said that the unused portion of the TARP funds for homeowners would be used to reduce the deficit.

So it is perhaps not a surprise that even though mortgage interest rates were around 4%, the Obama administration was hedging in 2011 on whether to direct Fannie and Freddie to allow the existing mortgages guaranteed by those agencies to be refinanced. David Wessel observes that whereas taxpayers bore all the downsides of nationalizing the two housing guarantors, the two firms and their regulators have consistently resisted helping taxpayers over their heads on their mortgages.

Even though the mortgage servicers and banks had been at the very least complicit in the liar’s loans of many of the sub-prime mortgages, the Obama administration was not sure even as late as mid 2011 whether homeowners behind in their payments should be able to refinance. According to the New York Times, despite “record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.” Yet it is “unclear . . . whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it.” So it would appear that only homeowners who don’t need the refinancing will be able to get it.

The priorities showing through both with TARP and the refinancing ideas being floated in 2011 may reflect the anti-borrower bias Countrywide and other mortgage originators, whose meagerly educated sales force and managers believed that the struggling sub-prime borrowers were lazy and dishonest idiots who do not deserve a break from the “sacred contracts” (even if constructed as a liar’s loan—meaning a lender lying about the borrower’s income to secure a double commission). In other words, the imbalance concerning the treatment of the banks and the borrowers by the U.S. Government is consistent with the bankers’ selective attention to culpability. Most likely, the sub-prime crisis had multiple contributing sources. Were the government’s responses to reflect this, both the financial institutions and the borrowers would be given some leeway so as to obviate a collapse of the entire economy. Both the major banks and the struggling homeowners would be attended to because the crisis was larger than any one of them. For the government’s priorities to reflect one of them suggests disproportionate influence, which ultimately is detrimental to the republic itself.


Shaila Dewan and Louise Story, “U.S. May Back Refinance Plan for Mortgages,” the New York Times, August 25, 2011. http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html

David Wessel, “Tracking Missteps Behind World’s Economic Slump,” Wall Street Journal, August 25, 2011. http://online.wsj.com/public/page/news-tech-technology.html?mod=WSJ_topnav_tech_main

Wednesday, August 24, 2011

States Bypassing the E.U.

In August 2011, opposition was mounting among state governments to the Finnish-Greek bilateral deal wherein Greece would pay Finland 500 million euros in cash (in an escrow account) as collateral against Finnish loans. Angela Merkel of the state of Germany objected to one state getting extra collateral. Indeed, other state governments are seeking similar deals as Finland, which could undermine Greece’s ability to repay (and the “preferred creditor” status of the IMF). Furthermore, much of what the state of Greece owned at the time had already been earmarked to be sold for privatization proceeds.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Monday, August 22, 2011

Anna Hazare: A Modern Incarnation of Gandhi?

On August 21, 2011 in New Delhi, India, tens of thousands marched in support of Anna Hazare, then in the sixth day of his hunger strike in support of the Jan Lokpal anti-corruption bill. He told the crowd, “Even if the prime minister comes, I will not withdraw my hunger strike until the [bill] is passed in the Parliament. I can die but I will not bend.” To be sure, his “professed unwillingness to compromise,” as well as his “occasionally belligerent tone, has attracted criticism.” Yet he inspired mainly hope, particularly from the young. His main constituency, however, is the middle class, who feel alienated and unfairly treated relative to the political elite class. That same alienation may be present in the U.S. and E.U., but people in America and Europe do not have the model of Gandhi, which Hazare self-consciously embraces. In fact, it is surprising that it took until 2011 for a societal figure so Gandhi-like to emerge and galvanize a mass protest using Gandhi’s methods. 
                              Associated Press

Yet it can be asked: how much like Gandhi is Hazare? Would Gandhi have stopped eating simply out of preference for one of two bills before the Indian Parliament? Furthermore, would he have fasted until the bill was passed or until the corruption stopped? I have in mind here his hunger strike related to the fighting between Hindus and Muslims in India prior to partition. Would a law have satisfied him? I suspect it would not have, as he was reacting morally against the human suffering. Stop it, just stop it! Not: Legislate it, just pass it!

I contend that Gandhi’s strength was rooted in his moral fortitude. Even though he did engage in politics, it was his underlying moral concern that made his unwillingness to compromise laudable. Such stubbornness can fall on its face in a legislative context in which the choice is merely between two contending bills. So it is perhaps worth asking whether Anna Hazare is more like the Tea Party politicians in the U.S. or Gandhi in British India.

For a refusal to compromise to be a virtue (rather than compromise itself), there has to be some pretty convincing principles at stake and a clear distinction on the table. In other words, there had better be a serious moral wrong involved. Typically, this involves great human suffering. Wide-scale corruption and the related extortion of the poor and middle class not only violate moral principles, but result in real suffering as people are forced to humiliate themselves below another’s greed (and power). I think the humiliation goes deeper than even the unfairness involved, or maybe the two are consubstantial. In any case, the world needs more people willing to suffer as Gandhi did and less people able to get away with corruption and lying. Maybe Hazare could use his hunger strike as a means to teach a new generation of something of the rich moral heritage of India. The world would not be for the worst.


Jim Yardley, “Thousands Back Antigraft Hunger Strike in New Delhi,” New York Times (August 22, 2011). http://www.nytimes.com/2011/08/22/world/asia/22india.html