From the NYT: At the Polls, Icelanders Punish Conservatives
Photographs of bankers who left Iceland after the financial crisis have a new use in the restroom of a bar in Reykjavik, the capital.
hilzoy: Magic!
From the NYT:
"The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise.
Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits.
Even as the industry's compensation has been put in the spotlight for being so high at a time when many banks have received taxpayer help, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees, according to a review of financial statements."
The fact that the very banks who just caused the world's economy to collapse are helping themselves to the same pay they made when they were earning record profits has occasioned a certain amount of snark from the class warriors of the hard left. But I think they're wrong. The banks' profits in the first quarter absolutely justify enormous paychecks, since they had to be made to appear where the uninitiated might see no profits at all.
Consider Citi: it made a profit of $1.6 billion, of which $2.7 billion was gains booked because -- get this -- its creditworthiness went down. To those of us outside the financial services industry, this might sound fishy: how can the fact that people think you're getting more likely to default mean that you are doing better? Here's the answer:
"When the debt declines in value, the banks have to assume at the end of the quarter that they bought the debt back and retired it. The banks would "buy it back" at a lower price, so they get to make a profit. Here's an example: Imagine that a bank has a bond that was once worth 100 cents on the dollar and is now trading at 60 cents on the dollar. At the end of the quarter, the bank has to assume it would buy that debt back at 60 cents -- which is essentially a profit of 40 cents.
That's what happened to Citigroup in the first quarter. Citigroup had a rough quarter in which investors showed little faith in the bank's future by widening the spreads on the bank's credit-default swaps. As those spreads widened, they sent the message that investors believed Citigroup would be less profitable. In a nice twist, the widening spreads also triggered an accounting rule that allowed Citigroup to record a profit."
Citi would have booked over a billion in losses without this -- and that's without getting into the other fascinating ways in which they made their earnings look more impressive than they otherwise have seemed. Bank of America did the same thing. Wells Fargo also deserves credit for using other accounting rules to make profits appear where none had been before.
But all of these feats of accounting pale before the astonishing achievement of Goldman Sachs, which is on track to pay employees almost as much, on average, as it did in 2007. That might seem excessive -- until you realize that in order to book a profit, Goldman Sachs had (among other things) to make an entire month disappear -- a month with a pretax loss of $1.3 billion. That's not easy to do -- but the intrepid Goldman employees made it happen. I'd say that deserves a raise.
If it weren't for the magicians on Wall Street, Goldman Sachs might have had to make do with twelve months like everyone else. Citi and Bank of America would not have been able to transform their deteriorating credit into big profits. Their actual loans disintegrate before our eyes, along with the rest of the economy; there seems to be no relief in sight; and lo! they make profits appear out of thin air. If Penn and Teller deserve their millions, why not Wall Street?
Krugman: Money for Nothing
On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.
Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.
All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.
Why is this disturbing? Let me count the ways.
First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”
I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.
Benen: GREAT MOMENTS IN POLITICAL FORESIGHT....
Back in February, a trio of Senate Republican "centrists" were willing to allow the chamber to vote on an economic recovery package, but not before they took out expenditures they perceived as unnecessary.
Sen. Susan Collins (R) of Maine spoke to reporters on Feb. 5, and explained her efforts in the stimulus negotiations.
"[T]hese decisions are difficult. For example, I think everybody in the room is concerned about a pandemic flu. Does it belong in this bill? Should we have $870 million in this bill? No, we should not. So, after discussion, we agreed that we would cut the funding for that, knowing that we can deal with that issue later."
Six days earlier, Collins was incredulous on the subject: "There is funding to help improve our preparedness for a pandemic flu.... What does that have to do with an economic stimulus package?"
Oops.
What's more, The Political Carnival notes that Collins' website, at least as of this morning, promotes a Wall Street Journal article that touts Collins' efforts to remove pandemic-flu preparedness from the recovery legislation.
As for the substance of Collins' concerns, and the rationale for removing the funding in February, John Nichols has a report in the The Nation noting precisely how the resources relate to an economic recovery.
When House Appropriations Committee chairman David Obey, the Wisconsin Democrat who has long championed investment in pandemic preparation, included roughly $900 million for that purpose in this year's emergency stimulus bill, he was ridiculed by conservative operatives and congressional Republicans.
Obey and other advocates for the spending argued, correctly, that a pandemic hitting in the midst of an economic downturn could turn a recession into something far worse -- with workers ordered to remain in their homes, workplaces shuttered to avoid the spread of disease, transportation systems grinding to a halt and demand for emergency services and public health interventions skyrocketing. Indeed, they suggested, pandemic preparation was essential to any responsible plan for renewing the U.S. economy.
Now, as the World Health Organization says a deadly swine flu outbreak that apparently began in Mexico but has spread to the United States has the potential to develop into a pandemic, Obey's attempt to secure the money seems eerily prescient.
And his partisan attacks on his efforts seem not just creepy, but dangerous.
On Feb. 5, the same as Collins unfortunate remarks, Karl Rove had an op-ed in the Wall Street Journal complaining about stimulus package, in part because it included money for "pandemic flu preparations."
Sometimes, these folks just don't think ahead.
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