Federal Bailout - Stress Test Negotiations Call Into Questions Results...
I Love it we can't be honest with the American People For One Stinkin Second!!!
Well come on now...we can't tell the American People We Are Another 68 Billion in the Hole! That would be wrong...
Honesty best policy on stress tests
Leela de Kretser
May 12, 2009 12:00am
IF the US Government wants its citizens to truly begin trusting the banks, it might want to start trusting the people enough to be honest with them.
After yet another week of growing optimism and a surging Dow, we've just learned that the results of the Federal Reserve's stress tests on banks - touted as the most comprehensive study done of the industry - aren't as clear cut as first made out.
The Wall Street Journal revealed that Fed officials had significantly cut the size of the capital deficits facing several banks after spending two weeks negotiating with executives over the results before they were released on Thursday.
Thanks to the silver tongues of its executives, Citigroup went from a capital shortfall of $US35 billion to $US5.5 billion in the Fed's much-vaunted report, which looked at how much money the banks would need if Depression-like conditions continued over the next two years.
Wells Fargo's deficit shrank from $US17.3 billion to $US13.7 billion and Bank of America had nearly a third taken off an estimated $US50 billion capital hole. Instead, the central bank said it lacked a necessary $US33.9 billion to fight off the worst-case scenario used in its stress tests.
It seems when the Fed submitted its preliminary findings, executives at more than half the banks flipped out, insisting they were not being given enough credit for future transactions or revenue growth.
Amazingly, given the recent history of the American financial system, when the banking executives pushed back the regulators suddenly became much more optimistic about many of the banks' future performances.
Not only did Fed officials apparently cave in to angry banking executives over the size of capital holes, but the Journal also revealed that the regulator used a far gentler measurement to test the banks than many investors and analysts had expected.
Instead of regulators employing the more commonly used metric to assess capital levels, known as tangible common equity, they opted for another measurement called Tier 1 common capital.
This, an analyst told the Journal, meant that the banks' combined shortfall was $US68 billion less than it would have been under the first method.
Over the coming days, we can expect to hear the banks on the defensive, arguing that the Federal Reserve was out of its mind to come up with such large numbers in the first place. The banks, the executives will argue, simply helped the Fed come to a clearer understanding of what these numbers should be.
The problem, of course, is that the new government rode to power on the promise that it was going to get tough on Wall Street.
This, remember, is supposed to be a new dawn when it comes to financial regulation. Letting the banks do it themselves just resulted in catastrophe.
And even if most Americans lack the financial smarts to wade through a report on capital requirements at banks, they surely know when they're being whitewashed.
Showing posts with label foreclosure bailout. Show all posts
Showing posts with label foreclosure bailout. Show all posts
Tuesday, May 12, 2009
Monday, May 11, 2009
Bank Bailout-Deutsche Bank’s Culture of Risk Costs Each Tax Payer $105.00 This Year
http://patrick.net/wp/?p=16278
God Bless Patrick.Net, I do love it.
Every tax payer in America wrote a check for $105.00 to Duetchebank to bail it out, so executives could take home huge paychecks, and oh yeah, nothing as changed business as usual. I love it when people scream about socialism, um, this is worse...we are paying huge corporations so that they can keep us impoverished and destroy our country.
Hello!
This is not the free market people, in a free market capitalist system these banks would have been handed their asses for the risks they took. And they should!
People say the system would crash, hmmm, I think they mean a lot of rich people would lose their shirts.
WAKE UP SHEEPLE!
Deutsche Bank’s Culture of Risk
Originally published in the NY Times. Reposted on patrick.net with permission of the author Deepak Moorjani.
Deepak Moorjani, an employee and shareholder of Deutsche Bank, offers his views on his firm’s risk-taking and the reward structure that he says helped encourage it. Mr. Moorjani is currently involved in litigation with a unit of Deutsche Bank; the views he expresses are his own and do not necessarily represent the views of Deutsche Bank.
When speaking about the banking sector, many people mention a “subprime crisis” or a “financial crisis” as if recent write-downs and losses are caused by external events. Where some see coincidence, I see consequence. At Deutsche Bank, I consider our poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances.
In my opinion, we took too much risk, failed to manage this risk and broke too many laws and regulations.
For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank. I joined the firm in 2006 in one of its foreign subsidiaries, and my due diligence revealed management failures as well as inconsistencies between our internal actions and our external statements.
Beginning in late 2006, my conclusions were disseminated internally on a number of occasions, and while not always eloquently stated, my concerns were honest. Unfortunately, raising concerns internally is like trying to clap with one hand. The firm retaliated, and this raises the question: Is it possible to question management’s performance without being marginalized, even when this marginalization might be a violation of law? Two years later, our mounting losses are gaining attention, and I offer my experiences and my thoughts in the hopes of contributing to the shareholder and public policy debate.
Background
Born and raised in Toledo, Ohio, I was infused with Midwestern values of hard work, individual responsibility, honesty, quiet integrity and fiscal prudence. After careers in New York City and Menlo Park, Calif., I moved to Tokyo in 2005 to pursue investments in corporate restructurings and distressed assets. At the time, the Japanese market offered unique opportunities.
I joined Deutsche Bank in 2006 to build an investment business within its commercial real estate lending operation, and I was generally surprised by the aggressive sales culture within our firm. While many people consider the banking sector’s problems to be caused by residential lending, I witnessed multibillion-dollar loan proposals for commercial property. With funds provided at more than 90 percent loan-to-value, these loans were “priced to perfection” and assumed that property prices and rental rates would continue to rise. For perspective, a single billion-dollar commercial real estate loan is equivalent to 2,000 residential loans of $500,000.
In general, my colleagues are hard-working, decent people, but the system of incentives encourages people to take risks. I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay. Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People’s Money) insures that the firm absorbs any losses from bad trades.
As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from American International Group (which has effectively been nationalized with $180 billion in taxpayer funds). Essentially, every American household sent my firm a check for $105. The reason for this payment: my firm bought credit default swaps from A.I.G. In plain-speak, we bought unregulated “insurance” from A.I.G. to cover losses from bad trades. What did taxpayers get in return? Nothing. Taxpayers simply paid an I.O.U. triggered by our gambling losses. (Note: This $12 billion payment was more than 50 percent of our market capitalization at the time of its disclosure).
Solution
While shareholders (and taxpayers) are becoming angry, I think they should be furious. Our management has eviscerated the concept of moral hazard by systematically adopting pay schemes that reward excessive risk-taking despite its long-term implications. If governments have decided to socialize our losses, governments are implicitly saying that the banking industry is fundamentally sound. In effect, governments would be voting in favor of the status quo. In my opinion, the status quo does not work, and we need to address the core issues of structure and compensation. Capping executive compensation is a first step, but as a solution, it is insufficient.
While I am on the “inside” at Deutsche Bank, much of my career has been within partnership structures, and I continue to advocate a partnership-like structure for our firm. With collective liability, partnerships provide a proper alignment of incentives between management and its stakeholders. In a partnership, bonuses are paid from co-investments and profits, not revenues. Losses are shared, and these losses introduce an appropriate penalty for excessive risk-taking. If profits are overstated in one-year, the already-paid bonuses are clawed-back (returned to the partnership).
Conclusion
Our asymmetric incentive structure is fundamental to our problems. The question remains: Do we maintain the status quo and naively hope for better results, or do we begin to implement structural reforms in order to align the incentives? If taxpayers are forced to pay for the losses from bad trades, this socialization of risk adds to the moral hazard problem. This socialization of risk actually encourages more aggressive behavior in the future.
The call-option bonus structure has led to the ascendency of sales over risk management. Maintaining the status quo is not a smart bet, and we cannot afford to ignore the fundamental issues of structure and compensation. We need to introduce personal responsibility into the system, because accountability is glaringly absent. The collective liability aspect of partnerships achieves this goal; collective liability is the most powerful way to align incentives and encourage rational risk-taking.
As an employee and as a shareholder, I am doing my part to build a better firm. Unfortunately, the political landscape within our firm finds it difficult to assimilate any criticism of management’s leadership. To my fellow employees, I ask that you resist the incentives that reward groupthink. To my fellow shareholders, I ask that you implement the changes needed to address our asymmetric incentive structures.
God Bless Patrick.Net, I do love it.
Every tax payer in America wrote a check for $105.00 to Duetchebank to bail it out, so executives could take home huge paychecks, and oh yeah, nothing as changed business as usual. I love it when people scream about socialism, um, this is worse...we are paying huge corporations so that they can keep us impoverished and destroy our country.
Hello!
This is not the free market people, in a free market capitalist system these banks would have been handed their asses for the risks they took. And they should!
People say the system would crash, hmmm, I think they mean a lot of rich people would lose their shirts.
WAKE UP SHEEPLE!
Deutsche Bank’s Culture of Risk
Originally published in the NY Times. Reposted on patrick.net with permission of the author Deepak Moorjani.
Deepak Moorjani, an employee and shareholder of Deutsche Bank, offers his views on his firm’s risk-taking and the reward structure that he says helped encourage it. Mr. Moorjani is currently involved in litigation with a unit of Deutsche Bank; the views he expresses are his own and do not necessarily represent the views of Deutsche Bank.
When speaking about the banking sector, many people mention a “subprime crisis” or a “financial crisis” as if recent write-downs and losses are caused by external events. Where some see coincidence, I see consequence. At Deutsche Bank, I consider our poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances.
In my opinion, we took too much risk, failed to manage this risk and broke too many laws and regulations.
For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank. I joined the firm in 2006 in one of its foreign subsidiaries, and my due diligence revealed management failures as well as inconsistencies between our internal actions and our external statements.
Beginning in late 2006, my conclusions were disseminated internally on a number of occasions, and while not always eloquently stated, my concerns were honest. Unfortunately, raising concerns internally is like trying to clap with one hand. The firm retaliated, and this raises the question: Is it possible to question management’s performance without being marginalized, even when this marginalization might be a violation of law? Two years later, our mounting losses are gaining attention, and I offer my experiences and my thoughts in the hopes of contributing to the shareholder and public policy debate.
Background
Born and raised in Toledo, Ohio, I was infused with Midwestern values of hard work, individual responsibility, honesty, quiet integrity and fiscal prudence. After careers in New York City and Menlo Park, Calif., I moved to Tokyo in 2005 to pursue investments in corporate restructurings and distressed assets. At the time, the Japanese market offered unique opportunities.
I joined Deutsche Bank in 2006 to build an investment business within its commercial real estate lending operation, and I was generally surprised by the aggressive sales culture within our firm. While many people consider the banking sector’s problems to be caused by residential lending, I witnessed multibillion-dollar loan proposals for commercial property. With funds provided at more than 90 percent loan-to-value, these loans were “priced to perfection” and assumed that property prices and rental rates would continue to rise. For perspective, a single billion-dollar commercial real estate loan is equivalent to 2,000 residential loans of $500,000.
In general, my colleagues are hard-working, decent people, but the system of incentives encourages people to take risks. I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay. Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People’s Money) insures that the firm absorbs any losses from bad trades.
As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from American International Group (which has effectively been nationalized with $180 billion in taxpayer funds). Essentially, every American household sent my firm a check for $105. The reason for this payment: my firm bought credit default swaps from A.I.G. In plain-speak, we bought unregulated “insurance” from A.I.G. to cover losses from bad trades. What did taxpayers get in return? Nothing. Taxpayers simply paid an I.O.U. triggered by our gambling losses. (Note: This $12 billion payment was more than 50 percent of our market capitalization at the time of its disclosure).
Solution
While shareholders (and taxpayers) are becoming angry, I think they should be furious. Our management has eviscerated the concept of moral hazard by systematically adopting pay schemes that reward excessive risk-taking despite its long-term implications. If governments have decided to socialize our losses, governments are implicitly saying that the banking industry is fundamentally sound. In effect, governments would be voting in favor of the status quo. In my opinion, the status quo does not work, and we need to address the core issues of structure and compensation. Capping executive compensation is a first step, but as a solution, it is insufficient.
While I am on the “inside” at Deutsche Bank, much of my career has been within partnership structures, and I continue to advocate a partnership-like structure for our firm. With collective liability, partnerships provide a proper alignment of incentives between management and its stakeholders. In a partnership, bonuses are paid from co-investments and profits, not revenues. Losses are shared, and these losses introduce an appropriate penalty for excessive risk-taking. If profits are overstated in one-year, the already-paid bonuses are clawed-back (returned to the partnership).
Conclusion
Our asymmetric incentive structure is fundamental to our problems. The question remains: Do we maintain the status quo and naively hope for better results, or do we begin to implement structural reforms in order to align the incentives? If taxpayers are forced to pay for the losses from bad trades, this socialization of risk adds to the moral hazard problem. This socialization of risk actually encourages more aggressive behavior in the future.
The call-option bonus structure has led to the ascendency of sales over risk management. Maintaining the status quo is not a smart bet, and we cannot afford to ignore the fundamental issues of structure and compensation. We need to introduce personal responsibility into the system, because accountability is glaringly absent. The collective liability aspect of partnerships achieves this goal; collective liability is the most powerful way to align incentives and encourage rational risk-taking.
As an employee and as a shareholder, I am doing my part to build a better firm. Unfortunately, the political landscape within our firm finds it difficult to assimilate any criticism of management’s leadership. To my fellow employees, I ask that you resist the incentives that reward groupthink. To my fellow shareholders, I ask that you implement the changes needed to address our asymmetric incentive structures.
Subscribe to:
Posts (Atom)
