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by Rob Barrone | Correspondent
Hudson -- Despite "end of the world" prophecies and then blizzard-like conditions outside Hudson High School's Ray "Buck" Hyser Gymnasium, the boys basketball game between Hudson and Aurora went on as scheduled Dec. 21.
It didn't take long for the Explorers to take control as they jumped out to an early lead and coasted to a 68-34 decision.
Hudson had leads of 17-2 (late in the first quarter) and 19-7 at the first stoppage, 32-16 at intermission and 52-32 after three periods.
It's safe to say the Explorers were never seriously threatened in this outing.
The Greenmen fought to the end, but no matter what combination of five Hudson head coach Jeff Brink assembled on the floor, the Explorers had the upper hand. It didn't take Brink long to empty his bench.
"Our starters didn't get a ton of minutes," Brink said. "We got some extensive playing time from our bench. We played 17 guys. It was nice to see those guys get into the game and contribute."
The biggest contribution off the bench was from 6-foot-2 junior Kevin Zullo.
The three-point shooting specialist came out of an early season and finished with a career-high 18 points.
After missing his first two attempts, Zullo hit from deep late in the first half and then added another late in the third.
In the fourth, he went off.
On four straight Hudson possessions, Zullo took deep shots, from well outside the arc, and buried them. Zullo made 6-of-9 three-pointers on the evening.
"That's what Kevin does," Brink said. "He was open and made some shots. It was nice to see him get his confidence. We see that all the time in practice, but that's the first time this year, he has gone off with an explosive-type game."
Aurora's top scorer on the night, Paul Kollat, also did most of his scoring in the final eight minutes. The junior scored 10 of his 12 points in the fourth.
Unfortunately, it was too little, too late for the Greenmen.
Aurora committed eight turnovers in the game's first five-plus minutes of action. Zack Brandy (12 points on the evening), Ben Gedeon (nine points and nine rebounds) and Steve Boslet (nine points) took control early on the offensive end, turning Greenmen miscues into Hudson points.
The Explorers (4-2) ran off 12 straight points in the period to stretch a 5-2 edge to 17-2.
Aurora committed five more turnovers and gave up 10 first-half rebounds on the offensive glass as Hudson had a 32-16 lead at halftime. The Explorers finished with a 37-22 advantage on the glass.
If there was any hope for the Greenmen, it disappeared early in the second half.
On its first five possessions, Aurora drew iron on its shots and Gedeon came away with all five rebounds.
"Zack took control of the game early and we wanted to get Ben involved," Brink said. "Ben had a size and strength advantage in the post and he set the tone early.
"Our post guys did a great job on the glass. Defensively, we played pretty well. Mitch [Guadagni] came in and did a great job at the defensive end. We also got to work on our man-to-man in the second half."
Guadagni finished with six points and four steals.
The Explorers are scheduled to host the Hudson Holiday Tournament Dec. 27 and 29.
The tournament is expected to feature Streetsboro, Medina and Kenston (Chagrin Falls).
Play is set to begin both days at 6 p.m.
Email: email@example.com
Phone: 330-541-9444


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It has been a very long month of family virus sharing, launching the Rambler, munchikn turning 2 and moving into a new classroom, bike to work month/week and it goes on and on. Last evening was a time to just take a break, ride the long way to dinner as a family and have some fun outside.
I have been sharing pictures like this for almost two years now, and every time I look at them I realize how blessed I/we are as a family to have this life together, and the freedom to ride places like this every day. I hope that the pictures help to inspire you to get out there and ride, with your family if you can, and get the most out of your home that you can.
There is still plenty going on and a backlog to dig out from, but taking time to smell the roses every now and then helps keep the machine running.

subset: commoncrawl


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A QUARTER of Wall Street execs see wrongdoing as the key to success (and 16% said they'd commit insider trading if they could get away with it)
Yet in an era of partisan gridlock in the nation's capital, Democrats and Republicans have come together to repeal or weaken those rules. Although Obama may not want to sign a standalone package of Wall Street deregulation into law, bipartisan legislation could be inserted into a broader bill that the president might find difficult to reject.
Bank executives indicted in Virginia bank failure
If in four weeks a president-elect Mitt Romney is seeking a Treasury secretary, he should look here, to Richard Fisher, president of the Federal Reserve Bank of Dallas. Candidate Romney can enhance his chance of having this choice to make by embracing a simple proposition from Fisher: Systemically important financial institutions (SIFIs), meaning too-big-to-fail (TBTF) banks, are "too dangerous to permit."
Former Citigroup CEO Weill Says Banks Should Be Broken Up
By Donal Griffin and Christine Harper – Jul 25, 2012 6:00 PM ET
Sanford "Sandy" Weill, whose creation of Citigroup Inc. (C) ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said it's time to break up the largest banks to avoid more bailouts.
"What we should probably do is go and split up investment banking from banking," Weill, 79, said yesterday in a CNBC interview. "Have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
Weill helped engineer the 1998 merger of Travelers Group Inc. and Citicorp, a deal that required repeal of the Depression-era Glass-Steagall law that forced deposit-taking companies backed by government insurance to be separate from investment banks. The New York-based company became the biggest lender in the world before taking a $45 billion taxpayer bailout in 2008 to avoid collapse.
Weill joins regulators, investors, analysts, former bankers and lawmakers in calling for the break-up of too-big-to-fail banks to unlock shareholder value and prevent another financial crisis.
"There is finally a growing recognition among a wide range of market analysts, financial market participants and policy makers that the repeal of Glass-Steagall was a mistake," said Thomas Hoenig, a Federal Deposit Insurance Corp. board member and former head of the Kansas City Federal Reserve. "It's time now to restrict banks to core services."
House Bill
Rep. Brad Miller, a Democrat from North Carolina, has introduced legislation that would cap the size of the biggest banks.
"There are very credible establishment voices now saying we really gain little if anything from the size and complexity of these banks," Miller said in an interview. He said he doesn't hold out much hope the Republican-controlled House of Representatives will take up his bill, meaning any breakup would be up to shareholders taking the initiative.
Arthur Levitt, a former business partner of Weill's who was chairman of the Securities and Exchange Commission when Citigroup was created, said Weill was "largely responsible" for the rollback of Glass-Steagall.
"He fought very hard for it, and really what Sandy did was to take advantage of regulators who weren't and still aren't doing their job," said Levitt, who is a member of the board of Bloomberg LP, the parent of Bloomberg News.
'Weak' Job
Levitt said he regrets supporting the bill that overturned Glass-Steagall, and didn't realize "how weak a job as regulators the Fed and Comptroller's office were doing," referring to banking oversight by the Federal Reserve and Office of the Comptroller of the Currency.
David Knutson, an analyst with Legal & General Investment Management, said it was hard to believe Weill, "the shatterer of Glass-Steagall," has now changed his mind. "He enjoyed the benefits of the demise of Glass-Steagall and only now has he become remorseful? Where was he five years ago?" said Knutson, whose firm owns bonds sold by Citigroup and JPMorgan (JPM) Chase & Co., now the biggest U.S. bank by both deposits and assets.
Directors of Citigroup paid Weill about $1 billion, including stock, during his 17 years as CEO, as he assembled a behemoth with operations across the world that offered investment banking, trading, commercial banking, insurance and consumer finance. He left the board in 2006.
Taxpayers rescued Citigroup in 2008 after losses tied to subprime mortgages threatened the financial system. Bank of America Corp. also accepted a $45 billion bailout while JPMorgan and Wells Fargo & Co. (WFC) each took $25 billion. Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) were given $10 billion apiece.
Taking Deposits
"We can have size and scale but it doesn't have to be connected to a deposit-taking institution," Weill said in the interview. "Have banks be deposit-takers, have banks make commercial loans and real estate loans."
Banks would be even more valuable if they heeded his advice, Weill said. Citigroup's shares, which traded as high as $564.10 at the end of 2006 adjusted for a reverse stock split, plummeted to $10.20 during March of 2009, six months after Lehman Brothers Holdings Inc. filed for bankruptcy protection. They closed at $25.79 yesterday.
Jon Diat, a spokesman for the bank, declined to comment on the remarks by Weill, who held the positions of chairman and chief executive officer of Citigroup after the Travelers merger. He retains the title of chairman emeritus.
Parsons, Reed
Richard Parsons, who earlier this year ended a 16-year tenure on Citigroup's board, said in April that the repeal of Glass-Steagall made the business more complicated and ultimately helped cause the financial crisis. Former Citicorp CEO John Reed apologized in 2009 for his role in building Citigroup and said banks that big should be divided into separate parts.
The four most complex U.S. financial holding companies — JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America — each contain more than 2,000 subsidiaries, with two of those controlling more than 3,000 subsidiaries, according to a research paper published this month by the Federal Reserve Bank of New York. Citigroup has 1,645. Just one firm exceeded 500 subsidiaries in 1991, the report shows.
Weill said he hasn't spoken with Citigroup CEO Vikram Pandit, 55, or JPMorgan's Jamie Dimon, 56, about his change of heart. Dimon is a former protege of Weill's and helped build Travelers before the merger with Citicorp.
Wall Street chiefs have resisted calls to break up their companies. Morgan Stanley CEO James Gorman, 54, described the debate as a "knee-jerk discussion" in a June 27 interview.
Dimon's View
Dimon said he disagreed with a shareholder who asked on a July 13 conference call whether the bank had become too big to manage.
"I beg to differ," Dimon said. "There is huge strength in this company that the units get from each other."
Breaking up the banks into different parts would make the firms much more valuable, Weill said. The stocks of five of the six biggest U.S. banks — Citigroup, JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley — are languishing at or below tangible book value. That means different pieces of the banks are worth more than the whole, fund manager Michael F. Price said last month.
Citigroup's shares trade at 50 percent of tangible book value and New York-based Morgan Stanley's are at 47 percent, according to data compiled by Bloomberg.
"Now you have the preeminent creator of the large financial-conglomerate model agreeing that large banks should be broken up," Michael Mayo, an analyst at CLSA Ltd. in New York who has covered the largest U.S. banks since before Glass- Steagall's repeal, said in an interview. "It's going to make some people pretty upset, since he's the one who created the current Citigroup model, and now he's saying, 'Look, we messed up.'"
Greenspan Speech
Even Alan Greenspan, who fought for the repeal of Glass- Steagall when he was chairman of the Federal Reserve, said in 2009 that breaking up the banks might make them more valuable.
"In 1911, we broke up Standard Oil — so what happened?" Greenspan said at New York's Council on Foreign Relations. "The individual parts became more valuable than the whole. Maybe that's what we need to do."
Weill altered his view about the industry because "the world changes," he said, adding that he's "been thinking about it a lot over the last year."
"The world we live in now is not the world we lived in 10 years ago," Weill said. "Good things are simple."
Former President Bill Clinton said when he signed the repeal of Glass-Steagall in 1999 that it was "no longer appropriate" for the economy.
"The world is very different," Clinton said at a White House signing ceremony.
February 3, 2011, 5:00 am
The Ruinous Fiscal Impact of Big Banks
By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."
The newly standard line from big global banks has two components – as seen clearly in the statements of Jamie Dimon of JPMorgan Chase and Robert E. Diamond Jr. of the British bank Barclays at Davos last weekend.
First, if you regulate us, we'll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.
This rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse.
On Tuesday, in testimony to the Senate Budget Committee , I had an opportunity to confront this myth-making by the banks and to suggest that the bankers' logic is completely backward.
Start with the bankers' point about budget deficits and spending cuts. Public deficits and debt relative to gross domestic product have ballooned in the last three years for one simple reason – the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.
No one forced the banks to take on so much risk. Top bankers lobbied long and hard for the rules that allowed them to behave recklessly. And these same people effectively captured the hearts, minds and, some would say, pocketbooks of the regulators – in the sense that a well-regarded regulator can and often does go work for a bank afterward.
The mega-recession, which is starting to look more like a mini-depression in terms of employment terms for the United States (which lost 6 percent of employment and is still down 5 percent from the pre-crisis peak), caused a big decline in tax revenues. Falling taxes under such circumstances are part of what is known technically as the "automatic stabilizers" of the economy, meaning they help offset the contractionary effect of the financial shock without the government having to take any discretionary action.
Whatever you think about the effectiveness of the additional fiscal stimulus packages provided to the economy in early 2008 (under President Bush) or starting in early 2009 (under President Obama), remember that the impact of these on the deficit was small relative to the decline in tax revenue.
The total fiscal impact of this cycle of regulatory co-option, as reflected, for example, in the Congressional Budget Office baseline debt forecast (which compares what this was precrisis and what this is now) – is about a 40-percentage-point increase in net federal government debt held by the private sector.
As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.
Neil Barofsky, the special inspector general for the latest quarterly report, which appeared last week: perhaps TARP's most significant legacy is "the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are 'too big to fail.' "
Next up for the United States economic outlook is not necessarily another too-big-to-fail boom-bust-bailout cycle. It may well move on to too big to save, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country.
In this context, the idea that megabanks would move to other countries is simply ludicrous. These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.
Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there. Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.
The latest credit rating methodology from Standard & Poor's says essentially just this – henceforth, it will evaluate banks not just on their standalone creditworthiness, but also in terms of their ability to attract generous support from a creditworthy government in the event of a crisis.
New York-based banks might move to London, and vice versa. But the Bank of England is far ahead of the Federal Reserve in its thinking about how to rein in banks – see, for example, the new paper by David Miles (a member of the Monetary Policy Committee in Britain) on the need for much more equity financing in banks than specified in the Basel III agreement.
Officials outside the United States are increasingly beginning to understand the point being made by Anat Admati and her colleagues – bank capital is not expensive in any social sense (for example, look at Switzerland, where the biggest banks are now required to have about double the Basel III levels of equity funding). The United States needs its financial system, particularly its largest banks, to be financed much more with equity than is currently the case.
The intellectual right in the United States understands all this and, broadly speaking, agrees. Officials in other countries begin to see the light. Unfortunately, officials in the United States and those of the political right who seek public office – as well as much of the political left – still appear greatly in thrall to the big banks.
Time to break up the big banks
By George F. Will, Published: February 8
With his chronically gravelly voice and relentlessly liberal agenda, Sherrod Brown seems to have stepped out of "Les Miserables," hoarse from singing revolutionary anthems at the barricades. Today, Ohio's senior senator has a project worthy of Victor Hugo — and of conservatives' support. He wants to break up the biggest banks.
He would advocate this even if he thought such banks would never have a crisis sufficient to threaten the financial system. He believes they are unhealthy for the financial system even when they are healthy. This is because there is a silent subsidy — an unfair competitive advantage relative to community banks — inherent in being deemed by the government, implicitly but clearly, too big to fail.
The Senate has unanimously passed a bill offered by Brown and Sen. David Vitter, a Louisiana Republican, directing the Government Accountability Office to study whether banks with more than $500 billion in assets acquire an "economic benefit" because of their dangerous scale. Is their debt priced favorably because, being TBTF, they are considered especially creditworthy? Brown believes the 20 largest banks pay less when borrowing — 50 to 80 basis points less — than community banks must pay.
In a sense, TBTF began under Ronald Reagan with the 1984 rescue of Continental Illinois, then the seventh-largest bank. In 2011, the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) had 40 percent of all federally insured deposits. Today, the 5,500 community banks have 12 percent of the banking industry's assets. The 12 banks with $250 billion to $2.3 trillion in assets total 69 percent. The 20 largest banks' assets total 84.5 percent of the nation's gross domestic product.
Such banks have become bigger, relative to the economy, since the financial crisis began, and they are not the only economic entities to do so. Last year, the Economist reported that in the past 15 years the combined assets of the 50 largest U.S. companies had risen from around 70 percent of GDP to around 130 percent. And banks are not the only entities designated TBTF because they are "systemically important." General Motors supposedly required a bailout because a chain of parts suppliers might have failed with it.
But this just means that the pernicious practice of socializing losses while keeping profits private is not quarantined in the financial sector.
To see why TBTF also can mean TBTM — too big to manage — read Dodd-Frank law may eventually be supplemented by 30 times that many pages of rules. The "Volcker rule" banning banks from speculating with federally insured deposits is 298 pages long.
There is no convincing consensus about a correlation between a bank's size and supposed efficiencies of scale, and any efficiencies must be weighed against management inefficiencies associated with complexity and opacity. Thirty or so years ago, Brown says, seven of the world's 10 largest banks were Japanese, which was not an advantage sufficient to prevent Japan's descent into prolonged stagnation. And he says that when Standard Oil was broken up in 1911, the parts of it became, cumulatively, more valuable than the unified corporation had been.
Brown is fond of the maxim that "banking should be boring." He suspects that within the organizational sprawl of the biggest banks, there is too much excitement. Clever people with the high spirits and adrenaline addictions of fighter pilots continue to develop exotic financial instruments and transactions unknown even in other parts of the sprawl. He is undecided about whether the proper metric for identifying a bank as "too big" should be if its assets are a certain percentage of GDP — he suggests 2 percent to 4 percent — or simply the size of its assets (Richard Fisher, president of the Federal Reserve Bank of Dallas, has suggested $100 billion).
By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail. Aux barricades!
George Will and I don't agree on much. We've shared many a spirited debate over the years on ABC's "This Week." But on one of the key issues of our time — how to save our economy and our democracy from the reign of the big banks — it's time for the Obama administration to listen to George Will.
Too big to maintain?
JPMorgan Chase CEO Jamie Dimon is accused of hiding information about big losses
Major Banks Aid in Payday Loans Banned by States
What's Inside America's Banks?
Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as "black boxes" that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank's financial records uncovers the reason for these fears—and points the way toward urgent reforms.
By FRANK PARTNOY and JESSE EISINGER
Jamie Dimon, JPMorgan's CEO, testifying last summer before the House Financial Services Committee about his bank's sudden $6 billion loss. (Jacqueline Martin/AP)
The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks' risks. It was impossible to tell, from looking at a particular bank's disclosures, whether it might suddenly implode.
For the past four years, the nation's political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn't worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgan's widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firm's charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever.
One reason was that the firm's huge commercial bank—the unit responsible for the old-line business of lending—looked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the bank's condition.
The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the bank's risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Office's positions would lose in one day was just $67 million. (This widely used statistical measure is known as "value at risk.") When analysts questioned Dimon in the spring about reports that the group had lost much more than that—before the size of the loss became publicly known—he dismissed the issue as a "tempest in a teapot."
Six billion dollars is not the kind of sum that can take down JPMorgan, but it's a lot to lose. The bank's stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation.
It gets worse. Federal prosecutors are now investigating whether traders lied about the value of the Chief Investment Office's trading positions as they were deteriorating. JPMorgan shareholders have filed numerous lawsuits alleging that the bank misled them in its financial statements; the bank itself is suing one of its former traders over the losses. It appears that Jamie Dimon, once among the most trusted leaders on Wall Street, didn't understand and couldn't adequately manage his behemoth. Investors are now left to doubt whether the bank is as stable as it seemed and whether any of its other disclosures are inaccurate.
The JPMorgan scandal isn't the only one in recent months to call into question whether the big banks are safe and trustworthy. Many of the biggest banks now stand accused of manipulating the world's most popular benchmark interest rate, the London Interbank Offered Rate (LIBOR), which is used as a baseline to set interest rates for trillions of dollars of loans and investments. Barclays paid a large fine in June to avoid civil and criminal charges that could have been brought by U.S. and U.K. authorities. The Swiss giant UBS was reportedly close to a similar settlement as of this writing. Other major banks, including JPMorgan, Bank of America, and Deutsche Bank, are under civil or criminal investigation (or both), though no charges have yet been filed.
Libor reflects how much banks charge when they lend to each other; it is a measure of their confidence in each other. Now the rate has become synonymous with manipulation and collusion. In other words, one can't even trust the gauge that is meant to show how much trust exists within the financial system.
Accusations of illegal, clandestine bank activities are also proliferating. Large global banks have been accused by U.S. government officials of helping Mexican drug dealers launder money (HSBC), and of funneling cash to Iran (Standard Chartered). Prosecutors have charged American banks with falsifying mortgage records by "robo-signing" papers to rush the process along, and with improperly foreclosing on borrowers. Only after the financial crisis did people learn that banks routinely misled clients, sold them securities known to be garbage, and even, in some cases, secretly bet against them to profit from their ignorance.
Together, these incidents have pushed public confidence ever lower. According to Gallup, back in the late 1970s, three out of five Americans said they trusted big banks "a great deal" or "quite a lot." During the following decades, that trust eroded. Since the financial crisis of 2008, it has collapsed. In June 2012, fewer than one in four respondents told Gallup they had faith in big banks—a record low. And in October, Luis Aguilar, a commissioner at the Securities and Exchange Commission, cited separate data showing that "79 percent of investors have no trust in the financial system."
When we asked Dane Holmes, the head of investor relations at Goldman Sachs, why so few people trust big banks, he told us, "People don't understand the banks," because "there is a lack of transparency." (Holmes later clarified that he was talking about average people, not the sophisticated investors with whom he interacts on an almost hourly basis.) He is certainly right that few students or plumbers or grandparents truly understand what big banks do anymore. Ordinary people have lost faith in financial institutions. That is a big enough problem on its own.
But an even bigger problem has developed—one that more fundamentally threatens the safety of the financial system—and it more squarely involves the sort of big investors with whom Holmes spends much of his time. More and more, the people in the know don't trust big banks either.
After all the purported "cleansing effects" of the panic, one might have expected big, sophisticated investors to grab up bank stocks, exploiting the timidity of the average investor by buying low. Banks wrote down bad loans; Treasury certified the banks' health after its "stress tests"; Congress passed the Dodd-Frank reforms to regulate previously unfettered corners of the financial markets and to minimize the impact of future crises. During the 2008 crisis, many leading investors had gotten out of bank stocks; these reforms were designed to bring them back.
And indeed, they did come back—at first. Many investors, including Warren Buffett, say bank stocks were underpriced after the crisis, and remain so today. Most large institutional investors, such as mutual funds, pension funds, and insurance companies, continue to hold substantial stakes in major banks. The Federal Reserve has tried to help banks make profitable loans and trades, by keeping interest rates low and pumping trillions of dollars into the economy. For investors, the combination of low stock prices, an accommodative Fed, and possibly limited downside (the federal government, needless to say, has shown a willingness to assist banks in bad times) can be a powerful incentive.
Yet the limits to big investors' enthusiasm are clearly reflected in the data. Some four years after the crisis, big banks' shares remain depressed. Even after a run-up in the price of bank stocks this fall, many remain below "book value," which means that the banks are worth less than the stated value of the assets on their books. This indicates that investors don't believe the stated value, or don't believe the banks will be profitable in the future—or both. Several financial executives told us that they see the large banks as "complete black boxes," and have no interest in investing in their stocks. A chief executive of one of the nation's largest financial institutions told us that he regularly hears from investors that the banks are "uninvestable," a Wall Street neologism for "untouchable."
That's an increasingly widespread view among the most sophisticated leaders in investing circles. Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, "There is no major financial institution today whose financial statements provide a meaningful clue" about its risks. Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has "significantly diminished the likelihood of financial crises." In a recent conversation, a prominent former regulator expressed concerns about the hidden risks that banks might still be carrying, comparing the big banks to Enron.
A recent survey by Barclays Capital found that more than half of institutional investors did not trust how banks measure the riskiness of their assets. When hedge-fund managers were asked how trustworthy they find "risk weightings"—the numbers that banks use to calculate how much capital they should set aside as a safety cushion in case of a business downturn—about 60 percent of those managers answered 1 or 2 on a five-point scale, with 1 being "not trustworthy at all." None of them gave banks a 5.
A disturbing number of former bankers have recently declared that the banking industry is broken (this newfound clarity typically follows their passage from financial titan to rich retiree). Herbert Allison, the ex-president of Merrill Lynch and former head of the Obama administration's Troubled Asset Relief Program, wrote a scathing e-book about the failures of the large banks, stopping just short of labeling them all vampire squids. A parade of former high-ranking executives has called for bank breakups, tighter regulation, or a return to the Depression-era Glass-Steagall law, which separated commercial banking from investment banking. Among them: Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former CEO of Citigroup). Sandy Weill, another ex-CEO of Citigroup, who built a career on financial megamergers, did a stunning about-face this summer, advising, with breathtaking chutzpah, that the banks should now be broken up.
Bill Ackman's journey is particularly telling. One of the nation's highest-profile and most successful investors, Ackman went from being a skeptic of investing in big banks, to being a believer, and then back again—with a loss of hundreds of millions along the way. In 2010, Ackman bought an almost $1 billion stake in Citigroup for Pershing Square, the $11 billion fund he runs. He reasoned that in the aftermath of the crisis, the big banks had written down their bad loans and become more conservative; they were also facing less competition. That should have been a great environment for investment, he says. He had avoided investing in big banks for most of his career. But "for once," he told us, "I thought you could trust the carrying values on bank books."
Last spring, Pershing Square sold its entire stake in Citigroup, as the bank's strategy drifted, at a loss approaching $400 million. Ackman says, "For the first seven years of Pershing Square, I believed that an investor couldn't invest in a giant bank. Then I felt I could invest in a bank, and I did—and I lost a lot of money doing it."
A crisis of trust among investors is insidious. It is far less obvious than a sudden panic, but over time, its damage compounds. It is not a tsunami; it is dry rot. It creeps in, noticed occasionally and then forgotten. Soon it is a daily fact of life. Even as the economy begins to come back, the trust crisis saps the recovery's strength. Banks can't attract capital. They lose customers, who fear being tricked and cheated. Their executives are, by turns, traumatized and enervated. Lacking confidence in themselves as they grapple with the toxic legacies of their previous excesses and mistakes, they don't lend as much as they should. Without trust in banks, the economy wheezes and stutters.
And, of course, as trust diminishes, the likelihood of another crisis grows larger. The next big storm might blow the weakened house down. Elite investors—those who move markets and control the flow of money—will flee, out of worry that the roof will collapse. The less they trust the banks, the faster and more decisively they will beat that path—disinvesting, freezing bank credit, and weakening the structure even more. In this way, fear becomes reality, and troubles that might once have been weathered become existential.
Good times roll again…for some: Inside the first Goldman Sachs partners' dinner in SIX YEARS as lavish parties return for bankers
'The Golden Globes of Investment Banking': Goldman Sachs has re-introduced lavish parties after celebrating massive quarterly profits
Morgan Stanley: 'We have too many overpaid bankers'
Wall Street has too many bankers and they are paid too much given the challenges facing the industry, according to James Gorman, the chief executive of Morgan Stanley.
Morgan Stanley may be facing a further round of job cuts. Photo: Getty Images
Tim Geithner's Libor Recommendations Came Straight From Banks, Documents Show
"We don't know who else was fixing bets. Other big banks, including some of the largest in the United States, are under investigation . Barclays doesn't appear to have acted alone, and it is clear that its fixes weren't secret deals by rogue traders. Traders put requests to manipulate the rates in writing and even joked about delivering champagne to those who helped them."
Name withheld June 11, 2012 at 4:34am
I started at Drexel Burnham in junk bonds (NYC) when I was 21. During those days it was a commission based, you ate what you killed, solely responsible for your own P&L. Watched Drexel go under, and people go to jail. Stayed on the street for another 15 years trading junk bonds. Not long after Drexel's demise, the street went from commissions to bonus pools. Because it is arbitrary, the higher ups sit around and divide up a pool of money based on a number of issues, it removes the individual from their particular performance to some degree. Just like the uptick rule. I wonder if each man (or woman in my case) were their own island, and that if they were going out on a limb, they knew if the branch snapped they would be solely culpable, if that would reign in some of the "gambling". It would certainly make it easier to ferret out those that were abusing the system. However, if you are a proprietary trader or a flow trader it is still "other people's money"…..(My husband is still a trader at one of the largest firms on the street). Instead of holding stock in abeyance I would argue that firms hold you responsible financially for any issues that comes to light within a set period of you being involved. Basically a clawback. I think it would be a very good deterrent.
The Barclays settlement exposed that traders colluded to try to fix the Libor rate. This is the rate used as the basis for exotic derivatives as well as mortgages, credit card and personal loan rates. Almost everyone is affected. Fixing the rate even a few hundreds of a percentage point could make Barclays millions on any single day — money taken out of the pockets of consumers and investors. Once more the banks were rigging the rules; once more their customers were their mark.
The wrecking of Barclays is organised looting by those at the very top
The way Barclays has been debased to enrich a few hundred of its elite employees is also the story of Britain in recent decades
Aditya Chakrabortty
guardian.co.uk, Monday 9 July 2012 15.00 EDT
Barclays' top 238 employees took a total of £1.01bn home last year – or £4.27m each. Photograph: Nadia Isakova/Alamy
You'd have learned precious little from watching Bob Diamond in parliament last week – apart, that is, from his love for his former employer. If pressed, you or I might admit to tolerating our jobs, to getting on with colleagues or, at the very least, to taking full advantage of the company stationery supplies. For the multimillionaire banker, however, this would be mere watery equivocation. The firm that had forced him out just the day before was "an amazing place", packed with "wonderful people". And, he told MPs over and over:" I love Barclays."
Sadly, no one asked the obvious follow-up: if that's how you treat organisations you admire, what on earth becomes of the ones you dislike? Because since arriving in 1996, Diamond has debased what was a venerable, Quaker-founded high-street institution into something else entirely: a financially precarious outfit with a reputation for dodging taxes and fixing interest rates.
This transformation hasn't helped the Treasury, which is now forced to chase the bank for taxes. It has harmed credit-starved firms, because Barclaysnow sticks them at the back of the queue for loans. It is even bad for your pension fund, since the company's insecure finances means it no longer makes good returns for shareholders. In fact, the biggest winners from the metamorphosis of Barclays have been Diamond and his investment bankers who – even this year, amid global financial turmoil – took home multimillion-pound bonuses.
If this were a tale involving just a single boutique bank, you could chalk it up as a dreadful shame. But the story of how one of Britain's biggest businesses has effectively been wrecked largely to enrich a few hundred of its elite employees is so much bigger than that. Not just in scale, but also for the larger picture it suggests of what has happened in Britain over the past few decades: how the people at the top of some of our biggest businesses have used their positions to extract money, rather than earn it, and how politicians and regulators have connived at this organised looting.
All this goes against Barclays' official history: of how a second-division bank has risen within Diamond's decade-and-a-half to join the international premier league. But what this story misses out is just how shaky the enterprise looks. In a new paper called The Madness of Barclays, the Centre for Socio-Cultural Research (Cresc) at Manchester University crunches through the company's accounts. What they find is a giant, risky trading arm – the Barclays Capital that Diamond created – joined on to a safe, steady high-street banking business. Importantly, that second business is supported by an implicit government guarantee, that protects its savers.
The BarCap trading arm generated just over half of the company's pre-tax income but it also carries £1.8tn in gross credit risk more than the UK's entire annual income. To be fair, the bank has done its bit to reduce the risk of that exposure, but the bulk of it lies with derivatives – and the majority of those derivatives are tied to double-dip Britain and crisis-hit Europe. You make up your own mind how safe those are if even one of the doomsday eurozone scenarios regularly floated in the papers comes true.
I have spelled all that out to make an obvious point: the British state, through its implicit guarantee of Barclays' high-street business, is allowing the company that Diamond created to run an enormous credit risk that could sink the entire country. You usually see BarCap's activities described as casino banking, but it's a funny kind of casino where the players don't put any of their money up. With all its taxpayer backing, BarCap looks less a casino and more like a creamery.
Except the fat cats are very small in number. Barclays has around 140,000 staff – and most of them never see the sort of huge payouts that you usually read about. You probably knew that, but what you might not have realised is just how small a group actually gets the rewards. But look at the last company report: 238 employees are identified as "code staff", 90% of them from BarCap. The code staff took a total of £1.01bn home, or £4.27m each. Compare that with the mere £113m the bank paid in corporation tax in 2009.
Defending the bankers, Boris Johnson wrote in yesterday's Daily Telegraph that we needed them to lend money to the Apples and Microsofts of tomorrow. But that's not what Barclays does, either. Of its loans last year, a little more than 7% went to businesses in wholesale, retail or manufacturing. Nearly a third went to other banks.
Yet, as Johnson reminds you, Barclays is the bank that – up until the Lie-bor scandal – got applauded no matter what it did. Its former chief executive, John Varley, was even in the running to replace Mervyn King as head of the Bank of England. And a few months ago, David Cameron attacked what he called the "dangerous rhetoric … that people in business are out for themselves. We've got to fight this mood with all we've got." And he singled out Barclays for praise for running a large work-experience scheme. The very next week, his Treasury minister demanded the bank close tax-avoidance schemes worth more than £500m.
People are more important than pig profits and fat bonuses. Banksters share the same moral ethos as bishops who ignored the problem of pedophile priests and switched them to another parish, under the rug.
The problem: Bankers and their traders have lost their focus and purpose. Instead of organizing and allocating capital to serve an economic purpose through investment, they make bets in order to obtain bonuses.
When there is personal accountability, prison, serious fines, removal from the industry, then there will a change in behavior.
The problem x 3
"The JPMorgan Chase debacle has highlighted the fact that chief executive Jamie Dimon sits on the board of the Federal Reserve Bank of New York, his company's primary regulator."
"As Michael Greenberger, a law professor at the University of Maryland — and a former official at the Commodity Futures Trading Commission — explained in an e-mail that landed in my in-box early Friday morning, it is quite likely that the loss would never have occurred if Dodd-Frank's proposed rules about derivatives had been in place. For starters, if the trades turn out to be proprietary trades — and we don't yet know if they are — they would have been forbidden under the Volcker Rule. "
Senators put federal regulators, not JPMorgan, on the hot seat
By Dana Milbank, Published: May 22
JPMorgan Chase has spent upward of $20 million on lobbying and campaign contributions in the past three years. On Tuesday, the bank received a healthy dividend on that investment.
Its chairman, Jamie Dimon, has admitted that the firm was "sloppy" and "stupid" in making trading bets that lost $2 billion. But Republicans on the Senate Banking Committee wouldn't hear of it; they preferred to blame government.
As the panel held the first hearing on the JPMorgan losses, Sen. Richard Shelby (Ala.), the committee's ranking Republican, glowered at federal regulators and charged that they "didn't know what was really going on."
"When did you first learn about these trades?" Shelby inquired.
Gary Gensler, head of the Commodity Futures Trading Commission, admitted that he had learned about them from press reports.
"Press reports!" Shelby echoed, with mock surprise. He smiled. "Were you in the dark?"
Gensler tried to explain that his agency does not yet have authority to regulate the bank, but Shelby interrupted. "So you really didn't know what was going on . . . until you read the press reports like the rest of us?" he asked again.
"That's what I've said," Gensler repeated.
But Shelby wanted him to keep saying it. "You didn't know there was a problem there until you read the press reports?"
Shelby's performance was worth every bit of the $72,950 JPMorgan Chase and its employees have given him in the past five years, making the bank his second-largest source of campaign cash. It was a remarkable bit of jujitsu: The trading scandal at JPMorgan highlighted the urgent need for tougher regulation of Wall Street, but Shelby's harangue was part of a larger effort to use the scandal as justification to repeal regulations.
JPMorgan has a long and colorful history in Washington, but this may have been the most absurd episode since 1933, when J.P. Morgan Jr. sat waiting to testify before the same Senate committee on the 1929 crash and a circus dwarf hopped onto his lap and posed for photographs.
Dimon himself has speculated that the firm's misbehavior would increase pressure for more regulation. But Republicans decided to defend the industry with a strong offense. Republican National Committee Chairman Reince Priebus set the message when he said this month that the JPMorgan episode showed " Dodd-Frank didn't work"
This is richer than John Pierpont himself ever was.
It's true that Dodd-Frank, the legislation responding to the 2008 economic collapse, hasn't worked — because it hasn't been put in place. At the heart of the proposed reforms is the " Volcker rule," named for a former Federal Reserve chairman, which attempts to separate banks' gambling from their government-backed deposits. This mimics the situation before the Depression-era Glass-Steagall law was repealed in 1999.
Banking lobbyists managed to weaken the Volcker rule in 2010 by securing exemptions. Even the watered-down version has been slowed by a barrage of objections from executives — none louder than Dimon. And regulators haven't had the funds to keep up with the workload. The result is that key parts of the law haven't been implemented.
Now industry-friendly lawmakers are using the scandal to discredit never-implemented regulations. Although reformers hoped the JPMorgan losses would give them momentum, it's a good bet the company will win the argument, if only because it holds so many IOUs.
According to data compiled by the Center for Responsive Politics, most senators on the Banking Committee have received sizable checks from JPMorgan and its employees over the past five years. They are the largest source of funds for Republicans Bob Corker (Tenn.), $61,000, and Mike Crapo (Idaho), $33,982, and the committee's Democratic chairman, Tim Johnson (S.D.), $38,995. They gave $108,800 to Mark Warner (D-Va.), $34,800 to Chuck Schumer (D-N.Y.) and lesser amounts to three other members. The group also found that 38 members of Congress, including three on the committee, were JPMorgan shareholders as of 2010.
As the hearing began Tuesday, Securities and Exchange Commission Chairman Mary Schapiro argued that JPMorgan's activities would have been more easily monitored "if the Dodd-Frank rules had been in place."
But the Republicans were more inclined to blame the Dodd-Frank law itself — tiptoeing past the awkward fact that it hasn't been in force. Corker predicted that "the American people are going to wake up" and realize "this big Dodd-Frank bill really doesn't address real-time issues." Nebraska Republican Mike Johanns added his concern that "regulations become more and more onerous."
And Pennsylvania Republican Pat Toomey judged that "we've gone down the wrong road" with Dodd-Frank. The better course, he said, is a less intrusive plan that would "let the people in the marketplace make the decisions they will make."
Fed's Tarullo warns that banking reforms are losing steam
By Zachary A. Goldfarb, Published: May 2
A top federal regulator overseeing the banking sector said Wednesday that reforms begun after the financial crisis are still far from complete and raised concerns that the energy behind the effort may be fading.
The warning from Daniel Tarullo, a Federal Reserve governor, comes as banks are putting up stiff resistance to new oversight and financial regulations — including at a private meeting Wednesday between Tarullo and the heads of Goldman Sachs, JPMorgan Chase and other Wall Street firms, according to the Fed.
"It is sobering to recognize that, more than four years after the failure of Bear Stearns began the acute phase of the financial crisis, so much remains to be done," Tarullo said Wednesday at the Council on Foreign Relations in New York before he met with the chief executives.
"For some time my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed," he added. "This remains a very real concern."
A report released this week by the law firm Davis Polk said that regulators have missed 67 percent of deadlines for new rules imposed by 2010's Dodd-Frank legislation, a rewrite of the rules governing the financial sector.
Among the major new regulations that has been delayed is the Volcker Rule, which would seek to prevent banks from taking excessive risks by curtailing their ability to speculate with their own money — rather than on behalf of clients.
The Fed and other regulators have published the details of the new rule, which was set to take effect in July, but they have faced intense objections from the financial industry. The Fed said last month that banks will have until July 2014 to comply fully with the rule as additional details are worked out.
The meeting Wednesday at the Federal Reserve Bank of New York brought together Tarullo, a former law school professor appointed by President Obama, and Wall Street chiefs, including JPMorgan boss Jamie Dimon and Goldman head Lloyd Blankfein. Other bank chiefs in attendance included Richard K. Davis of U.S. Bancorp, James P. Gorman of Morgan Stanley, Joseph L. "Jay" Hooley of State Street and Brian T. Moynihan of Bank of America.
The meeting focused primarily on the Fed's stress tests — periodic evaluations of how banks would perform under bad economic conditions — but also on the financial industry's broader concerns about regulators' plans, the Fed said.
Banks are complaining that the regular set of stress tests overseen by Tarullo is being done in a secretive and ambiguous manner that can create new risks.
The criticism came after the Fed said this year that stress tests revealed that four of the 19 largest banks did not hold enough financial reserves to withstand a severe economic decline. The Fed required them to come up with plans to improve their buffers.
"It is simply unfair to ask a bank to pass a test — and manage towards the standards of that test — if the parameters are largely unknown or otherwise opaque," banks said in an April 27 letter to the Fed.
In remarks last month, Tarullo said that sharing too much information about the nature of the Fed stress tests would allow banks to game the results.
"There is some tension between the desirability of providing more information to firms and the importance of not turning capital planning into a mechanical compliance exercise, in which firms simply run the Federal Reserve model, instead of developing and enhancing their own risk-management and capital planning capacities," Tarullo said at a conference in Chicago.
Bank executives have been especially pointed in their criticism of a proposal that seeks to limit the risk when two very large financial firms do business with each other. Their exposure to each other would be limited to 10 percent of their credit risk.
The proposed rules "would mandate methodologies that markedly depart from well-established and sensible risk management practices, drastically exaggerating actual exposures, and, if adopted as proposed, would require massive unwinding of existing transactions and reduce liquidity in key markets," the banks wrote in the letter.
Tarullo and other Fed officials have met routinely with banking executives during the rulemaking process. But meetings between chief executives and Tarullo have been less common. Tarullo last met with bank officials in March.
On Wednesday, Tarullo did not respond directly to the bank CEOs' criticism and said the Fed's judgments would be based on their views as well as all other comments the central bank receives.
Also discussed Wednesday were issues involving the Volcker Rule, credit ratings, risk retention and international regulation.
And it is why, last week, I found myself drawn to an article in the June issue of The Harvard Business Review that argued for a handful of simpler ways to restrain banking behavior.
…In her Harvard Business Review article, she lays out a handful of market-oriented ideas that would almost surely pare back the complexity risk posed by banks. My favorite is her first one: top bank executives and senior management should be paid in bonds as well as stocks — and in the same percentage as the bank's risk profile. Thus, as she envisions it, a bank that had a dollar of debt for every dollar of equity would pay its chief executive half in debt and half in stock. But if the bank was accumulating, say, $30 of debt for every $1 of equity, the executive's pay would also be skewed 30 to 1 in favor of debt. One would be hard pressed to imagine a more surefire way to focus a banker's mind on making sure the bank could pay back that debt.
A solution:
How to fix the banking system
Shanny Basar in New York
24 May 2012
In the Harvard Business Review, [Sallie]Krawcheck writes that despite the Dodd-Frank reforms, big banks are still too complex to manage and taking enormous risks that are not transparent. She argues that even the smartest, most qualified boards cannot adequately monitor the largest banks and that capital ratios are an inadequate tool because they are too slow to react to markets and based on banks' own internal models.
In the Harvard Business Review, Krawcheck writes that despite the Dodd-Frank reforms,
1 – Adding bonds to executive compensation
She uses the example of a chief executive called "Handsomely Paid" whose bank's capital structure is $1 of debt for every $1 of equity – whose $20m pay package would be equally split with $10m each in debt and equity.
If leverage increased to $39 of debt for every $1 of equity, which was common before the financial crisis, the compensation structure would change to $19.5m in bonds and $0.5m in stock.
Krawcheck writes: "The CEO's attention to risk would be heightened. He would most likely focus on enabling repayment of the debt in a timely fashion, rather than on increasing the upside for the $500,000 in equity."
2- Adjusting dividend payments
Instead of setting dividends as a fixed dollar amount, such as 15 cents per share, Krawcheck suggests they should be a proportion of reported earnings. Shareholders would receive a dividend of 15 cents per share if the bank reports $1 in earnings per share, but only $0.015 if earnings per share drops to 10 cents.
She writes: "This approach would provide a capital buffer by naturally reducing dividends in a downturn (even as boards and management failed to foresee the downturn's length and severity) and would pass strong earnings along to shareholders during an upturn."
3- Not judging executives purely on earnings
According to Krawcheck, boards should focus less on changes in interest income – the difference between the interest banks pay on deposits and loans – that are the outcome of market conditions and more on changes that are driven by customer behaviour, such as attracting more deposits.
She writes: "In my experience, bank boards and even management teams do not fully differentiate between net interest income and customer-driven net income changes. Boards would also be well advised to pay close attention to indicators other than earnings. Perhaps the most crucial metric is customer satisfaction."
4 – Better scrutiny of booming businesses
Board meetings are largely spent dealing with governance and businesses which are not performing well. However Krawcheck argues that an equal amount of time should be spent reviewing units with the largest returns or that use the most capital.
She writes: "At Citigroup, before regulators forced the company's private bank to shutter its operation in Japan owing to improprieties, its returns were at the very top of Citi's businesses – driven, as it turned out, by those same improprieties."
Krawcheck is familiar with Citigroup as her roles at the bank included chief financial officer and chairman and chief executive of global wealth management before she joined Bank of America.
subscription required
June 2012
Four Ways to Fix Banks
by Sallie Krawcheck
t is tempting to view the financial downturn as a closed chapter whose primary causes have been resolved—perhaps not perfectly, but fairly comprehensively—by the Dodd-Frank Act's reregulation of the financial services industry. But big banks continue to have a governance problem, which poses significant risks not just to them but potentially to the entire economy during the next downturn.
It is well-known that many banks were nearly wiped out in 2008 by a global financial crisis they helped cause. Since then most of them have been nursed back to health, with lots of help from taxpayers and central bankers. Yet despite the reregulation, they remain complex, opaque institutions in the business of taking enormous risks. Figuring out how to oversee them successfully—to keep their risks in check while allowing them to be profitable and economically productive—is a continuing unmet challenge for boards, regulators, and society as a whole.
Upgrading bank boards is one way to take on the challenge. Since the crisis, boards at major banks have revamped their membership and substantially increased their time commitments. This movement could be taken even further: Robert C. Pozen has suggested ("The Case for Professional Boards," HBR December 2010) that board membership at a big bank should be a full-time job. But even smart, experienced, full-time board members would struggle with the staggering complexity of the biggest banks. Without a way to cut through this complexity to the core issues and drivers, they'd have little hope of steering their institutions in a risk-sensitive fashion.
The main tool with which boards and regulators have managed risk at banks in recent decades is the capital ratio. The logic is that the higher the capital ratio—that is, the more money set aside against potential losses—the lower the risk. This is simple enough in theory but wildly complicated and confusing in practice. It's not at all clear what the right amount of capital is; in fact, it's not even clear how capital should be measured. At any given board meeting, bank directors will hear about GAAP capital, capital as measured under the current Basel regime (international standards set by bank regulators), capital as measured under the coming Basel regime, and the bank's own view of the right amount of capital, often called economic capital. Within these categories are various subcategories, including Tier 1 capital, tangible capital, and total capital. These capital measures often fail to keep up with market events. Also, the calculations can be shaped by banks' own assessments of risk, regulators' assessments of banks' risk models, and ratings from rating agencies—all of which are subject to underlying biases, to put it mildly.
So the capital ratio clearly isn't the answer. Boards need simple and commonsense—but powerful—tools to cut through the complexity and push management behavior in the direction of responsible risk taking. Here are four that, if adopted widely, could help a lot:
1: Pay Executives with Bonds as Well as Stock
Management compensation is a powerful driver of corporate behavior. But the debate over how best to use this tool in financial services has been clouded by emotion and popular outrage—and action on compensation has been limited primarily to adjusting the mix of bonus and salary and of cash and stock.
Since the crisis, regulators and boards have gravitated toward increasing the amount of stock-based compensation and lengthening the mandatory holding period to induce senior banking executives to behave properly. Underlying this seems to be a belief that if a bank's CEO—let's call him Handsomely Paid—earns and holds $40 million worth of stock in his bank, rather than earning $20 million in cash and holding $20 million in stock, he will lead his institution in a more risk-sensitive manner. Don't be too sure about that.
Multiple academic studies done since the financial crisis have shown a strong correlation between "shareholder friendly" governance and compensation policies and financial distress during the crisis. The financial company executives with the biggest equity stakes at the end of 2006 were James Cayne, of Bear Stearns; Richard Fuld, of Lehman Brothers; Stan O'Neal, of Merrill Lynch; Angelo Mozilo, of Countrywide; and Robert J. Glickman, of Corus Bankshares, according to Rüdiger Fahlenbrach and René M. Stulz, the authors of one of these studies. Not exactly a great advertisement for increasing stock-based compensation.
Most equity investors focus on the upside: How high can the stock go? Over what (preferably brief) period of time? Why can't it go up even faster? When I was the chief financial officer at Citigroup, I sat in meetings with equity investors who literally rolled their eyes when the CEO projected a growth rate they thought was too low—even when it was multiples of GDP growth. This impatience has only risen as stock ownership periods have declined, shrinking investors' time horizons. In contrast, fixed-income investors focus most on limiting the downside: Can interest payments be made? Can principal be returned? In other words, equity investors tend to be more risk-seeking and debt investors more risk-averse.
A simple but powerful way for boards to alter the risk appetite of senior bank executives would be to add fixed-income instruments to the compensation equation. Any shift in this direction would have an impact, but the most logical end point would be a compensation mix that mirrors the bank's capital structure. Thus, as bank financial leverage (and therefore financial risk) increased, senior executives would be motivated to become more risk-averse.
An example: If Handsomely Paid's financial institution had $1 of debt for every $1 of equity, his $20 million in compensation (down from $40 million because of pressure from shareholders) would be paid as $10 million in debt and $10 million in equity, and his risk tolerance would probably remain relatively robust. If the capital structure shifted to $39 of debt for every $1 of equity—a hugely risky position—his compensation would be paid as $19.5 million in fixed-income instruments and $500,000 in equity, and the CEO's attention to risk would be heightened. He would most likely focus on enabling repayment of the debt in a timely fashion, rather than on increasing the upside for the $500,000 in equity. This structure would thus provide an automatic brake on the bank's risk taking.
Note that debt market values move up and down according to a variety of factors, including interest rates. Boards would want to put in place a mechanism, such as CEOs' holding the debt to maturity or receiving principal at a specified date, to negate this impact and keep executives focused on repayment of the debt.
2: Pay Dividends as a Percentage of Earnings
Boards can also adjust dividend policy to moderate capital risk. When earnings begin to deteriorate, management teams (and boards) are usually too slow to cut dividends, which sap capital when it is most needed. It is human nature to recognize meaningful inflection points only gradually (as obvious as such changes always appear in hindsight, according to the pundits). It is also human nature to see backing down on a commitment as an admission of failure.
Changing human nature is too tall an order; changing conventions around dividends shouldn't be. Today dividends are declared as a set dollar amount. Many boards evaluate them internally as a percentage of earnings, but when they commit to a payout, it's always expressed as, say, $0.15 a share.
A more risk-sensitive approach would be to pay dividends as a percentage of reported earnings. At a stated 15% payout rate, shareholders would get $0.15 a share if earnings came in at $1 but only $0.015 if they fell to $0.10. This approach would provide a capital buffer by naturally reducing dividends in a downturn (even as boards and management failed to foresee the downturn's length and severity) and would pass strong earnings along to shareholders during an upturn. The additional layer of protection would have been meaningful in the most recent downturn.
Shareholders might well be skeptical of having dividends paid out as a percentage of earnings rather than a fixed dollar amount—but the financial crisis would have been a perfect opportunity to make such a change, given that during it many banks stopped paying dividends entirely. A percentage is better than nothing, after all. Regulators and the industry have so far missed this opportunity, with more and more banks resuming or increasing their dividends. Over time that could be bad news for taxpayers and investors of all stripes.
3: Don't Judge Managers (Just) by Earnings
Bank executives' performance is typically evaluated in large part on the basis of earnings. But as the financial crisis brought home, not all bank earnings are created equal. Those driven by additional business from satisfied customers are worth much more over the medium to long term than those achieved by trading, expense cuts, or increases in banks' net interest income. The first leads to a sustainable earnings stream. The others, by their nature, do not grow the underlying business over time. In the wake of the financial downturn, much ink has been spilled on the subject of trading income and its risks. But net interest income, with its disproportionate impact on the bottom line, is perhaps the least understood of banks' earnings streams.
Net interest income is a fundamental part of banking. Banks collect deposits in return for paying a certain rate of interest, and they use the deposits to make loans at a higher rate. The spread between those two rates—the net interest margin—fluctuates for a number of reasons, most of which are out of banks' control. A key factor is the external interest-rate environment. A steep yield curve, on which long-term rates are much higher than short-term ones—as can happen when the Federal Reserve drives down short-term rates with an easy money policy—tends to increase net interest income, whereas a flat one does the opposite.
Suppose a steepening yield curve drives a bank's net interest margin from 250 basis points (2.5 cents on the dollar) to 350. That added penny on the dollar falls directly to the bottom line. The bank doesn't have to do any more work, open any more branches, or answer customer calls any more quickly. And when the yield curve flattens, revenue goes down without any associated decrease in costs. So changes in net interest income can have a powerful effect on a bank's earnings while giving no indication of how well the bank is serving its customers or how likely those customers are to stick around.
Changes in net interest income can significantly mask the underlying strength (or weakness) of a bank's business, in some cases for years. Indeed, in the recent past a full range of banking "experts" have greatly underestimated the negative impact of falling net interest income (and thus greatly overestimated banks' earning power) as the interest-rate environment became unfavorable, leading to earnings shortfalls and highlighting poor capital allocation.
In my experience, bank boards and even management teams do not fully differentiate between net interest income and customer-driven net income changes. Boards should take steps to isolate changes in each and evaluate their senior management teams not according to aggregate earnings but according to the elements of earnings they can affect.
Boards would also be well advised to pay close attention to indicators other than earnings. Perhaps the most crucial metric is customer satisfaction. More business from happy customers represents quality earnings. Continuing business from unhappy customers who feel stuck—because of the increasing prevalence of fees to close accounts, the time needed to retype automatic bill-payment addresses at another bank, and confusion about whether another bank's products are equivalent—represents a real risk for today's banks and a real business opportunity for competitors and new entrants. The current disconnect between customer dissatisfaction with the banking industry (relatively high) and customer churn levels (relatively low) is simply not sustainable over the long term.
4: Give Board Scrutiny to Booming Businesses, Too
A board's scarcest resource is its meeting time. Boards should change how they use it.
Most board members will tell you that their meetings are spent on governance issues, business updates, and "problem children," with well-performing business segments given an affectionate nod. This should be reversed. Boards should actually spend much more of their time reviewing the business segments with the highest returns. In banking—an industry with few copyrights or patents to act as barriers to entry—product and business complexity has historically served as a barrier to entry. If competitors can't figure out a product, they can't copy it. This may lead to higher returns for a while, but it means that high-return businesses are often among the most complex—and therefore the riskiest. Certainly not all high-return businesses crash, but variations on the comment "In hindsight, the returns were probably too good and too steady" are all too common in the financial sector. Industrywide, this was true of collateralized debt obligations, which generated spectacular returns before causing spectacular losses. And at Citigroup, before regulators forced the company's private bank to shutter its operation in Japan owing to improprieties, its returns were at the very top of Citi's businesses—driven, as it turned out, by those same improprieties.
Boards should also prioritize their business-line review according to capital consumption. Spending time on the businesses that use the most capital, and working to reduce the need for that capital by controlling risk, will deliver a higher payoff. In a postcrisis world, boards must accept that their role has changed. A key to operating successfully is finding and using simple tools to cut through the business's underlying complexity in order to manage risk. This change in approach is needed to increase customer and shareholder value in the banking system and to protect the broader economy.
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The bankers are getting nervous.
The talk in Washington about heightened regulation — and what seems like an increasingly real risk that talk may translate into action this time — has investors buying more credit-default swaps on Wall Street banks. In fact, investors are snapping up more credit default swaps on banks than any other companies right now.
Contracts tied to the debt of Goldman Sachs, JPMorgan, Morgan Stanley and Bank of America were the most traded among companies last week, with a combined gross notional amount of $7.45 billion, according to the Depository Trust & Clearing Corp.
With the SEC looking into the Facebook IPO and Washington leaders concerned about oversight in the wake of JPMorgan's $2 billion trading loss, the scrutiny is raising more than just eyebrows. Investors are looking for insurance against the chance that tighter regs and the European debt crisis will cut into the banks' revenue. Swaps insuring an average $470 million of Goldman Sachs's debt were traded each day last week, double the past month's average of $230 million, according to Bloomberg's Abigail Moses.
"People now fully believe regulators are in charge and will get to push things through, and there's a real risk they overregulate," Peter Tchir, founder of New York-based hedge fund TF Market Advisors told Bloomberg.
Additional perspective:
JPMorgan's soap opera makes clear that Wall Street is detached from reality
One of the things to notice about this tale is that the change in the prices of these derivative instruments had little if anything to do with any change in the value of corporate bonds or the number of bonds that went into default. Nor do most of the entities buying the "insurance" actually own the underlying index or the individual bonds that make up the index. The explanation is a simple one: It all has very little to do with hedging and a lot to do with gambling.
I'll leave to other pundits the question of whether banks should be speculating in credit derivative markets. For me, the more interesting question is why these markets exist in the first place. What useful social or economic purpose do they serve?
Let's not hedge about JP Morgan's losses
This wasn't hedging; it was a huge bet. Wall Street's titans just hope we and regulators are too mystifed by high finance to know
Charles Geisst
guardian.co.uk, Tuesday 15 May 2012 11.33 EDT
The recent revelations by JP Morgan Chase of large hedging losses ultimately bring too big to fail to the forefront once again. But the issue needs to be rephrased in a slightly different context. Is an institution's exposure to the markets actually too big to hedge?
The term "hedging" is a red herring in banking. Banks regularly hedge foreign exchange exposure and bond exposure by taking opposite positions to offset potential losses. The hedge positions usually are of the same size or proportion as the actual positions. But when a bank decides to hedge the market – a macro hedge – then a new set of risks is presented. What seems safe most likely is nothing more than a large bet.
A hedging loss implies that the hedge did not match the position to be offset. This is another category of risk, when hedging enormous positions by adopting counter-positions. Even worse, a loss or gain in hedging means that the hedged position or the hedge itself was lifted, leaving the other side still in place exposed again.
That is not hedging; it is outright speculation.
This was the sort of activity that the Volcker rule, part of the Dodd-Frank Wall Street Reform and Investor Protection Act, was meant to avoid. Unfortunately, traders have not taken it seriously. Wall Street and the City of London have always operated under the assumption that only they truly understand finance, and that critics should stay out of the way. In this context,hedging is understood to be a macro bet on the direction of the economy, not protecting individual positions against it.
It is difficult to imagine that JP Morgan Chase or any other bank can state with a straight face that hedging losses occurred on a $2bn scale. The longer that they go unchallenged only reinforces the arrogant notion that only they truly understand the intricacies and nuances of finance. This also reinforces the immediate need for strong language in the Dodd-Frank law currently being written into final form.
The Dodd Frank law, like all of finance, has become too complex to be fully understood by anyone except finance professionals with the time to plow through its 2,000 plus pages. The markets have now accepted this "complexity risk", in addition to the other more apparent traditional risks faced by investors and financial institutions. Unfortunately, traders and bankers also recognize this and have exploited it to the fullest. Hence, place a bet and call it a hedge.
If the past is any guide, only strong action will prevent a repeat of these alleged hedging escapades. In the first swaps debacle in the London borough of Hammersmith and Fulham in the late 1980s, it was discovered that the alleged hedge taken out by the London borough was many times larger than its operating budget, the subject of the hedge in the first place. The same was true of Orange County, California several years later. In both cases, the courts had to intervene to put an end to those practices.
Progress suggests that effective legislation should be passed before the courts have to intervene the next time around. An irony of the hedging debacle at JP Morgan is the name used to describe a trader involved in this macro hedge – "the whale". This whale is beached.
More Volcker rules might help
By Harold Meyerson, Published: May 16
"As a group," the economist Robert Lekachman wrote in 1976, "economists are slightly more entertaining than bankers and a trifle duller than lawyers." Bankers, please note, were the dullest of all. And while Lekachman (with John Kenneth Galbraith, the wittiest economist of his generation) authored many books and papers well outside his profession's mainstream, his assessment of bankers was not intended to provoke controversy and didn't. In America before Reaganomics, banking was dull.
That's one reason Jimmy Stewart's George Bailey in the classic " It's a Wonderful Life" feels so thwarted and dissatisfied. Running Bailey Building and Loan was pretty humdrum stuff, though it was a boon to Bedford Falls.
With the deregulation of finance, however, bankers' capital — financial, social and cultural — soared. And as they accumulated a steadily larger share of the nation's wealth, Wall Street traders and executives became market-makers for not just securities but also Fifth Avenue duplexes, townhouses in Mayfair, Caribbean islands and high-priced hookers. They were celebrated in print and television journalism. Mega-wealth transformed them: They were dull no more.
Which, I suspect, may be one reason JPMorgan Chase chief executive Jamie Dimon — a man who could give hubris classes to Oedipus — went out of his way not simply to criticize the "Volcker rule," which would restrict banks from making risky proprietary trades and swaps, but to attack Paul Volcker personally. Volcker, 84, is an old-school banker unimpressed by the financial "innovations" that led to Wall Street's ascent over the rest of the economy. Its sole innovation that actually helped real people, he famously remarked in 2009, was the ATM.
After the 2008 crash, Volcker proposed legislation restricting depositor banks from funneling their own funds into chancy investments. Wall Street erupted. Well, it would have erupted if it had had any credibility left, but Dimon — the one banker who came out of the panic with his bank and his credibility intact — erupted on behalf of his bank and the street. In recent months, as JPMorgan lobbyists sought to weaken the Volcker-derived provisions of the Dodd-Frank financial reform, Dimon fairly oozed contempt for Volcker, whom he depicted as an old duffer out of his depth.
" infantile."
Volcker didn't merely want to reinstate prudential standards that would effectively lower the big banks' profits. He was also a relic of banking's boring past, having worked as an economist at a bank (Chase Manhattan) and later managed the Federal Reserve at a time when commercial banks were forbidden from investing their depositors' money by the terms of the 1933 Glass-Steagall Act (which, until its repeal in 1999, spared the nation from the convulsions of a Wall Street collapse). Rumpled and unglamorous, Volcker personified banking before big money gave it glitz. He implicitly threatened to drag it back to the days when Wall Streeters occasionally had to hail their own cabs.
Now, Dimon has confirmed the wisdom of both the Volcker rule and Glass-Steagall. Precisely because JPMorgan may be the best run bank, and Dimon the most risk-sensitive CEO, their failure to grasp that their hedge on their hedge on their investment in corporate bond indexes exposed them to major losses and couldn't readily be unwound makes the case that today's financial innovations are too complicated for even the smartest bankers and too risky to be entered into with depositors' funds.
Indeed, Dimon's debacle calls into question several fundamentals of modern financial capitalism — globalization among them. Like AIG, JPMorgan Chase is a New York-based company whose miscreant and highly profitable investment unit was located in London. In theory, modern communications should obviate any problems that might create. In practice, it's clear that transatlantic oversight — by the companies themselves and by regulators — was less than diligent.
Jamie Dimon remains a big deal. He still runs America's biggest bank. But if Dimon's bank and others like it are not to periodically blow themselves up — taking the economy down with them — they'll have to be made smaller, safer and less dashing. They'll have to become boring again, as they were in the days when the U.S. economy — one Bedford Falls after another — thrived.
When Will They Learn?
The Way Forward
Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness
By Daniel Alpert, Westwood Capital; Robert Hockett, Professor of Law, Cornell University; and Nouriel Roubini, Professor of Economics, New York University
October 10, 2011 |
JPMorgan Chase's huge loss exposes the risky side of banks
With Depression-era rules abolished, banks are making risky bets with federally insured deposits. Even Wall Street pros wonder whether that should be allowed.
May 31, 2012|By Ken Bensinger, Los Angeles Times
The nation's biggest banks like to tout their low-cost checking accounts, extensive ATM networks and loans to home buyers and Main Street merchants.
"Investing in the places we all call home," a recent JPMorgan Chase television ad intoned. "This is the way forward."
Somehow those folksy messages never seem to get around to mentioning another part of the banking business: high-pressure trading rooms where a company's best and brightest bet hundreds of millions of dollars on arcane financial instruments such as over-the-counter synthetic derivatives and credit default swaps.
These activities aren't showcased in ads and news releases, but they are as central to modern banking as certificates of deposit and debit cards. The risks are considerable, however, a fact underscored by JPMorgan Chase & Co.'s recent trading loss of at least $2 billion on such trades.
Coming just four years after the financial collapse of 2008, JPMorgan's humbling admission has spurred lawmakers, regulators and even many seasoned Wall Street hands to question whether banks — shepherds of trillions in consumer deposits — should be allowed to make such investments at all.
Speculative trading can turbocharge profit in a way a revolving credit card loan portfolio cannot, but it comes at the risk of losses that, at the extreme, could threaten the bank itself or force yet another taxpayer bailout.
"We have to understand that these losses are not rare," said Christopher Whalen, senior managing director of Tangent Capital Partners in New York. "These are recurring events that have to do with the fact that banks don't want to lend money. They want to trade opaque, illiquid securities that are not well understood, and I'm not sure banks should be doing that."
For decades, banks were prohibited from such trading by the Glass-Steagall Act, a Depression-era law separating retail and commercial banking from investment banking and trading. But both the spirit and the letter of that law were progressively weakened over time and abolished in 1999, clearing the way for a huge expansion of activities that had little relationship to conventional lending and borrowing.
Now an increasingly large share of bank profit comes from closely guarded trading operations with limited outside oversight, run by people chasing seven-figure bonuses who treat FDIC-insured deposits like so many chips at the Wall Street casino.
JPMorgan's chief investment office, which made the infamous trade, has a few hundred traders, only a small portion of the company's 260,000 employees worldwide, but those traders manage about $360 billion, more than 15% of the assets of the nation's largest bank.
And because bigger bets can spell richer rewards, the most aggressive speculation is concentrated at the top. Just four banks — JPMorgan, Citibank, Bank of America and Goldman Sachs — control almost 95% of the marketplace for derivatives.
Derivatives are specialized investments usually tied to the value of an underlying asset. A simple example is a future contract for oil, in which investors bet on what they think the price of oil will be in months ahead.
These investments potentially offer something conventional lending doesn't: big returns. With interest rates near record lows, banks find it increasingly hard to make money on auto loans and lines of credit.
"Traditional banking just isn't that profitable," said Frank Partnoy, a professor of law and finance at the University of San Diego. "Bankers like to make lots of money, and they are finding other ways to do it."
At JPMorgan, the chief investment office makes many conservative investments in stable securities like treasuries, but it also relies on high-end financial analysis performed by math experts known as quantitative analysts, or quants, who devise strategies to guide traders on more exotic positions.
Jamie Dimon, chairman and chief executive of JPMorgan, has contended that the chief investment office's trades were intended to be hedges, essentially performing as insurance against the potential for losses in its overall loan portfolio. By the bank's own admission, those trades turned into a position that was no longer a hedge at all.
That's an important distinction to make as Washington finalizes the so-called Volcker rule, which bars banks from speculating with federally insured deposits, but has a loophole: Investments designed specifically as hedges would be permitted.
Some counter that hedges, if properly executed, aren't supposed to be a profit center, and depositor cash isn't supposed to be used to make arcane bets that require a doctorate in math to comprehend. They suggest that the chief motivations on such trades are pure profit.
Joseph Stiglitz: Man who ran World Bank calls for bankers to face the music
Joseph Stiglitz tells Ben Chu that rogue financiers have proven that regulation must get tougher


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Mueller is seen smoking substance, which appears to be crack cocaine, in a newly-emerged video and saying that she will pay $1,500 for crystal methamphetamine.
Brooke Mueller has been caught in a video smoking substance out of a glass pipe. The video, which was obtained by Radar Online, also shows Charlie Sheen's ex-wife scoring a $1,500 crystal methamphetamine deal.
In the video, Mueller is seen lighting and inhaling the substance which is believed to be crack cocaine. She wears a brown robe and her hair is unkempt. She can be heard asking, "Where is the crystal? I am giving you $1500." The video apparently was taken days before she lost custody of her twins in May.
A source close to the situation said that Mueller "loved getting high." The source added, "This was just another crazy night of her getting high. When she did drugs, it was three to four times a week. I know that she is aware that if she doesn't stop doing drugs, she is going to lose her kids (for good)... hopefully she can stop."
Authorities removed her sons Max and Bob from her care earlier this year after they deemed the house unsafe for the children because of her addiction. The boys are currently under the care of Charlie's other ex, Denise Richards.
Mueller is fighting to regain custody of her sons. "She is in a really good place right now, and is ready to resume her life with the boys. When she returns home, she will have a sober living companion with her for the first month," a source said earlier this month.
Mueller would take random drug tests and appear in front of judge to discuss her recovery. "It's looking like if Brooke stays on track, she could get the boys back by Christmas," the source said.