Month: December 2009

. . . And They Can’t Change

The public now is stuck with immense debt from last year’s credit meltdown – not to mention a ten percent jobless rate – but the financial companies that brought it about seem to have little interest in reform – or, even, in helping along the recovery.  That shouldn’t be surprising.

Goldman Sach’s new compensation plan has gotten a lot of attention and praise in the press, but that seems to have been the point.  A close look suggests that it is more of a shell game than true reform.  As Nomi Prins writes in The Daily Beast: “Once again, Goldman is attempting to spin nothing of consequence into something of meaning.” (See, “Goldman’s Bogus Bonus Ploy.”)

The main feature of their plan is that stock in the firm will be given rather than cash.  Since the stock vests in five years, it seems to answer critics who have noted that short-term gains are being rewarded with cash bonuses before the long- term effects are seen.  Moreover, they have a “claw back” provision that allows them to reclaim some or all of the bonuses in the case of “improper risk.”

But the fine print reveals clearly that the plan is for this year only, and that much of the money they will hold back this year could be distributed a year from now when, perhaps, public outcry will have died down.  Then stock may easily end up being worth more than today’s cash.  Moreover, there is no tax to pay on stock options, a nice way of stepping around what governments in France and the U.K. have proposed in taxing bonuses.

We have some difficulty in grasping that financial firms like Goldman Sachs have no incentive to reform so long as they see the opportunity to make money.  Similarly the bank presidents that met with the President on Monday have no incentive to be more generous in extending loans to small business and individuals.  They are driven by profit, their profit – that’s our system.

What we have to take into account is that it’s not about not wanting to serve the public.  Taking risks with money is what they do.  That’s what they hire people to do.  That’s what they are designed to do.  That’s what their competitors do.  And that’s what their stakeholders expect them to do.  Without external the force of regulation or legislation, they can’t do otherwise.

No amount of public relations or spin, no wishful thinking or even good intentions, can move them off that dime.

How Long Will It Last?

One of the great myths about America is that we are a middle class society.  That is, most of us fit between the extremes of wealth and poverty.

This myth may have originated with the fact that, unlike Europe – and the rest of the world, for that matter – we started out with no aristocracy or serfs. That lack of inherited privilege or servitude has linked to several other ideas about ourselves we also hold dear, that we are a land of opportunity and equality.

Elizabeth Warren, Chair of the Congressional Oversight Panel and Harvard law professor, has recently speculated about “America Without a Middle Class.” (See Huffington Post)  Incisively describing the economic decline of middle class families, she makes the following points:

One in five Americans is unemployed, underemployed or just plain out of work.

One in nine families can’t make the minimum payment on their credit cards.

One in eight mortgages is in default or foreclosure.

More than 120,000 families are filing for bankruptcy every month.

The economic crisis has wiped more than $5 trillion from pensions and savings.

These facts are forcing us to rethink our myths, particularly as they are paralleled by the enormous growth of wealth at the other end of the scale.  As the middle class erodes, we are becoming a divided country of rich and poor.

But class is not just about wealth.  It’s also about identity and status.  We are familiar with some upper class families who have become destitute but salvaged their pride and self-respect.  Conversely, many have risen to great wealth but held on to their middle class life-styles.  Warren Buffet is perhaps our best example of that.

So we are facing a wrenching disconnect between economic and psychological reality.  The media focus, of course, is on the facts of the economy, but this increasing identity gap is likely to provoke a host of emotional consequences for those who have been displaced: embarrassment and shame at being exposed as not who you thought you were, humiliation for the loss of status, depression for the failure for feel yourself to be, and anger at those who caused it to happen.

But we are also in danger of losing a key element of national identity.  Unequal, without opportunity, with rigid new class boundaries, there will be nothing special about us, nothing that sets us apart except our financial power and military force.

Arguably, our myths have been illusions all along, but they have been a key element in our national identity.  And they have kept us from bitterly fighting among ourselves.

There is a lot of inertia in national identity.  It takes a long time for it to change.  But without a foundation in reality, it can’t last forever.

What Are Celebrities For?

Tiger Woods’ predicament has gotten many of us to think again about why men have affairs.  Working in a highly competitive environment seems to be one of the reasons.

According to Reuters, a recent study of extra-marital affairs among London bankers provided the following explanations:  “public revulsion for bankers combined with a lack of affection in private was the top reason for having an affair, followed closely by the excitement of doing something risky, escaping boredom, feeding the ego and one-upping the boys with a trophy mistress.” (See, “Bankers Having More Affairs in Recession.”)

Obviously, Tiger Woods’ celebrity certainly did make him attractive to many women.  Perhaps he succumbed to temptation because the affirmation they provided was irresistible.  Famous athletes, rock stars, and Hollywood actors seem to have no trouble arousing such attention. Bankers, on the other hand, are used to paying for it, and even seem to enjoy using their money to get what they want.  Either way, attention is a powerful aphrodisiac.

What about the other factors, such as doing something risky?  As every tournament involves the risk of losing, it’s not likely that Tiger Woods needed more risk in his life.  But it might be true that he was used to living with risk and, perhaps, craved more than he had – and different kinds of risk as well.  This is linked to boredom, of course, as risk lends excitement to life.  Conquest and success also feed the ego, and add a thrill — together with a boost to self-esteem.

Finally, the London bankers were “one-upping” each other with their trophy catches.  That suggests they knew about each other’s affairs, in principle if not in detail;  only the wives were in the dark.

As we go down the list of reasons, it becomes more and more clear that this is essentially about competition:  craving the excitement of the chase, beating out others, getting more than your fair share of attention – and all of this in an arena with others watching.

Famous athletes lead abnormal lives, constantly performing while seeking more achievement and recognition.  In this they are like other celebrities, actors, models and politicians.  For them, what matters are the things that lead to their success and notoriety.  On the other hand, those things matter so much more than anything else.  It would take exceptional determination to resist that pull, and an unusual person to tolerate the boredom, loneliness and frustration that are essential parts of most normal lives.

The truly strange thing here, though, is not the lives they lead, but the fact that while we spur them on, relentlessly following them in the media, we also blame them if they fail to be decent citizens and role models.  We encourage this deformation of character and then celebrate their failures with a certain amount of shadenfreude.

Could it be that the complete trajectories of these careers make a kind of sense, from fame to infamy?  Perhaps what we don’t know we know is that they are supposed to suffer and fail for having enjoyed a different life, one beyond our reach.

The Silent Majority

Political observers were surprised last week when legislation to approve gay marriage in New York went down to a substantial defeat.  But some of the explanations offered were even more surprising.

“Certainly this is an emotional issue and an important issue for many New Yorkers,” said Senator Tom Libous, the deputy Republican leader.  Yes, that’s true enough, and if feelings run high on a contentious issue one could expect politicians to fear a backlash from voters.  But then he went on to add: “I just don’t think the majority care too much about it at this time because they’re out of work, they want to see the state reduce spending, and they are having a hard time making ends meet.” (See, “New York State Senate Votes Down Gay Marriage Bill.”)

What could he possibly mean? If voters don’t care, what do legislators have to fear?  Presumably, that would make it easier for them to vote their consciences or, at least, vote to satisfy a vocal minority fighting for what they see as their rights.  And, then, what does this have to do with unemployment or budget deficits?

But maybe he really meant that voters do care about it.  And could he be implying that with so many bread and butter issues to confront, legislators fear being seen spending too much time on “trivial” issues like gay marriage.  On the other hand, polls indicated that most New York voters supported the bill, though a substantial vocal and virulent minority opposed it, as well as New York’s Roman Catholic bishops.

The Times reported that during the debate, “Opponents remained mostly silent; all but one of those who spoke on the floor supported the measure.”  Possibly the silent legislators were afraid of provoking an attack from those who opposed the bill, an attack worse than the almost certain attack they will get from gay activists.  Perhaps they were afraid of the bishops. Perhaps they just afraid of change.

Sometimes, an unconscious motivation can be traced to its avoidance or its denial.  It’s not always the case that when someone says they “don’t care” they really mean they do.  In this case, however, that explanation gains further plausibility from Senator Libous’ final comment to the reporter who interviewed him:  “I don’t mean to sound callous, but [what I said is] true.”

He must think he sounds callous. But we are still left wondering, what actually is “true?”

But Why?  And Who Is Being Fooled By Whom?

One of the bright spots in the economy – perhaps the only one – has been the renewed profitability of investment banks.  But a recent story on The Daily Beast suggests that the picture is misleading – if not illusory.

Nomi Prins describes in detail the various accounting tricks that the big banks have resorted to in order to inflate their profits:  most of them have changed their reporting periods, so it is now virtually impossible to compare this year’s figures with last year’s;  then they have massively reclassified their debts and assets;  finally, the mergers and acquisitions that have occurred have melded together (or not) quite different accounting procedures and sets of figures.  It’s a mess – but it’s a mess that has been made to look good because trading profits have been emphasized and credit losses disguised.

It is not hard to figure out why they want to create this appearance of financial health.  It will help persuade investors to trade with them, and, as they are in fierce competition with each other, their relative profitability will attract yet more money.  An additional motive is to pay back their TARP loans, so they can get out from under federal supervision for their compensation policies.

It’s worth noting that the one thing none of them seem eager to do is lend money to small businesses.  That would really help the economy as a whole as it would increase productivity and add to jobs, but that does not generate the quick profits they are seeking.

Prins concluded: “Trading profitability, albeit inconsistent and volatile, is the quickest way back to the illusion of financial health, as these banks continue to take hits from their consumer-oriented businesses. But, appearance doesn’t equal stability, or necessarily, reality.” (See, “Worse Than Enron.”)

This is crafty and deceptive, but it is not unconscious.  One might argue it is an essential part of our competitive system, and those who are playing the game know it very well.  But what is unconscious and truly dangerous here is that high levels of risk are being minimized all over again.  To be sure, sub-prime mortgage derivatives are no longer driving the market, and AIG is no longer supporting the illusion of insurance against loss.  But, as Pins notes, “appearance doesn’t equal stability.”

She argues that a greater degree of transparency is required:  “we need an objective, consistent evaluation of bank balance sheets complete with probing questions about trading and speculative revenues, allowing for comparisons across the banking industry.”  That will help regulators check what is really happening.  But it could also be a reality check for those who, caught up in the relentless competitive drive for profits, will want to keep on betting the farm and, once again, put us all at risk.