Author: Helena

I don’t want to see bankers jumping out of windows. But I do want to see some of these alleged “Titans” of the western financial world expressing– and enacting– some real remorse to those of their fellow-citizens whom they’ve been exploiting for so long now and whose tax dollars they are now lining up to grab hold of.
The rapidly growing literature on the strong social value of remorse (e.g., the work of Pumla Gobod-Madikizela or other sources explored in the last chapter of my “Atrocities” book) makes clear the valuable role it plays as a gateway to social healing and thereby also to resolving the problems occasioned by the miscreants’ past deeds.
When a former miscreant credibly expresses remorse to those he has harmed, that signifies to those former victims that he:

1. Recognizes that their worth as human persons to be equal to his own,
2. Recognizes that his own previous actions have harmed these (equally valuable) other persons,
3. Expresses credible regret for that harm, and
4. Communicates a sincere desire to see it repaired.

To be even more credible, such remorse may well (and most likely, should) be accompanied by the miscreant engaging in the actual work of repairing the harm, i.e. participating in reparations of some kind.
Judged by this standard of the kind of remorse we might want to see being expressed by the former “Masters of the Universe” who have brought the western world’s financial system to its knees, yesterday’s performance by Richard Fuld, Chairman and CEO of the now-failed Lehman Brothers Bank, at the House Oversight and Government Affairs Committee fell far, far short.
The committee is conducting hearings into how the actions of the leaders of the financial world has ended up wrecking the west’s financial system. Today it has been the turn of AIG, the insurance behemoth that (unlike Lehman) did get bailed out by the Treasury weeks ago.
In yesterday’s hearing, committee chair Rep. Henry Waxman (D. CA) put up a slide showing how much Fuld has been earning in recent years. Scroll down here to see it.
It shows that in 2007, Fuld earned a “cash bonus” of $4.3 million, on top of his $900,000 “regular” salary. That was down from his all-time high cash bonus: $13.8 million, in 2005. It was also quite separate from his stock options of $40.3 million in 2007 (down from a high of $93.6 million in 2001.) But his stock options are probably not worth anything now.
The cash bonuses and base-salary payments he gets to keep.
These figures are obscene.
The people and institutions that either invested in or loaned money to Lehman will get very little of their money back.
For many of them, this will bring serious harm.
I saw no recognition from Fuld of the harms his actions have caused to others. Nor does he take any responsibility for decisions he made that led to Lehman’s crash. Nor does he offer to do anything to help repair the harms.
It’s as though for him, all the “little people” whom he defrauded don’t count at all.
The WaPo’s Annys Shin reported that

Fuld told lawmakers he hasn’t been sleeping well at all.
“Not that anybody on this committee cares about this, but I wake up every single night thinking what I could have done different,” he said. “This is a pain that will stay with me for the rest of my life.”
But during more than an hour of questioning, Fuld did not admit any specific mistakes. He blamed investors looking to make money from a fall in Lehman’s share price for spreading false rumors that made it harder for Lehman to raise money. That, he said, created a liquidity problem and a crisis of confidence, leading to a run on the bank…
Lawmakers took the opportunity to exorcise taxpayer anger over executive pay, posting Fuld’s compensation since 2000, an estimated total of $484.8 million. Fuld later said it was closer to $350 million.
The panel also took issue with a decision last month by board members to pay three executives a total of $23.2 million for leaving, even as the firm was collapsing, according to committee documents.
Fuld defended Lehman’s pay practices, saying “the system worked” because 85 percent of his pay was in the form of stock, aligning him with shareholder interests.

How’s that again? The system worked?? The proof of that would be that the firm would still be in business, doing the useful work of helping provide financial backing for productive businesses in the real economy while giving a steady (even if sometimes small) return to its shareholders.
Earth to Richard Fuld: The system did not work!!!
Also, just because you got an extra payment in stock options, additional to the millions you took home in cash, that still didn’t “align your interests with those of the shareholders.” You got out of the mess with tens or hundreds of millions of dollars of past cash compensation payments squirreled away. They got out with nothing.
Anyway, the company wasn’t structured as a “partnership” between you and the shareholders. You were their employee, however many (now worthless) stock options you might have been given. As their employee you had a responsibility to safeguard their investment.
The “system”, including that whole quite rotten structure of executive compensation from which you benefitted, did not in any sense “work.”
The financial crisis– and the real-economy crisis that it has already started to cause– is very bad news for the Republicans, on whose watch the vast majority of this mess has occurred. And of course, John McCain must bear some personal responsibility for what has happened. He has been an ardent deregulator for many years; and before that, he showed his sleaziness through his involvement in the “fast money” S&L scandal of the 1980s.
Many Democratic leaders in congress also bear a portion of the blame, as did the Clinton administration in its day. Leading Democrats have taken huge amounts of money from the financial “industry” for far too long. So now those legislators are bobbing and weaving a bit to avoid getting stuck with too much of the blame. I hope that one other big change that’s enacted as next year’s congress and president continue dealing with this crisis is that– finally– they start to enact some serious, hard-hitting campaign finance reform.
Meanwhile, though, let’s continue demanding that these recently failed financiers start to show (and act upon) some real remorse in their communications with the public. Not just a thin form of “regret”, which could mean mainly that they “regret” the fact that they got caught. But a much thicker form of remorse. And a good readiness to engage in some real acts of reparation, too.
One commenter over on this post on Think Progress suggests today, regarding the amazingly lavishly pampered leaders of AIG, that “They should have their ‘homes’ turned into homeless shelters.” That might not be a wholly bad idea, though homeless shelters are not a great longterm solution to the anguish of homelessness.
But maybe those executives’ “homes”– all except the one-each that might actually be called a home with some validity– could be divided into condos at the executives’ expense and given away to foreclosee families by lottery?
The legal basis for such a plan? Well, regarding Lehman Brothers, Annys Shin notes that, “The FBI is investigating whether there was fraud at Lehman Brothers, and the Securities and Exchange Commission is looking into what Lehman disclosed about housing-related investments and how it valued them…. ”
So who knows what’s next for Richard Fuld and his former colleagues?

This is my second pick of current highlights from my Google Reader.
Buiter is the former chief economist of the European Bank for Reconstruction and Development, currently Professor of European Political Economy at LSE. This week, the Economist described him as “an honorary Brit.” (Not clear whether that was meant as a compliment?)
Anyway, I have found Buiter’s Maverecon blog, published by the Financial Times really helpful and informative in recent weeks. (Along with, I should say, Calculated Risk, a person with excellent judgment for what’s important in breaking financial news, and a good clear way of presenting it. They cover slightly different slices of the action: while CR looks more at breaking news most of Buiter’s posts are written with a broader, though still extremely timely, purview.)
So here’s what we have from Buiter yesterday and today: “Don’t worry: We can always lease Heathrow to the Russians”. It’s a short but I’d say classic post, which reads in its entirety:

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

In this post, published 45 minutes earlier, Buiter bemoaned the inability of the finance ministers of “the North Atlantic region” to fashion a workable and coordinated response to the still unfolding crisis:

Statements that “we shall do whatever it takes to safeguard the banking system of (fill in name of country)” don’t cut it any more. The banks with border-crossing activities in the US, the UK and continental Europe are now all at risk of failing. They are all cutting back drastically on their lending to the real economy. Official dithering is exacting a growing price, to be paid by tax payers and the future unemployed.
The European Union thus far has been an utter paper tiger. The agreement on a €30bn fund to help SMEs is almost worst than nothing, because it draws attention to what was not achieved. There has been no agreement to restrict beggar-thy-neigbour (and shoot-your-own-tax-payer-in the-foot) extensions of guarantees on bank liabilities. There has been no agreement on sharing rules for the fiscal burdens associated with recapitalisations of the 44 or so European financial institutions with significant border-crossing activities. There has been no decision so implement a full information sharing between national regulators and central banks (including the ECB) for these same border-crossing financial institutions. There has been no agreement on common principles for national TARPs, to prevent large-scale border-crossing dumping of toxic assets in whatever jurisdiction offers the best terms.
The UK authorities are limping after the widening and deepening crisis, falling steadily further behind…

His preferred policy, for the UK, is a partial nationalization of the banks, which he argues,

would transform the high and growing risk of private bank insolvency for a low and manageable risk of UK sovereign insolvency. The UK government is capable of the domestic fiscal transfer required to back up the partial nationalisation. With the right policies, UK Ltd (households and businesses) would be able to generate the increased external primary surpluses necessary to effect the external transfer required to make a partial nationalisation credible. It would be a good trade for the UK tax payer and for all those trying to make a living in this country.

He also notes that the UK is in a better position to make some form of a bank-nationalization move work than is Iceland, which has just implemented one: “The UK has a smaller internationally exposed financial sector relative to its GDP than Iceland (UK gross external assets and liabilities are around 450 percent of annual GDP rather than just under 900 percent) and its tax base is much larger and much diversified than Iceland’s.”
This post, published late last night London time, was titled “A Special Resolution Regime for banks must put tax payers before shareholders and bank creditors” It starts out with these very sobering words:

It’s reasonable to assume that the banking system in the North Atlantic region is insolvent and would be bankrupt but for the reality of recent government bailouts and the expectation of future government bailouts. Certainly, for the system as a whole, the marked-to-market value of its assets is way below that of its liabilities. I strongly suspect that even the hold-to-maturity value of its assets is well below that of its liabilities. Although the system as a whole is broke, there are no doubt individual banks that are solvent. We may not, however be certain as to which banks are solvent and which banks are not.
I also take it is given that it is desirable – essential even – to preserve the core of the banking system and to keep it operating without interruption, because it fulfills an essential role in the intermediation of funds between financial surplus units and financial deficit units – a role for which no substitute can be found or created in the short and medium term. The bulk of the banking system therefore needs to be bailed out…
The main remaining question then becomes who will pay for the bail out, the tax payers or the existing creditors of the banks (including the shareholders and other providers of equity). I have a strong preference for putting much of the cost of a bailout on the existing creditors. This is in part for reasons of equity and fairness: the existing creditors made bad investments/loans; they ought to pay for their failures. They earned a risk premium while the going was good. They ought to eat the risk when it materialises. It is also for incentive reasons. Future lending to banks and future purchases of bank obligations will be undertaken with a better appreciation of the credit risk involved. Another massive over-expansion of the banking sector will be less likely…

This sounds like excellent good sense to me.
What I like about Buiter is (1) The fact that he evidently speaks from such broad experience as a special kind of banking practitioner, and (2) That he also speaks from what feels like a very broad and humanistic understanding of economics and finance.
I also like his tagging the problem economies as “North Atlantic” economies… H’mmm, where have a heard that term used in a different context in recent years?
It is very notable to me that the leaders and “Titans” in all these ultra-free-market systems who for years now have been shucking off (or actively subverting) regulation by governments and lobbying hard to destroy mechanisms of social security, welfare safety nets, etc, are now making a mad rush for the public feeding trough themselves. The terms on which we, the rest of the citizenry, allow them to continue to play any kind of a role in our countries’ economies should be determined by us, not them.
Which is what Buiter was broadly arguing there….
I am not as sure as he is, though, that it is “essential” to preserve “the core of the banking system.” Well, it all depends what we mean by “core.” Some form of banking system, yes. But a banking system that encourages speculation, usury, and the development of arcane financial instruments and “derivatives” that grow literally like a cancer on the body of the real economy of goods and productive (non-financial) services? I don’t think so.