From Claire Berlinski in City Journal:
You see, about a month ago, I asked my mother to bail me out. I knew she’d do it. She’s done it before. She sent me money she’s been saving toward my retirement. I resolved to stop spending money on stupid things. (There was really no excuse for that lamp, Mom, I know. Sorry! In my defense, I was sure there was a genie in it.)
With my mom paying my rent, I’ve been able to charge less for what I write and stay in the black. Voilà, I’m selling a cheaper product (for now) than Reuters and AP. That will teach them where to stuff their “good investment decisions” and their “economies of scale.” I fired the guy who does my odd jobs—it was painful, but it had to be done. So, congratulations to me! I’m making it in this tough business climate, with a little help from Mom. America’s back! And if I’m broke again in a year, I’ll hit her up again. (Don’t forget, Mom, that you really have no choice: no matter what you do, I’m still going to be a huge financial drag on you. If I fail, I’ll end up coming home with all my cats. You don’t want me sleeping on your couch, do you? And you sure don’t want to see what my cats would do to that couch. Antique, I believe it is?)
All of this is, alas, a perfectly accurate description of my financial life. The reader may wonder about my mom’s wisdom in going along with this plan. That’s between me and her—she loves me, and it’s her money, not yours. The money that went to GM was yours, however. And I suppose you must love GM as if it’s your profligate kid, because surely you could not be so credulous as to believe these reports about the spectacular success of the bailout.
There was a rush to buy GM shares last Thursday, when the company, which emerged from bankruptcy restructuring last summer, held an IPO. The company has been drowned in taxpayer cash. It’s going to be fine in the short term. No one should be surprised by this. Anyone—and any company—can get back in the black in the short term if someone gives it a ton of money. And who wouldn’t want to invest in a company that everyone knows won’t be allowed to go down? All the merchants in my neighborhood would lend me money, too, if I asked, confident that their loan would be repaid. A “generous American mom” sounds pretty good to them.
Of course, GM is paying back its new loans, though this doesn’t help investors who hold old GM stock; that’s worthless. By the way, I’m also considering stiffing my creditors. The GM example proves that it will result in an immediate improvement of my balance sheet. GM’s production numbers have been increasing, and mine have, too: it’s a lot easier to write when you’ve got peace of mind. Whether anyone will buy the stuff I’m writing, God knows, but my word count is definitely up, and that, apparently, is the number that matters.
Note that GM is still producing those gas-guzzling pickups and SUVs that no one seemed to want before. Great news for me: I’ll just keep writing about the arcana of Turkish constitutional politics. It’s what the market should want. Turkish politics are fascinating. I don’t know what’s wrong with Americans. If they understood what was good for them, they’d want to be better informed about Turkey. (They’d want that Volt electric car, too. I hear it’s much better for the environment.)
Naturally, I’ll pay my mother back. Here’s how: I’m going to have her put a small percentage of all the money she’s given me in an escrow account, which I’ll call a “working capital” account. Then I’ll transfer the rest of my assets to her. (Good news, Mom: you own seven cats and seven litter boxes.) Then I’m going to use the money from that escrow account to pay her back at an interest rate no one but my own mother would give me. As soon as I empty the escrow account, I’ll declare the loans repaid. What do you mean, that makes no sense? That’s just what the U.S. governmentdid for GM, and no one finds that problematic, do they? Never mind that the cash part of the loan has been repaid from TARP, or that this in fact represents only about 15 percent of the total bailout, or that the rest remains tied up in the automotive equivalent of cats and litter boxes. By the way, I’m thinking of bundling all my liabilities into a separate company, just like GM. I’ll call the company “Some other Claire who can deal with the creditors, never heard of that Claire.”
Read the whole thing here.
In the upper reaches of Wall Street, talk of another financial crisis is dismissed as alarmism. Last fall, John Mack, to his credit, was one of the first Wall Street C.E.O.s to say publicly that his industry needed stricter regulation. Now that Morgan Stanley and Goldman Sachs, the last two remaining big independent Wall Street firms, have converted to bank holding companies, a legal switch that placed them under the regulatory authority of the Federal Reserve, Mack insists that proper supervision is in place. Fed regulators “have more expertise, and they challenge us,” Mack told me. Since the middle of 2007, Morgan Stanley has raised about twenty billion dollars in new capital and cut in half its leverage ratio—the total value of its assets divided by its capital. In addition, it now holds much more of its assets in forms that can be readily converted to cash. Other firms, including Goldman Sachs, have taken similar measures. “It’s a much safer system now,” Mack insisted. “There’s no question.”
That’s true. But the history of Wall Street is a series of booms and busts. After each blowup, the firms that survive temporarily shy away from risky ventures and cut back on leverage. Over time, the markets recover their losses, memories fade, spirits revive, and the action starts up again, until, eventually, it goes too far. The mere fact that Wall Street poses less of an immediate threat to the rest of us doesn’t mean it has permanently mended its ways.
Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves. Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry?
Thomas Philippon, an economist at N.Y.U.’s Stern School of Business, thinks there is. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers. But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”
On Wall Street dealing desks, profits and losses are evaluated every afternoon when trading ends, and the firms’ positions are “marked to market”—valued on the basis of the closing prices. A trader can borrow money and place a leveraged bet on a certain market. As long as the market goes up, he will appear to be making a steady profit. But if the market eventually turns against him his capital may be wiped out. “You can create a trading strategy that overnight makes lots of money, and it can take months or years to find out whether it is real money or luck or excessive risk-taking,” Philippon explained. “Sometimes, even then it is hard.” Since traders (and their managers) get evaluated on a quarterly basis, they can be paid handsomely for placing bets that ultimately bankrupt their companies. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” Philippon said. “In finance, it is often just a trading gain. The closer you get to financial markets the easier it is to book funny profits.”
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From Claire Berlinski in City Journal:
You see, about a month ago, I asked my mother to bail me out. I knew she’d do it. She’s done it before. She sent me money she’s been saving toward my retirement. I resolved to stop spending money on stupid things. (There was really no excuse for that lamp, Mom, I know. Sorry! In my defense, I was sure there was a genie in it.)
With my mom paying my rent, I’ve been able to charge less for what I write and stay in the black. Voilà, I’m selling a cheaper product (for now) than Reuters and AP. That will teach them where to stuff their “good investment decisions” and their “economies of scale.” I fired the guy who does my odd jobs—it was painful, but it had to be done. So, congratulations to me! I’m making it in this tough business climate, with a little help from Mom. America’s back! And if I’m broke again in a year, I’ll hit her up again. (Don’t forget, Mom, that you really have no choice: no matter what you do, I’m still going to be a huge financial drag on you. If I fail, I’ll end up coming home with all my cats. You don’t want me sleeping on your couch, do you? And you sure don’t want to see what my cats would do to that couch. Antique, I believe it is?)
All of this is, alas, a perfectly accurate description of my financial life. The reader may wonder about my mom’s wisdom in going along with this plan. That’s between me and her—she loves me, and it’s her money, not yours. The money that went to GM was yours, however. And I suppose you must love GM as if it’s your profligate kid, because surely you could not be so credulous as to believe these reports about the spectacular success of the bailout.
There was a rush to buy GM shares last Thursday, when the company, which emerged from bankruptcy restructuring last summer, held an IPO. The company has been drowned in taxpayer cash. It’s going to be fine in the short term. No one should be surprised by this. Anyone—and any company—can get back in the black in the short term if someone gives it a ton of money. And who wouldn’t want to invest in a company that everyone knows won’t be allowed to go down? All the merchants in my neighborhood would lend me money, too, if I asked, confident that their loan would be repaid. A “generous American mom” sounds pretty good to them.
Of course, GM is paying back its new loans, though this doesn’t help investors who hold old GM stock; that’s worthless. By the way, I’m also considering stiffing my creditors. The GM example proves that it will result in an immediate improvement of my balance sheet. GM’s production numbers have been increasing, and mine have, too: it’s a lot easier to write when you’ve got peace of mind. Whether anyone will buy the stuff I’m writing, God knows, but my word count is definitely up, and that, apparently, is the number that matters.
Note that GM is still producing those gas-guzzling pickups and SUVs that no one seemed to want before. Great news for me: I’ll just keep writing about the arcana of Turkish constitutional politics. It’s what the market should want. Turkish politics are fascinating. I don’t know what’s wrong with Americans. If they understood what was good for them, they’d want to be better informed about Turkey. (They’d want that Volt electric car, too. I hear it’s much better for the environment.)
Naturally, I’ll pay my mother back. Here’s how: I’m going to have her put a small percentage of all the money she’s given me in an escrow account, which I’ll call a “working capital” account. Then I’ll transfer the rest of my assets to her. (Good news, Mom: you own seven cats and seven litter boxes.) Then I’m going to use the money from that escrow account to pay her back at an interest rate no one but my own mother would give me. As soon as I empty the escrow account, I’ll declare the loans repaid. What do you mean, that makes no sense? That’s just what the U.S. governmentdid for GM, and no one finds that problematic, do they? Never mind that the cash part of the loan has been repaid from TARP, or that this in fact represents only about 15 percent of the total bailout, or that the rest remains tied up in the automotive equivalent of cats and litter boxes. By the way, I’m thinking of bundling all my liabilities into a separate company, just like GM. I’ll call the company “Some other Claire who can deal with the creditors, never heard of that Claire.”
Read the whole thing here.
In the upper reaches of Wall Street, talk of another financial crisis is dismissed as alarmism. Last fall, John Mack, to his credit, was one of the first Wall Street C.E.O.s to say publicly that his industry needed stricter regulation. Now that Morgan Stanley and Goldman Sachs, the last two remaining big independent Wall Street firms, have converted to bank holding companies, a legal switch that placed them under the regulatory authority of the Federal Reserve, Mack insists that proper supervision is in place. Fed regulators “have more expertise, and they challenge us,” Mack told me. Since the middle of 2007, Morgan Stanley has raised about twenty billion dollars in new capital and cut in half its leverage ratio—the total value of its assets divided by its capital. In addition, it now holds much more of its assets in forms that can be readily converted to cash. Other firms, including Goldman Sachs, have taken similar measures. “It’s a much safer system now,” Mack insisted. “There’s no question.”
That’s true. But the history of Wall Street is a series of booms and busts. After each blowup, the firms that survive temporarily shy away from risky ventures and cut back on leverage. Over time, the markets recover their losses, memories fade, spirits revive, and the action starts up again, until, eventually, it goes too far. The mere fact that Wall Street poses less of an immediate threat to the rest of us doesn’t mean it has permanently mended its ways.
Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves. Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry?
Thomas Philippon, an economist at N.Y.U.’s Stern School of Business, thinks there is. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers. But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”
On Wall Street dealing desks, profits and losses are evaluated every afternoon when trading ends, and the firms’ positions are “marked to market”—valued on the basis of the closing prices. A trader can borrow money and place a leveraged bet on a certain market. As long as the market goes up, he will appear to be making a steady profit. But if the market eventually turns against him his capital may be wiped out. “You can create a trading strategy that overnight makes lots of money, and it can take months or years to find out whether it is real money or luck or excessive risk-taking,” Philippon explained. “Sometimes, even then it is hard.” Since traders (and their managers) get evaluated on a quarterly basis, they can be paid handsomely for placing bets that ultimately bankrupt their companies. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” Philippon said. “In finance, it is often just a trading gain. The closer you get to financial markets the easier it is to book funny profits.”
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