Saturday, November 19, 2011

"Join OWS" Email Exchange

Names have been changed.  The email exchange is real.

Dear Ron,

I spent much of Saturday marching around lower Manhattan and shouting things like "Banks got bailed out; we got sold out!". The primary result of that action for me is the realization that, however much I support Occupy Wall Street, these things are best left to people your son's age (assuming that they are not anti-OWS, like my kids are!).

But what should be obvious to everybody is that, once the bad guys realize the depth of support for OWS, they will resort to obfuscation, propaganda, embedding hidden fees and hidden risks in deals, etc.

What is needed is an organization of financial professionals who will stand against that. People who DON'T run banks, but who know about the financial markets. People who are not complicit in the chicanery, but who know what goes on. In other words, us.

Now neither of us have time to do this now, but, then again, it may not be time yet. The mood of the country is STILL not ready for meaningful financial reform, but perhaps it will be in a year or two. Kids out of the house and time for something new?

Have a great day,

Dear Fred,

Sounds like you've had an exciting weekend. I should introduce you to a friend of mine Jerome Berry who is out there marching as well.

My personal view is that the bulk of people working for financial firms are decent folks. They don't deserve the abuse my friend got because his job was to sell insurance for AIG. There are countless people busting their ass in operations, accounting, technology, customer service, etc. Yes they get paid more than the average Joe, but trying to live in NJ with 3 kids and paying the crazy taxes and outrageous home prices puts many back at the national average or below in terms of their standard of living. And now they will be asked to pay more in taxes because OWS people need to collect their unemployment check.

There is no shortage of greedy, corrupt, and overpaid executives, but in my view they are no different than say auto, oil, pharma, food, insurance, etc. executives - all of whom get some sort of government support. It's much more fashionable however to protest against Goldman than say Exxon or Archer Daniels Midland, who in my view do much more damage to an average American than Goldman ever did. Their lobby is also more powerful than that of most financial institutions. Nobody seems to be protesting that the greedy insurance industry got bailed out (guys like Hartford or MetLife) or the auto industry got rewarded for their incompetence. Many people don't even know they were part of TARP. GE got more support from the Fed than most financial institutions. And nobody seems to be protesting against the rating agencies - who are still doing their thing.

People want me to move my money from Chase to a community bank, but I saw how community banks put real estate developers on their board and funded their "local" development projects with depositor money - just to be bailed out by the FDIC. I am not defending the large banking organizations, but I'd just like to see some balance.

With regard to setting up an organization, the best way to start is to set up a LinkedIn group. It's free and you quickly get traction. Once the group gets big enough you set up an event or two and the momentum picks up. I'd be happy to help with this.

All the best,

Dear Ron,

The nuanced views that you put forward in your email are precisely the kind of thing that needs to be more prominent in the public discourse. For example, I assume your friend Jerome is in finance (In fact, he may have conducted the first interview that I ever had for a financial job!). You would never know from the media or from OWS that there are many people in finance who would agree with him.

While it is true that execs in other industries are just as greedy as Wall Street execs, they have less of a baleful influence over the economy as a whole. Our economy would not be in recession if it were not for the massive contraction of credit that took place as the result of the mortgage market going bust. If you have a job and most of the people you know have jobs, it is easy to forget the widespread suffering that recessions cause: divorces, bankruptcies, deteriorating health because of inability to pay for good food, drugs, and medical care, and even suicides.

Admittedly, there is plenty of blame to go around for this recession, as was expressed so eloquently by the attached column by Thomas Friedman. Nevertheless, in the eyes of the law, “everybody’s doing it,” is not a legitimate defense. Nor should it be.

As you well know, the big banks have plenty to answer for in creating the current economic mess. In Friedman’s words, either “some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye.” Either way, there was a massive failure in corporate governance.

There was also a massive failure in corporate governance at Enron, at WorldComm, and at GM. But Enron, WorldComm, and GM all declared bankruptcy, and there were significant management changes. Of the many banks that were technically bankrupt, only Bear and Lehman (who both happened to be competitors of Sec. Paulson’s old firm, Goldman Sachs) were allowed to go under. The remaining banks are still managed by many of the same people, people who have lost more money in the latest fiasco than all banks have ever made in the entire history of banking.

Of course, the bankers had their enablers, the rating agencies, the big accounting firms, government regulators, and the foolish people who bought homes they couldn’t afford. I hold the rating agencies especially accountable because they seem to have rated sub-prime mortgage backed securities with models that they knew were flawed. Why? Because they were being paid $250,000 for, at most, a man week’s worth of work. This isn’t quite fraud, but it sure stinks!

Anyway, that’s why I’m part of OWS.

But I am certainly open to other people's point of view. My son Peter, for example, agrees more with you than with me!


Dear Fred,

Thanks for the explanation. I am also very open-minded on this issue. Here are a few points for further discussion.

1. I understand the suffering caused by the recession and the contraction of credit. Personally I got hurt tremendously by this. It's just not clear to me how the large financial institutions caused the crisis. We had a real estate bubble with highly leveraged homeowners who kept leveraging to the max, taking out home equity (taking vacations) or mortgages they couldn't afford. Many were flipping homes. Many were buying with the goal to refinance later and take equity out. Just like the Dutch tulip bubble, this one burst when people could no longer refinance. And everyone got hurt including the large financial institutions.

2. Financial institutions failed not as much because of corporate governance but because of the structure of their assets and liabilities. They relied on short-term funding to finance their illiquid assets (Bear, Lehman, Citi). This has been the case long before the real estate bubble (some 30 years) and neither the Fed nor the SEC or even the Basle Committee ever told them to do otherwise. By the way, the MF Global default was due to the same problem. Their European bond holdings were 1-3 years in maturity, while they financed them overnight in the repo market. If they had locked in term financing (match-funded) these investments, MF would still be OK.

3. With respect to not allowing large banks to fail, the decision was approved by the US Congress. Neither the Bush administration nor the Fed could have done this unilaterally. So our elective representatives chose to inject capital into these firms - whether they asked for it or not. The larger firms got funding from private sources: Morgan Stanley from Mitsubishi, Goldman from Buffett, but the government forced them to take the TARP money. I don't see how it's their fault. Again, I am not defending them, just trying to understand the logic here.

4. I agree these firms overpaid their people. And the people getting paid the most were often the worst assholes and often quite incompetent. But the last time I checked, overpaying people isn't against the law. If I own a company and hire you at some ridiculous pay level, it's nobody's business but mine and other shareholders'. The shareholders of these firms didn't seem to complain as long as the companies were profitable. Maybe they should get more active on this issue when they elect their directors.

5. People running most of the large financial institutions have in fact changed. Chuck Prince at Citi got replaced, John Mack at Morgan Stanley is out, BofA/Merrill, UBS, etc. have all new management. GS, JPM, CS were the healthier of the institutions (limited losses), so their management remained.

My science background makes me a skeptic, but like I said I am quite open-minded if I see good empirical evidence. I might be the next to join OWS after all.

Enjoy your weekend downtown.

(to be continued)
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