September 2010 - Represent Consumers

Around The Web: Wall Street Rules

When it comes to the big money, we’re still playing by Wall Street rules.
For example, California pension officials are paying their investment advisors hefty bonuses even though the funds suffered whopping losses in the real estate crash, an investigation by Associated Press found.

The pension fund faces unfunded liabilities of billions of dollars, though there are sharp differences about the exact amount.

While the rest of the state suffers layoffs, cutbacks and furloughs, life is good for the crew at CALPERS. Fifteen employees were paid more than $200,000 – two more than two years earlier. Though the fund lost nearly $60 billion, all the funds investment managers got bonuses of more than $10,000, and several got more than $100,000.
CALPERS’ generosity extended beyond its investment advisers; the agency also gave its public affairs officer nearly $19,000 in bonuses for two straight years, and a human resources executive who got nearly $16,000 for those years.
Officials at CALPERS offer a variety of explanations: they say the bonuses cover 5 years to encourage their advisers to think long term, not short term. As a result, some of the managers’ funds that saw the steepest short-term declines got the largest bonuses. They have to pay the big bonuses despite the losses because they’re contractually obligated. They insist they have to pay the bonuses because if they don’t, their investment advisers will go to work at hedge funds.

Sound familiar? These are the same explanations we got from the big, bailed out banks who insisted that they had to hand over huge bonuses even though had to go on the dole.
CALPERS’ bonus system seems guaranteed to give its investment advisers lavish bonuses. When times are tough, the bonuses are a little less lavish. But none of the investment experts are actually accountable or will lose out for plunging the state’s pension in too deep into an unsustainable real estate bubble.

California’s pension system is hardly alone in making sure that those who manage its money are rewarded handsomely whether they win or lose.

In Massachusetts, the executive director of the state employees pension fund quit earlier this year while the Legislature contemplated a pay cap. Michael Travelgini, was paid a base salary of $322,000. In 2008, even though the fund’s investments lost money, they did better than other states, so he was given a $64,000 bonus.

Travelgini said the state’s investment managers weren’t paid enough. He’s going through the revolving door to work at a hedge fund that does business with the state, though he won’t solicit the state for a year.

These compensation issues are a strong reminder for the rest of us the lingering issues of the bubble culture. The people who run the pension systems seem to have been infected by the culture of Wall Street and forgotten whose money they’re managing. It will take a powerful disinfectant to remind them.

Suck it in And Cope, Buddy

Charlie Munger is one of the world’s richest men, a partner to Warren Buffet in Berkshire-Hathaway, which was a major recipient of taxpayers’ generosity in the bailout.

So it’s no surprise that Munger recently told a crowd at the University of Michigan: “Thank God for the bailout.”

Having come through the financial collapse unscathed, Munger went on to offer some advice to those less fortunate than himself, who are suffering in distress without the benefit of much federal help.

Munger sees a sharp distinction between the necessity of bailing out the wealthy, like himself, and everybody else.

"Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies," he continued.

The bailouts were required to save America, according to Munger, but bailing out Americans who aren’t bankers would have been a big mistake.

"There's danger in just shoveling out money to people who say, 'My life is a little harder than it used to be,'" Munger said. "At a certain place you've got to say to the people, 'Suck it in and cope, buddy. Suck it in and cope.'"

Munger, at 86, is probably not as comfortable navigating the vernacular as he is the corridors of power, probably meant, “suck it up.”

Full disclosure: I worked for a newspaper of which Munger, who also founded Los Angeles-based mega law firm Munger Tolles & Olson, was a primary owner. I had plenty of opportunity to watch his philosophy in action.

His view of the workplace and his employees seemed to be shaped by a close reading of Charles Dickens, not so much as social critique but as a how to manual.

Dickens is especially relevant with a new report about all of the people who will need to be “sucking it in” – 1 in 7 Americans now live in poverty, according to a report issued last week by the Census Bureau. That’s the highest level in 15 years. Four million more people descended poverty in 2009. Especially hard hit are children: one 1 in 5 in the U.S. now live below the poverty line.

Suck it in, kids.

Another recent outburst from a member of the nation’s uber-rich shows that Munger is not alone in his self-righteous entitlement. Steve Schwartzman, billionaire head of one of the nation’s largest and most successful hedge funds, Blackstone Group, recently compared President Obama’s proposal to let the Bush tax cuts for the wealthiest Americans expire to the Nazi invasion of Poland in 1939. “It’s a war,” Schwartzman said.

He didn’t elaborate on the metaphor, but as I understand his perverse analogy, he’s comparing the president to the Nazis and the nation’s rich to Poles, who thought they were safe, because they had negotiated a peace treaty with the Reich. Hitler’s Army invaded anyway.

Apparently Schwartzman believed that he and Wall Street had a deal with Obama that he would go easy on them. After all, the administration did oppose the toughest proposals for financial reform, instead leading the effort to pass a timid tinkering that doesn’t limit Wall Street’s risky behavior or offer enough public protection from its excesses. So Obama suggesting that the Bush tax cuts should expire would amount to a giant betrayal.

Schwartzman later apologized, but it’s breathtaking that a person – especially one of such prominence and presumed sophistication – not only sees the world in such distorted terms, but feels OK about saying so.

Munger and Schwartzman’s comments reflect not only their profound sense of entitlement, but just how far the nation’s most wealthy and powerful have gone in their war on the middle class.

Men like Munger and Schwartzman have not—at least in the recent past—felt the need to vent their contempt for those who don’t share their advantages. Instead, they would negotiate and lobby for deregulation behind closed doors, and when their investments went south, scare the taxpayers into bailing them out.

What’s striking now is their bold frankness. In the wake of this financial collapse and bailout, which strengthened them while crushing ordinary folks, Munger and Schwartzman aren’t afraid to come out from behind the closed doors of the boardroom and strut their stuff.

Martin Column - 09/22/2010

Elizabeth Warren's Inside Move

So President Obama did not appoint bailout critic and middle-class champion Elizabeth Warren to head the new Consumer Financial Protection Agency.

He did appoint her to an important-sounding post as a White House adviser with responsibility to set up the agency, which after all was her idea in the first place.

Is the president actually marginalizing her with the window dressing of a fancy title? Or will she have a meaningful role in setting up the agency and shaping policy?

The punditocracy has gone into overdrive analyzing the president’s handling of Warren.

The positive spin is that it’s a savvy political move on Obama’s part to get her to work right away creating the agency and avoid a Republican filibuster, and that the president will finally be hearing from an insider not under Wall Street’s spell.

The more skeptical interpretation sees it as the latest example of the president’s failure to push back against Wall Street on issues that Wall Street cares about. As he has in the past, rather than picking a principled fight with Wall Street (and Republicans) Obama found a way around it.

The third spin, from Barney Frank, is that Warren actually didn’t want a permanent appointment now, keeping her options open to either exit the administration or accept the job later.

Writing on WheresOurMoney.org earlier, Harvey Rosenfield, eloquently described why Warren is the best person to lead the new agency.

Warren has been a long-time critic of predatory lending practices and the American way of debt. In her role as congressional monitor of the federal bank bailout she’s been a fearless straight shooter and a down-to-earth demystifier of the complexities and foibles of high finance.

But Obama’s handling of her appointment reinforces the impression that he’s weak in the face of Wall Street’s power. Why in the world, with a high-stakes election less than 2 months away, would the president want to avoid a fight with Wall Street and Republicans on behalf of the undisputed champion of the middle-class and consumers? If the president does intend to appoint Warren to head the agency later, does he seriously think it will be easier later?

Unlike most of the president’s other top economic advisers, Warren has never been cozy with Wall Street. But it’s simply not realistic to expect the president is about to get more aggressive in reining in the big banks with Warren on the inside.

The president has shown that he is capable of ignoring perfectly good advice from well-respected advisers with impressive job titles within his administration. Remember Paul Volcker? The former Fed adviser has been a lonely voice within the Obama administration warning about the continuing dangers of the too big to fail banks and too much risky business in the financial system. But the president used Volcker as little more than a populist prop, preferring the more conciliatory approach championed by his other top economic adviser, Larry Summers, Treasury Secretary Tim Geithner and Fed president Ben Bernanke. These three effectively fought off the tougher aspects of financial regulation at the same they time touted themselves as real reformers. While the president made clear Warren will work directly for him, will she be able to match Summers, Geithner and Bernanke, all seasoned bureaucratic infighters? She’s done little to endear herself to them and has publicly tangled with Geithner.

There’s no question that Warren, a Harvard bankruptcy law professor, has already played an extraordinary and important role in helping understand the financial collapse and its fallout. She’s never been anything but forthright, no-nonsense, principled, unafraid to speak truth to financial power and to demand accountability. She will need all those qualities as well as thick skin and nerves of steel for her new job. The stakes are high. I wish her well.

Consumer Financial Protection Agency / Martin Column / Paul Volcker / President Barack Obama - 09/17/2010