Four Years Of Tim Geithner - By The Numbers
U.S. Bailout Secretary says goodbye.
Jan. 24 -- Peter Cook reports on Treasury Secretary Tim Geithner's last day in office and the possibility he will replace Ben Bernanke as Federal Reserve chairman.
First, Bernanke actually has to leave. He has told friends he won't seek a third term in 2014, but consider us skeptical until we see the door hit him in the a$$. If he does leave, William Cohan thinks Geithner is the most likely candidate.
Second, Larry Summers really wants the job.
Third, don't forget former Goldman Sachs director William Dudley.
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Friday, January 25, 2013
Withdrawn: $114 Billion From Big U.S. Banks
Business Week – by Nick Summers
More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.
The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.
The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.
But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., toldThe Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought-out situation.”Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.
So if the missing $114 billion is not the result of the TAG program expiration—or at least not all related to TAG—what’s going on? Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings—that is, tens of billions of dollars—from positive to negative, or vice-versa, one week to the next.
Noise can increase near the start of a year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change. First, the fiscal cliff drama had companies shifting dividends and had bank clients guessing what their tax liabilities would be, which might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second, the payroll tax just went up, sticking most wage earners with paychecks that are 2 percent smaller.
Third, ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did very well in 2012. As Bloomberg Businessweek’s Roben Farzad wrote on Jan. 16, equity mutual funds saw their second-highest inflows on recordin the first week of the year. Economists are worrying that market exuberance is getting too high, with one measure of risk aversion at a three-decade low.
“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.
“One week is just a very thin slice,” he says. Still, $114 billion is a big figure, and it’s one to keep an eye on in order to understand where the economy is headed in 2013.
http://www.businessweek.com/articles/2013-01-23/missing-114-billion-from-u-dot-s-dot-banks
More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.
The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.
The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.
But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., toldThe Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought-out situation.”Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.
So if the missing $114 billion is not the result of the TAG program expiration—or at least not all related to TAG—what’s going on? Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings—that is, tens of billions of dollars—from positive to negative, or vice-versa, one week to the next.
Noise can increase near the start of a year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change. First, the fiscal cliff drama had companies shifting dividends and had bank clients guessing what their tax liabilities would be, which might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second, the payroll tax just went up, sticking most wage earners with paychecks that are 2 percent smaller.
Third, ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did very well in 2012. As Bloomberg Businessweek’s Roben Farzad wrote on Jan. 16, equity mutual funds saw their second-highest inflows on recordin the first week of the year. Economists are worrying that market exuberance is getting too high, with one measure of risk aversion at a three-decade low.
“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.
“One week is just a very thin slice,” he says. Still, $114 billion is a big figure, and it’s one to keep an eye on in order to understand where the economy is headed in 2013.
http://www.businessweek.com/articles/2013-01-23/missing-114-billion-from-u-dot-s-dot-banks
How the Obama administration protected Wall Street from prosecutions
- guardian.co.uk, Wednesday 23 January 2013 07.27 EST
- Jump to comments (…)
Eric Holder talks to DOJ Criminal Chief Lanny Breuer in 2010. Photograph: Jason Reed/Reuters
(updated below - Update II)
PBS' Frontline program on Tuesday night broadcast a new one-hour report on one of the greatest and most shameful failings of the Obama administration: the lack of even a single arrest or prosecution of any senior Wall Street banker for the systemic fraud that precipitated the 2008 financial crisis: a crisis from which millions of people around the world are still suffering. What this program particularly demonstrated was that the Obama justice department, in particular the Chief of its Criminal Division, Lanny Breuer, never even tried to hold the high-level criminals accountable.
What Obama justice officials did instead is exactly what they did in the face of high-level Bush era crimes of torture and warrantless eavesdropping: namely, acted to protect the most powerful factions in the society in the face of overwhelming evidence of serious criminality. Indeed, financial elites were not only vested with immunity for their fraud, but thrived as a result of it, even as ordinary Americans continue to suffer the effects of that crisis.
Worst of all, Obama justice officials both shielded and feted these Wall Street oligarchs (who, just by the way, overwhelmingly supported Obama's 2008 presidential campaign) as they simultaneously prosecuted and imprisoned powerless Americans for far more trivial transgressions. As Harvard law professor Larry Lessig put it two weeks ago when expressing anger over the DOJ's persecution of Aaron Swartz: "we live in a world where the architects of the financial crisis regularly dine at the White House." (Indeed, as "The Untouchables" put it: while no senior Wall Street executives have been prosecuted, "many small mortgage brokers, loan appraisers and even home buyers" have been).
As I documented at length in my 2011 book on America's two-tiered justice system, With Liberty and Justice for Some, the evidence that felonies were committed by Wall Street is overwhelming. That evidence directly negates the primary excuse by Breuer (previously offered by Obama himself) that the bad acts of Wall Street were not criminal.
Numerous documents prove that executives at leading banks, credit agencies, and mortgage brokers were falsely touting assets as sound that knew were junk: the very definition of fraud. As former Wall Street analyst Yves Smith wrote in her book ECONned: "What went on at Lehman and AIG, as well as the chicanery in the CDO [collateralized debt obligation] business, by any sensible standard is criminal." Even lifelong Wall Street defender Alan Greenspan, the former Federal Reserve Chair, said in Congressional testimony that "a lot of that stuff was just plain fraud."
A New York Times editorial in August explained that the DOJ's excuse for failing to prosecute Wall Street executives - that it was too hard to obtain convictions - "has always defied common sense - and all the more so now that a fuller picture is emerging of the range of banks' reckless and lawless activities, including interest-rate rigging, money laundering, securities fraud and excessive speculation." The Frontline program interviewed former prosecutors, Senate staffers and regulators who unequivocally said the same: it is inconceivable that the DOJ could not have successfully prosecuted at least some high-level Wall Street executives - had they tried.
What's most remarkable about all of this is not even Wall Street had the audacity to expect the generosity of largesse they ended up receiving. "The Untouchables" begins by recounting the massive financial devastation the 2008 crisis wrought - "the economy was in ruins and bankers were being blamed" - and recounts:
In response to the DOJ's excuse-making that these criminal cases are too hard to win, numerous experts - Senators, top Hill staffers, former DOJ prosecutors - emphasized the key point: Obama officials never even tried. One of the heroes of "The Untouchables", former Democratic Sen. Ted Kaufman, worked tirelessly to provide the DOJ with all the funds it needed to ensure probing criminal investigations and even to pressure and compel them to do so. Yet when he and his staff would meet with Breuer and other top DOJ officials, they would proudly tout the small mortgage brokers they were pursuing, in response to which Kafuman and his staff said: "No. Don't show me small-time mortgage guys in California. This is totally about what went on in Wall Street. . . . We are talking about investigating senior level Wall Street executives, even at the Board level". (The same Lanny Breuer was recently seen announcing that the banking giant HSBC would face no criminal prosecution for its money laundering of funds for designated terrorist groups and drug networks on the ground that the bank was too big to risk prosecuting).
As Kaufman and his staffers make clear, Obama officials were plainly uninterested in pursuing criminal accountability for Wall Street. One former staffer to both Biden and Kaufman, Jeff Connaughton, wrote a book in 2011 - "The Payoff: Why Wall Street Always Wins" - devoted to alerting the nation that the Obama DOJ refused even to try to find criminal culprits on Wall Street. In the book, this career-Democratic-aide-turned-whistleblower details how the levers of Washington power are used to shield and protect high-level Wall Street executives, many of whom have close ties to the leaders of both parties and themselves are former high-level government officials. This is a system, he makes clear, that is constituted to ensure that those executives never face real accountability even for their most egregious and destructive crimes.
The reason there have been no efforts made to criminally investigate is obvious. Former banking regulator and current securities Professor Bill Black told Bill Moyers in 2009 that "Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong." In the documentary "Inside Job", the economist Nouriel Roubini, when asked why there have been no such investigations, replied: "Because then you'd find the culprits." Underlying all of that is what the Senate's second-highest ranking Democrat, Dick Durbin, admitted in 2009: the banks "frankly own the place".
The harms from this refusal to hold Wall Street accountable are the same generated by the general legal immunity the US political culture has vested in its elites. Just as was true for the protection of torturers and illegal eavesdroppers, it ensures that there are no incentives to avoid similar crimes in the future. It is an injustice in its own right to allow those with power and wealth to commit destructive crimes with impunity. It subverts democracy and warps the justice system when a person's treatment under the law is determined not by their acts but by their power, position, and prestige. And it exposes just how shameful is the American penal state by contrasting the immunity given to the nation's most powerful with the merciless and brutal punishment meted out to its most marginalized.
The real mystery from all of this is that it has not led to greater social unrest. To some extent, both the early version of the Tea Party and the Occupy movements were spurred by the government's protection of Wall Street at the expense of everyone else. Still, Americans continue to be plagued by massive unemployment, foreclosures, the threat of austerity and economic insecurity while those who caused those problems have more power and profit than ever. And they watch millions of their fellow citizens be put in cages for relatively minor offenses while the most powerful are free to commit far more serious crimes with complete impunity. Far less injustice than this has spurred serious unrest in other societies.
[The one-hour Frontline program can be viewed in its entirety here.]
The Obama administration is not accustomed to actual adversarial journalism that sheds light on their malfeasance. They do not like it. And when they see it, they respond about as petulantly as possible: we will never cooperate with you again! It's not Frontline's fault that the Obama administration actively shielded Wall Street from all forms of criminal accountability. If, as seems to be the case, that fact embarrasses them, they should blame those responsible (themselves), not those reporting it.
PBS' Frontline program on Tuesday night broadcast a new one-hour report on one of the greatest and most shameful failings of the Obama administration: the lack of even a single arrest or prosecution of any senior Wall Street banker for the systemic fraud that precipitated the 2008 financial crisis: a crisis from which millions of people around the world are still suffering. What this program particularly demonstrated was that the Obama justice department, in particular the Chief of its Criminal Division, Lanny Breuer, never even tried to hold the high-level criminals accountable.
What Obama justice officials did instead is exactly what they did in the face of high-level Bush era crimes of torture and warrantless eavesdropping: namely, acted to protect the most powerful factions in the society in the face of overwhelming evidence of serious criminality. Indeed, financial elites were not only vested with immunity for their fraud, but thrived as a result of it, even as ordinary Americans continue to suffer the effects of that crisis.
Worst of all, Obama justice officials both shielded and feted these Wall Street oligarchs (who, just by the way, overwhelmingly supported Obama's 2008 presidential campaign) as they simultaneously prosecuted and imprisoned powerless Americans for far more trivial transgressions. As Harvard law professor Larry Lessig put it two weeks ago when expressing anger over the DOJ's persecution of Aaron Swartz: "we live in a world where the architects of the financial crisis regularly dine at the White House." (Indeed, as "The Untouchables" put it: while no senior Wall Street executives have been prosecuted, "many small mortgage brokers, loan appraisers and even home buyers" have been).
As I documented at length in my 2011 book on America's two-tiered justice system, With Liberty and Justice for Some, the evidence that felonies were committed by Wall Street is overwhelming. That evidence directly negates the primary excuse by Breuer (previously offered by Obama himself) that the bad acts of Wall Street were not criminal.
Numerous documents prove that executives at leading banks, credit agencies, and mortgage brokers were falsely touting assets as sound that knew were junk: the very definition of fraud. As former Wall Street analyst Yves Smith wrote in her book ECONned: "What went on at Lehman and AIG, as well as the chicanery in the CDO [collateralized debt obligation] business, by any sensible standard is criminal." Even lifelong Wall Street defender Alan Greenspan, the former Federal Reserve Chair, said in Congressional testimony that "a lot of that stuff was just plain fraud."
A New York Times editorial in August explained that the DOJ's excuse for failing to prosecute Wall Street executives - that it was too hard to obtain convictions - "has always defied common sense - and all the more so now that a fuller picture is emerging of the range of banks' reckless and lawless activities, including interest-rate rigging, money laundering, securities fraud and excessive speculation." The Frontline program interviewed former prosecutors, Senate staffers and regulators who unequivocally said the same: it is inconceivable that the DOJ could not have successfully prosecuted at least some high-level Wall Street executives - had they tried.
What's most remarkable about all of this is not even Wall Street had the audacity to expect the generosity of largesse they ended up receiving. "The Untouchables" begins by recounting the massive financial devastation the 2008 crisis wrought - "the economy was in ruins and bankers were being blamed" - and recounts:
"In 2009, Wall Street bankers were on the defensive, worried they could be held criminally liable for fraud. With a new administration, bankers and their attorneys expected investigations and at least some prosecutions."Indeed, the show recalls that both in Washington and the country generally, "there was broad support for prosecuting Wall Street." Nonetheless: "four years later, there have been no arrests of any senior Wall Street executives."
In response to the DOJ's excuse-making that these criminal cases are too hard to win, numerous experts - Senators, top Hill staffers, former DOJ prosecutors - emphasized the key point: Obama officials never even tried. One of the heroes of "The Untouchables", former Democratic Sen. Ted Kaufman, worked tirelessly to provide the DOJ with all the funds it needed to ensure probing criminal investigations and even to pressure and compel them to do so. Yet when he and his staff would meet with Breuer and other top DOJ officials, they would proudly tout the small mortgage brokers they were pursuing, in response to which Kafuman and his staff said: "No. Don't show me small-time mortgage guys in California. This is totally about what went on in Wall Street. . . . We are talking about investigating senior level Wall Street executives, even at the Board level". (The same Lanny Breuer was recently seen announcing that the banking giant HSBC would face no criminal prosecution for its money laundering of funds for designated terrorist groups and drug networks on the ground that the bank was too big to risk prosecuting).
As Kaufman and his staffers make clear, Obama officials were plainly uninterested in pursuing criminal accountability for Wall Street. One former staffer to both Biden and Kaufman, Jeff Connaughton, wrote a book in 2011 - "The Payoff: Why Wall Street Always Wins" - devoted to alerting the nation that the Obama DOJ refused even to try to find criminal culprits on Wall Street. In the book, this career-Democratic-aide-turned-whistleblower details how the levers of Washington power are used to shield and protect high-level Wall Street executives, many of whom have close ties to the leaders of both parties and themselves are former high-level government officials. This is a system, he makes clear, that is constituted to ensure that those executives never face real accountability even for their most egregious and destructive crimes.
The reason there have been no efforts made to criminally investigate is obvious. Former banking regulator and current securities Professor Bill Black told Bill Moyers in 2009 that "Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong." In the documentary "Inside Job", the economist Nouriel Roubini, when asked why there have been no such investigations, replied: "Because then you'd find the culprits." Underlying all of that is what the Senate's second-highest ranking Democrat, Dick Durbin, admitted in 2009: the banks "frankly own the place".
The harms from this refusal to hold Wall Street accountable are the same generated by the general legal immunity the US political culture has vested in its elites. Just as was true for the protection of torturers and illegal eavesdroppers, it ensures that there are no incentives to avoid similar crimes in the future. It is an injustice in its own right to allow those with power and wealth to commit destructive crimes with impunity. It subverts democracy and warps the justice system when a person's treatment under the law is determined not by their acts but by their power, position, and prestige. And it exposes just how shameful is the American penal state by contrasting the immunity given to the nation's most powerful with the merciless and brutal punishment meted out to its most marginalized.
The real mystery from all of this is that it has not led to greater social unrest. To some extent, both the early version of the Tea Party and the Occupy movements were spurred by the government's protection of Wall Street at the expense of everyone else. Still, Americans continue to be plagued by massive unemployment, foreclosures, the threat of austerity and economic insecurity while those who caused those problems have more power and profit than ever. And they watch millions of their fellow citizens be put in cages for relatively minor offenses while the most powerful are free to commit far more serious crimes with complete impunity. Far less injustice than this has spurred serious unrest in other societies.
[The one-hour Frontline program can be viewed in its entirety here.]
New feature
We're going to institute a new feature tomorrow (Thursday), beginning at 10:00 am EST: a live question-and-answer session between myself and readers regarding columns I've written over the last month. At that time tomorrow morning, a column will be posted here in which readers can leave questions, and from 2:00 pm to 4:00 pm EST, I'll be here live to answer selected ones. The exchange will then be posted in a form similar to this one previously done by the Guardian with Clay Shirky. The Guardian has several really good ideas for maximizing the involvement of and interaction with readers in the journalism that it does - a goal that has been important to me since I first began writing about politics online - and this is the first of the features we'll try in pursuit of that end. I hope everyone inclined to do so is able to participate.UPDATE
The New York Times' Dealbook section hosted a Q-and-A today with Martin Smith, the producer of "The Untouchables". Here is one quite revealing exchange from that (via @QuietAmerican55):The Obama administration is not accustomed to actual adversarial journalism that sheds light on their malfeasance. They do not like it. And when they see it, they respond about as petulantly as possible: we will never cooperate with you again! It's not Frontline's fault that the Obama administration actively shielded Wall Street from all forms of criminal accountability. If, as seems to be the case, that fact embarrasses them, they should blame those responsible (themselves), not those reporting it.
UPDATE II
The Washington Post is reporting this afternoon that Breuer is planning to leave the DOJ. Don't worry: he'll be fine. Given how valiantly he protected Wall Street and HSBC, one need not be Nate Silver to predict with a fair degree of confidence that he'll land on his feet. When public officials use their government power to serve the interests of private sector elites, they are often lavishly rewarded by the faction they served upon leaving government. That's one of the key dynamics greasing the sleazy revolving door of Washington. Beyond that, Breuer's contacts in and influence with the DOJ will be in high demand by corporations, banks and other assorted oligarchs seeking to exercise the legal immunity which US political culture has bestowed on them.From the man who left Goldman Sachs, advice to Stanford about saving Wall Street from itself
Greg Smith, a Stanford alumnus who resigned from Goldman Sachs in a New York Times op-ed last year, gave an Ethics of Wealth talk Thursday at the Stanford Graduate School of Business.
Goldman Sachs is a notoriously secretive company, even by Wall Street
standards. So when the head of the company's U.S. equity derivatives
business in Europe, the Middle East and Africa publicly resigned in
early 2012 with a New York Times op-ed criticizing the firm's corporate culture, he drew instant attention.
"If you were an alien from Mars and sat in on [a derivatives sales meeting], you would believe that a client's success or progress was not part of the thought process at all," he wrote.
The opinion piece drew praise from figures like Paul Volcker and Mike Bloomberg, sparked counters from Goldman Sachs and spawned a book-length reflection on Smith's Wall Street experience, Why I Left Goldman Sachs.
On Thursday, Smith, a Stanford alumnus, spoke on campus about the "behavioral and cultural shift" that has tilted the Wall Street playing field over the past decade.
"I don't think Goldman Sachs is the problem," he said. "I think this is a systemic problem."
The talk was part of the Ethics of Wealth lecture series, organized by Stanford's Bowen H. McCoy Family Center for Ethics in Society in collaboration with the Graduate School of Business.
But, Smith said, the culture of Wall Street changed in the mid-2000s. Trading began to account for a larger and larger share of Wall Street's profits, and bankers were encouraged to view the client as "an information provider that can make you rich, rather than as a partner."
Smith views this as a switch from Goldman Sachs's traditional "long-term greedy" approach – in which profit is maximized, but over a long time scale, with a focus on maintaining relationships with clients – to "short-term greedy." Analysts were expected to encourage unsuspecting clients to buy products the company knew were risky.
Admitting that Wall Street has always been a gamble, Smith pointed out that the average casino offers much fairer odds. The average dealer isn't actively misleading a blackjack player about the value of the cards he's holding, he pointed out. Nor is he secretly looking at the other players' hands and then going out and placing his own bets.
"You would expect someone not to lose very often when you can see everyone's cards," Smith said. And it's not uncommon for Wall Street traders to post huge profits – a phenomenon made possible by the fact that Wall Street firms know more about their products than their clients do, he said.
Three basic steps are needed in order to rein in the financial sector, Smith said: regulate derivatives markets, outlaw proprietary trading and split banks into smaller units.
His recommendations aren't radical – in large part, they derive from the Glass-Steagall Act, the Depression-era regulatory legislation repealed in 1999. And Smith repeatedly assured the audience that he wasn't a fan of regulation.
"I think people should be able to get rich," he said. "I just think they need to do it in a way that's transparent."
L.A. Cicero
Greg Smith speaking at Stanford on Thursday about the 'behavioral and
cultural shift' that has tilted the Wall Street playing field over the
past decade.
Greg Smith speaking at Stanford on Thursday about the 'behavioral and
cultural shift' that has tilted the Wall Street playing field over the
past decade."If you were an alien from Mars and sat in on [a derivatives sales meeting], you would believe that a client's success or progress was not part of the thought process at all," he wrote.
The opinion piece drew praise from figures like Paul Volcker and Mike Bloomberg, sparked counters from Goldman Sachs and spawned a book-length reflection on Smith's Wall Street experience, Why I Left Goldman Sachs.
On Thursday, Smith, a Stanford alumnus, spoke on campus about the "behavioral and cultural shift" that has tilted the Wall Street playing field over the past decade.
"I don't think Goldman Sachs is the problem," he said. "I think this is a systemic problem."
The talk was part of the Ethics of Wealth lecture series, organized by Stanford's Bowen H. McCoy Family Center for Ethics in Society in collaboration with the Graduate School of Business.
'Very much a capitalist'
Smith went to work for Goldman Sachs straight out of college, and he maintains a love of finance. His reviewers have often characterized his early relationship with the firm as a love story, and he characterizes himself as "very much a capitalist."But, Smith said, the culture of Wall Street changed in the mid-2000s. Trading began to account for a larger and larger share of Wall Street's profits, and bankers were encouraged to view the client as "an information provider that can make you rich, rather than as a partner."
Smith views this as a switch from Goldman Sachs's traditional "long-term greedy" approach – in which profit is maximized, but over a long time scale, with a focus on maintaining relationships with clients – to "short-term greedy." Analysts were expected to encourage unsuspecting clients to buy products the company knew were risky.
Admitting that Wall Street has always been a gamble, Smith pointed out that the average casino offers much fairer odds. The average dealer isn't actively misleading a blackjack player about the value of the cards he's holding, he pointed out. Nor is he secretly looking at the other players' hands and then going out and placing his own bets.
"You would expect someone not to lose very often when you can see everyone's cards," Smith said. And it's not uncommon for Wall Street traders to post huge profits – a phenomenon made possible by the fact that Wall Street firms know more about their products than their clients do, he said.
Way forward
Little has changed since the global economic meltdown, Smith said – there have been zero criminal prosecutions of Wall Street executives, and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has been slow and ineffective. He pointed out that America's five largest banks are bigger now than they were before the financial crisis.Three basic steps are needed in order to rein in the financial sector, Smith said: regulate derivatives markets, outlaw proprietary trading and split banks into smaller units.
His recommendations aren't radical – in large part, they derive from the Glass-Steagall Act, the Depression-era regulatory legislation repealed in 1999. And Smith repeatedly assured the audience that he wasn't a fan of regulation.
"I think people should be able to get rich," he said. "I just think they need to do it in a way that's transparent."
Apple Shares Plunge 10% on Slowing Growth, New Product Jitters
For years, Apple
consistently beat Wall Street expectations, not only because the company
habitually low-balled its financial projections, but also because it
was growing at a rate and scale that was virtually unprecedented in the
history of corporate America. It appears those days are over.
For the third consecutive quarter, Apple, the world’s largest technology company, fell short of analyst estimates, sending the company’s stock down a whopping 10% in after-hours trading, wiping out nearly $50 billion in shareholder value. Although it reported record financial results, Apple’s slowing growth has raised questions about the next phase in the company’s evolution.
(MORE: Apple Profit Surges 24% Ahead of Holiday Blowout; CEO Tim Cook Disses Microsoft)
One thing is for sure: The numbers associated with Apple’s business are staggering. Apple sold 47.8 million iPhones and 22.9 million iPads during the holiday quarter, but both of those figures were about one million short of analyst expectations. The company generated profit of $13.1 billion, but that was flat compared to the year ago period — the company’s lowest rate of profit growth in a decade — in part because of higher production costs associated with new products. Revenue came in at $54.5 billion, an 18% increase over one year ago, but less than the $55 billion that analysts had been expecting.
For the current quarter, Apple projected sales of between $41 billion and $43 billion, but that number also fell below the $45.6 billion that analysts had been expecting. That translates to revenue growth of about 7%, which is lower than the double-digit sales growth that Apple had enjoyed in recent years.
The fundamental question facing Apple is whether its existing, wildly popular products like the iPhone and the iPad can continue to power revenue and profit growth, or whether it needs new, breakthrough products. After all, during his legendary career, Apple’s late co-founder Steve Jobs radically disrupted several industries with iconic products like the iPod, iPhone and iPad.
(MORE: Apple Earnings Miss Wall Street Target as Buyers Wait for New iPhone)
“It has been an overriding concern with Apple that they would not be able to generate revenue growth just rolling out new versions of old products,” Jeff Sica, president and chief investment officer of SICA Wealth Management, told the Associated Press. “Now they’ve proven it in their numbers.”
What will be Apple’s next revolutionary product? On a conference call with analysts, Apple CEO Tim Cook didn’t say — he likes to keep people guessing — but he did insist that the company has some surprises up its sleeve.
“We’re working on some incredible stuff,” Cook said. “The pipeline is chock full.” There has been speculation that Apple could introduce a new television product, especially after Jobs told his biographer Walter Isaacson that he cracked the code on a revolutionary new TV. But so far, those rumors remain just that — rumors. “We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world,” Cook added in a statement.
(More: Is Apple Losing Its Shine After Steve Jobs?)
Apple’s most recent quarter was just the latest period to fall short of Wall Street expectations. (Though to be fair, the most recent holiday quarter was one week shorter than the previous year. Also, new products — and there were several this holiday season — are more expensive to produce.) Last October, sales of the company’s iPad tablet device fell short of analyst forecasts, as many consumers held off buying in anticipation of the new iPad Mini. And in July, Apple’s iPhone sales disappointed analysts, again, as buyers waited for the new model. This suggests that consumers are becoming more savvy — and perhaps selective — about Apple’s product cycle.
Apple’s latest quarter raised questions for some Wall Street analysts. ”It’s going to call into question Apple’s dominance in the space,” Sterne Agee analyst Shaw Wu told Reuters. “It’s still one of the strong players, the others being Samsung and Google. It’s still a two-horse race, but Android continues to grow rapidly.” Indeed, Google’s Android mobile operating system is the most ubiquitous platform in the world, although it’s vastly less profitable for Google than the iOS devices are for Apple.
Apple’s slowing growth rate has taken a major bite out of the company’s stock price, which has declined by nearly 30% since its peak in September — and that’s before Wednesday’s 10% after-hours free fall. Still, despite the pessimism, which is being driven by typically sky-high expectations, there’s is little doubt that Apple’s fundamental business remains very strong. “Sentiment has turned super-pessimistic on Apple, where they’ve gone from being able to do no wrong to suddenly being able to do no right,” Rob Cihra, an analyst at Evercore Partners, told the New York Times. “I tend to think the company’s momentum is a heck of a lot more solid than people are concerned about.”
For the third consecutive quarter, Apple, the world’s largest technology company, fell short of analyst estimates, sending the company’s stock down a whopping 10% in after-hours trading, wiping out nearly $50 billion in shareholder value. Although it reported record financial results, Apple’s slowing growth has raised questions about the next phase in the company’s evolution.
(MORE: Apple Profit Surges 24% Ahead of Holiday Blowout; CEO Tim Cook Disses Microsoft)
One thing is for sure: The numbers associated with Apple’s business are staggering. Apple sold 47.8 million iPhones and 22.9 million iPads during the holiday quarter, but both of those figures were about one million short of analyst expectations. The company generated profit of $13.1 billion, but that was flat compared to the year ago period — the company’s lowest rate of profit growth in a decade — in part because of higher production costs associated with new products. Revenue came in at $54.5 billion, an 18% increase over one year ago, but less than the $55 billion that analysts had been expecting.
For the current quarter, Apple projected sales of between $41 billion and $43 billion, but that number also fell below the $45.6 billion that analysts had been expecting. That translates to revenue growth of about 7%, which is lower than the double-digit sales growth that Apple had enjoyed in recent years.
The fundamental question facing Apple is whether its existing, wildly popular products like the iPhone and the iPad can continue to power revenue and profit growth, or whether it needs new, breakthrough products. After all, during his legendary career, Apple’s late co-founder Steve Jobs radically disrupted several industries with iconic products like the iPod, iPhone and iPad.
(MORE: Apple Earnings Miss Wall Street Target as Buyers Wait for New iPhone)
“It has been an overriding concern with Apple that they would not be able to generate revenue growth just rolling out new versions of old products,” Jeff Sica, president and chief investment officer of SICA Wealth Management, told the Associated Press. “Now they’ve proven it in their numbers.”
What will be Apple’s next revolutionary product? On a conference call with analysts, Apple CEO Tim Cook didn’t say — he likes to keep people guessing — but he did insist that the company has some surprises up its sleeve.
“We’re working on some incredible stuff,” Cook said. “The pipeline is chock full.” There has been speculation that Apple could introduce a new television product, especially after Jobs told his biographer Walter Isaacson that he cracked the code on a revolutionary new TV. But so far, those rumors remain just that — rumors. “We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world,” Cook added in a statement.
(More: Is Apple Losing Its Shine After Steve Jobs?)
Apple’s most recent quarter was just the latest period to fall short of Wall Street expectations. (Though to be fair, the most recent holiday quarter was one week shorter than the previous year. Also, new products — and there were several this holiday season — are more expensive to produce.) Last October, sales of the company’s iPad tablet device fell short of analyst forecasts, as many consumers held off buying in anticipation of the new iPad Mini. And in July, Apple’s iPhone sales disappointed analysts, again, as buyers waited for the new model. This suggests that consumers are becoming more savvy — and perhaps selective — about Apple’s product cycle.
Apple’s latest quarter raised questions for some Wall Street analysts. ”It’s going to call into question Apple’s dominance in the space,” Sterne Agee analyst Shaw Wu told Reuters. “It’s still one of the strong players, the others being Samsung and Google. It’s still a two-horse race, but Android continues to grow rapidly.” Indeed, Google’s Android mobile operating system is the most ubiquitous platform in the world, although it’s vastly less profitable for Google than the iOS devices are for Apple.
Apple’s slowing growth rate has taken a major bite out of the company’s stock price, which has declined by nearly 30% since its peak in September — and that’s before Wednesday’s 10% after-hours free fall. Still, despite the pessimism, which is being driven by typically sky-high expectations, there’s is little doubt that Apple’s fundamental business remains very strong. “Sentiment has turned super-pessimistic on Apple, where they’ve gone from being able to do no wrong to suddenly being able to do no right,” Rob Cihra, an analyst at Evercore Partners, told the New York Times. “I tend to think the company’s momentum is a heck of a lot more solid than people are concerned about.”
AXE FALLS: Morgan Stanley Slashes 1,600 Jobs
The $9 billion check that saved Morgan Stanley.
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Bloomberg
Morgan Stanley, the sixth-largest U.S. bank by assets, plans to eliminate about 1,600 jobs from its investment bank and support staff in coming weeks, a person with direct knowledge of the matter said.
The cuts total about 6 percent of the New York-based company’s institutional securities group, which includes investment banking and trading units, and support staff, the person said, asking not to be identified because the decision hasn’t been made public. About half the reductions will be in the U.S., the person said.
Morgan Stanley reduced staff by about 4,200 people in the first nine months of last year through job cuts and unit sales, after saying in December 2011 it would trim 1,600 jobs. Chief Executive Officer James Gorman, 54, has pledged to lower costs as return on equity remains below the bank’s cost of capital.
All levels of employees will be affected, with a focus on senior workers, the person said. The cuts will be distributed across all investment banking and trading units, and some workers have already been notified, the person said.
Morgan Stanley, which had 57,726 employees as of Sept. 30, has laid out a plan to cut $1.4 billion of annual expenses by next year. The firm produced a return on equity of about 5 percent in the first nine months of 2012, excluding charges related to its own credit spreads. That’s below Gorman’s target of 15 percent.
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