Friday, September 23, 2011

The Rich Are Winning BIG! (As Usual) The Democratization of Banking? California Legislature Passes Bill to Study State-Owned Bank (Earth's 20-Minute WARNING!!!!!)

We are losing everything, and the rich (especially the CEO's) are winning big (even the dreaded Washington Post reports this most salient fact and says in effect that this is cause for concern - whoopee!). And they will not agree to stop winning so incredibly overwhelmingly, even to safeguard the well-being of our country. (I'm guessing it's no longer their country?)

The data from this spring’s proxy season is mostly in and it shows that after two years of decline, the average compensation for chief executives of the 500 largest U.S. corporations is on the rise again. According to Governance Metrics International, the average “total realized compensation” (salary, bonus and benefits plus any value realized from the exercise of stock options and vesting of stock grants and retirement benefits) was just under $12 million in 2010, up 18 percent from 2009 but still below the $15 million peak in 2007.
If you believe, as the corporate crowd apparently does, that this market for corporate talent is competitive and efficient, then you must also believe two things: First, that none of these guys (and the vast majority still are guys) would do the same job for a nickel less. Second, that the value of the chief executive went up 18 percent last year while the value of average workers in their companies changed very little. And if you believe that you are a fool and an ideal candidate for an open seat on an S&P company board of directors.
We’ve been having this argument about executive pay for 30 years, and we’re still pretty much where we began: Executives think the market has affirmed that they are worth every penny of what they get, and the rest of us think they’re grossly overpaid.
By my lights, the best academic work on this subject has been done by two law school professors, Lucian Bebchuk and Jesse Fried at Harvard, who unlike most finance professors understand that the market for executive compensation is essentially rigged. Their studies have found that the top five executives capture about 10 percent of the net profits of large public companies, up from about 5 percent in the early 1990s, which means that it has a material effect on shareholders. More significantly, they have run the numbers and found that chief executive pay correlates negatively with the profitability and market valuation relative to book value. Put more simply, the firms with high CEO pay turn out not to be the best performers.
Despite this compelling evidence, and the unambiguous public outrage, all the attempts to correct the excessiveness of executive compensation have pretty much made things worse or failed.

If you thought the Fed's decision today was nonsensical in trying to provide a solution to our economic/job loss financial catastrophe, wait till you see what my pal, jazzbumpa reports:

Today, the Fed announced it's plans to fiddle while the economy burns purchase $400 hundred billion in long maturity treasuries and sell the same amount in short term treasuries - over the next 10 months in a feeble attempt to wrest as much as 17 basis points difference for its efforts.  This maneuver is called Operation Twist.


Mark Thoma

1. This shifts the duration of the balance sheet, but it does not change its size. I would have preferred balance sheet expansion, i.e. QE3, as that would have a much better chance of helping the economy. But the inflation hawks on the committee will not tolerate further expansion in the balance sheet due to worries about inflation.

2. It's not big enough.

3. Even if it causes rates to fall, will consumers and businesses respond?

That is, this might help some, but not enough to solve our employment crisis -- not by any means. Thus, this does not alleviate the need for Congress to implement serious job creation programs as soon as possible.

The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.

I wish the people making these decisions had to face what households struggling to find a job endure daily -- the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they'd finally get it and, more importantly, do what needs to be done.
Tim Duy:
The Three Stooges (Fischer, Plosser, and  Kocherlakota) once again dissented.  My initial take - I didn't have high hopes for this policy to begin with, and continue to be underwhelmed.  $400 billion is too small, and, more importantly, the time horizon is too long.  Really, June 2012?  Unemployment in the high single digits and they can't speed this up a bit?  Yes, another step toward more easing, but the pace of progress just seems glacial compared to the economic need.
Brad Delong:
The problem is that such policies work, to the extent that they work, by taking duration and other forms of risk onto the government's balance sheet, leaving the private sector with extra risk-bearing capacity that it can then use to extend loans to risky private borrowers.

But buying a 10 or even a 30-year Treasury bond and selling Treasury bills does not remove all that much risk from the government's balance sheet. Much better - if you have $400 billion to spend - to buy something much riskier...
Me:  Big whoop.  If you're only going to score 17 basis points, then why even get out of bed?  Look, I'm as nostalgic as anyone for the 60's  - probably more so, truth to tell.  But a program that was marginally successful then, and took 4 god-damned years to do anything, and worked because interest rates were a hell of a lot higher, and now is approached in a half-assed way is probably worse than doing nothing.

Of course the FOMC announcement at 2:15 is what sent markets tumbling this afternoon.  How this explains the 10 point SP500 gain (about 1284 to 1294) between 2:37 and 3:12 p.m. is somewhat mysterious.  We can be sure though that it definitely caused the bottom to fall out a full hour after the announcement was made.  Isn't that what efficient markets are all about?  Never mind that third wave of third wave thang . . .

When I first heard about the success of state-owned banking in North Dakota, I thought that it was a terrific model (as a first-adopter) for North Carolina to pursue. After all, Governor Bev Purdue is keen to figure out a way to defeat the newly (Koch-funded) Rethug Legislature's plans to reduce North Carolina's taxpayers to destitution.

Looks like California beat us to it.

The Democratization of Banking? California Legislature Passes Bill to Study State-Owned Bank

Ellen Brown

Global Research
, September 15, 2011 

AB 750, California’s bill to study the feasibility of establishing a state-owned bank that would receive deposits of state funds, has passed both houses of the legislature and is now on the desk of Governor Jerry Brown awaiting his signature.

It could be the governor’s chance to restore the state to its former glory. As noted >in Time Magazine:

[I]n the 1950s and ‘60s, California was a liberal showcase. Governors Earl Warren and Pat Brown responded to the population growth of the postwar boom with a massive program of public infrastructure—the nation’s finest public college system, the freeway system and the state aqueduct that carries water from the well-watered north to the parched south.

But that was before Proposition 13, California constitutional amendment enacted by voter initiative in 1978. Prop 13 limited real property taxes to one percent of the full cash value of the property and required a two-thirds majority in both legislative houses for future increases of any state tax rates.

Prop 13 radically reduced the tax base, and as economist Michael Hudson observes, it is too late to raise property taxes now. The tax savings simply drove property prices up, getting capitalized into additional debt service to the banks. Today, he says, “so much urban property is sinking into negative equity territory that a rise in property taxes will lead to even more foreclosures and abandonments, and hence even lower fiscal returns.”

Meanwhile, the state is struggling to meet its budget with a vastly shrunken tax base. What it needs is a new source of revenue, something that won’t squeeze consumers, homeowners, or local business.

A state-owned bank can provide that opportunity. North Dakota, the one state that currently has its own bank, is the only state to be in continuous budget surplus since the banking crisis began. North Dakota’s balance sheet is so strong that it recently individual income taxes and property taxes by a combined $400 million and is debating further cutscuts. It also has the lowest unemployment rate, lowest foreclosure rate and lowest credit card default rate in the country, and it hasn’t had a bank failure in at least the last decade.

Revenues from the Bank of North Dakota (BND) have been a major boost to the state budget. The bank has contributed over $300 million in revenues over the last decade to state coffers, a substantial sum for a state with a population less than one-tenth the size of Los Angeles County. North Dakota is an oil state, but according to a study by the Center for State Innovation, from 2007 to 2009 the BND added nearly as much money to the state’s general fund as oil and gas tax revenues did. Over a 15-year period, according to other data, the BND has contributed more to the state budget than oil taxes have.         

North Dakota is a conservative red state, not the sort you would expect to be engaging in government enterprise. But the conservative justification for a state-owned bank is that it preserves state sovereignty, allowing the state to be independent of Wall Street and the Feds. The BND is not a business competitor of the local banks but partners with them, helping with capital and liquidity requirements. It participates in loans, provides guarantees, and acts as a sort of mini-Fed for the state.

According to the annual BND report for 2010:

2010 was our strongest year ever. Profits increased by nearly $4 million to $61.9 million during our seventh consecutive year of record profits. . . . We ended the year with the highest capital level in our history at just over $325 million. The Bank returned a healthy 19 percent ROE, which represents the state’s return on its investment.

A 19 percent return on equity beats the 170 billion dollars LOST by CalPERS and CalSTRS, California’s two public pension funds, by the time the stock market hit bottom in March 2009. The BND was making record profits all through that period.
The BND augments state revenues in other ways besides just returning its profits to the general fund. It helps build the tax base by providing the funding needed by local businesses, and by financing the infrastructure that attracts them. Among other resources, it has a loan program called Flex PACE that allows a local community to provide assistance to borrowers in areas of jobs retention, technology creation, retail, small business, and essential community services.
The BND also furnishes a credit line to the state itself, one that is effectively interest-free, since the state owns the bank. Credit lines are extended in times of emergency or whenever state departments or municipalities face unforeseen circumstances, such as the recent flooding in the state. Having a credit line to the state’s own bank allows state and local governments to avoid extortionate interest rates from Wall Street and pressure to privatize and reduce services in order to avoid downgrades from rating agencies. 
Timothy Canova is Professor of International Economic Law at Chapman University School of Law in Orange, California. In a June 2011 paper called “The Public Option: The Case for Parallel Public Banking Institutions,” he compared North Dakota’s comfortable financial situation to California’s: 

. . . California is the largest state economy in the nation, yet without a state-owned bank, is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state’s own bonds), and do not remit any of their earnings back to the state treasury. Meanwhile, California suffers from constrained private credit conditions, high unemployment levels well above the national average, and the stagnation of state and local tax receipts.
California was once the nation’s leader in technology, industry, entertainment and public education. Under Governor Pat Brown, tuition at UC campuses was free, making higher education available to all. Today tuition is about $13,000 a year, and the state has an unemployment rate hovering at 12%. 

California, like North Dakota, is resource-rich. A state-owned bank will allow it to capitalize on its resources to full advantage, by providing the credit needed to realize its potential.  As the bank was described by Assembly Member Ben Hueso of San Diego, who authored AB 750, "It's not the fad of the moment, a pair of tight fitting jeans; it's a pair of construction boots."

You can contact Governor Brown's office to urge him to sign AB 750 by writing or calling:
Governor Jerry Brown
c/o State Capitol, Suite 1173
Sacramento, CA 95814

First posted on YES! Magazine.

Ellen Brown is an attorney, President of the Public Banking Institute, and the author of eleven books, including
Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free.
And what's happening to the major banksters? BoA has sad news:

Earlier this month, Bank of America announced that it’d be laying off 30,000 employees, as part of a program designed to help the firm make/not lose money called Project New BAC. It’s not that Brian Moynihan et al wanted to let these people go, but thanks to decisions by his predecessors including but not limited to funding Ken Lewis’s Boone’s of the Month Club and paying $4.1 billion to find out what it feels like to be violated by Angelo Mozilo, it’d become more than a little necessary. Lest there be any confusion, the 13 members of BAC’s industrials group who were axed this afternoon did not fall under the “because we have to” but rather the “because we feel like it” category on Bri-Moy’s master spreadsheet. Sayeth Bloomberg:

Bank of America dismissed 13 investment bankers in its industrials group, including managing directors David Iwan and Egan Antill, said two people with direct knowledge of the actions. Iwan and Antill left this month during a round of 3,500 reductions throughout the Charlotte, North Carolina-based company, said the people, who declined to be named because personnel matters aren’t public.

The cuts amount to about 5 percent of jobs in the group, one person said. Chief Executive Officer Brian T. Moynihan is trimming staff as costs from soured mortgages rise and revenue shrinks amid the slowing U.S. economy. The industrial group cuts weren’t part of Moynihan’s broader cost-cutting plan known as Project New BAC, announced earlier this month, which will eliminate 30,000 jobs over the next few years, said one of the people.
Moody's Bank Downgrades: What, Us Worry?

September 22, 2011

Matt Taibbi

Big news in the financial world yesterday, as Moody’s downgraded three of America’s biggest commercial banks. This is a serious blow. You know you’re seriously fucked when even Moody’s, the most whorishly corrupt ratings company in modern history – one that “accidentally” gave billions in dicey derivatives AAA ratings a few years back (blaming the faux-bullish ratings on a computer error).

Need more evidence?

CEO Pay Vs. Worker Pay

(Scott Olson / GETTY IMAGES)

Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

Federal dollars fuel great wealth
Capital gains tax policy feeds gap between rich and poor

Stephen Colbert warns us about the real threats (as if we're not in enough trouble already.)

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