Wednesday, September 24, 2008
Where Did the Money Go?
Where did all that money go?
Auditors:
Billions went into excessive compensation to senior executives based on profits that were an illusion. (The compensation is not "excessive" because it was large. It is excessive because it was based on profits and revenue that we now know did not accurately reflect the toxic waste on their books). Some might call that fraud. If there was fraud (they knew) or negligence (they should have known) then some of that money may be recoverable back to the firms/their shareholders.
2007:
Auditors:
"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street [ed: and auditors] liability for aiding and abetting fraud."(Remember Arthur Andersen and Enron:
Auditor: Supervisors Covered Up Risky Loans
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs.Rating Firms:
Since the ruling vacated Andersen's felony conviction, it theoretically left Andersen free to resume operations. However, as of 2008 Andersen has not returned as a viable business even on a limited scale. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies.
Arthur Andersen)
In 2000, Standard & Poor's made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a "piggyback," where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.Wall Street Compensation:
While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America's home-loan industry: a boom in "subprime" mortgages taken out by buyers with weak credit.
Six years later, S&P reversed its view of loans with piggybacks. It said they actually were far more likely to default. By then, however, they and other newfangled loans were key parts of a massive $1.1 trillion subprime-mortgage market.
How Rating Firms' Calls Fueled Subprime Mess
Billions went into excessive compensation to senior executives based on profits that were an illusion. (The compensation is not "excessive" because it was large. It is excessive because it was based on profits and revenue that we now know did not accurately reflect the toxic waste on their books). Some might call that fraud. If there was fraud (they knew) or negligence (they should have known) then some of that money may be recoverable back to the firms/their shareholders.
2007:
...bonuses split among employees of Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns will in fact add up to about $38 billion, beating last year's record. And all that despite each firm (besides Goldman) losing all their market value!
Wall Street Bonuses Biggest Ever, Again!
They needn't have worried. Wall Street bonuses totaled $33.2 billion in 2007, down just 2 percent, by the estimates of the New York state comptroller's office.2006:
Seven of Wall Street's biggest firms boosted their total compensation and benefits to a combined $122 billion, up 10 percent since 2006, despite seeing their net revenue collectively fall 6 percent, according to Equilar, an executive-compensation research firm based in California. Mortgage-related losses reported by the seven firms totaled $55 billion and wiped out more than $200 billion in shareholder value.
The Bonuses Keep Coming
All told, this year's bonus pool for Wall Street executives hit $23.9 billion, the New York State Comptroller's office estimates.2005:
To a great extent, Wall Street's biggest banks are prospering because they've all expanded beyond their traditional businesses into the trading of complex financial products.
And yet, some observers doubt that the big firms can keep breaking one earnings record after another.
"There's a disconnect between the economy and the financial system," says Richard Bove, who tracks the financial services industry for Punk Ziegel. "Income has to be generated somewhere. The financial sector has taken on a life of its own not connected to what's going on in the economy and, ultimately, that has to be addressed."
It's a Wall Street bonus bonanza
Early estimates of the 2005 bonus pool reach as high as $19 billion.
Please, Sir, I Want Some More.
December is the month for year-end bonuses for Wall Street’s traders, brokers and investment bankers and this year the top layers are expected to pocket some $17 billion in incentive payoutsTreasury Secretary Paulson Grabs about $500 Million from Goldman Sachs:
Billions in bonuses for Wall Street execs, mayor denounces “selfish” transit workers
The incoming Treasury secretary, Henry M. Paulson Jr., was awarded an $18.7 million cash bonus for half a year of work as the chief executive of the Goldman Sachs Group, the company said yesterday.
Goldman filed with regulators last Thursday for a sale of Mr. Paulson's 3.23 million common shares, worth $491.6 million based on that day's closing price.
It said Mr. Paulson also owned restricted stock worth $75.2 million, plus options to buy 680,474 shares. His holdings were equal to 1.02 percent of Goldman's common shares, the investment bank said.
Goldman awarded Mr. Paulson about $38.8 million of compensation for its 2005 fiscal year, mainly in restricted stock, making him Wall Street's highest-paid chief executive.
Goldman Gives Ex-Chief $18.7 Million Bonus
“This financial crisis is a direct result of the compensation practices at these Wall Street firms,” said Paul Hodgson, a senior analyst at the Corporate Library, a governance research group.
In Bailout Furor, Wall Street Pay Becomes a Target
Its time to start talking about a clawback provision as the grounds of any bailout. As I have argued in the past, I have no problem with people making millions or billions IF THEY EARN IT.
But these guys above? If every man woman and child in the USA is going to be on the hook for a Wall Street Incompetence Tax of $5-10k each, then the folks who brought us this mess, and took bonuses under the false pretense that the profits they generated were real, should also shoulder some of the costs . . .
CEO Clawback Provisions in the Bailout?
In a negotiation between a government official and banker with a bonus at risk, who will have more clout in determining the price? The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses. ...
Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.
Why Paulson is Wrong (pdf)
Labels: economy
