Economy -- Rewarding Risky Business

October 15, 2009

by Faiz Shakir, Amanda Terkel, Matt Corley, Benjamin Armbruster, and Zaid Jilani

ECONOMY

Rewarding Risky Business

The Wall Street Journal reported yesterday that despite a still-sluggish economy, unemployment approaching 10 percent, and "regulatory scrutiny of Wall Street's pay culture," major U.S. banks and securities firms are on pace to award their employees a record high $140 billion in compensation packages this year. According to the Journal's analysis, "Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007," which witnessed a $130 billion payout. Goldman Sachs has set aside $5.35 billion in bonus pay, "putting it on course for a record payout to its executives by the end of 2009." Yet, these large financial institutions continue to engage in the same risky lending practices that led to the near collapse of the financial system in September 2008. The Journal reported last month that "companies are selling exotic financial products similar to those that felled markets and the world economy last fall. And banks' appetite for risk has grown." "Compensation played a role in the financial crisis, and yet nothing has changed," said J. Robert Brown, a professor at University of Denver's law school and an expert on corporate governance. And while the Obama administration has vowed to clamp down on companies rewarding risk, there has been limited action thus far in Congress.

REINING IN AIG: The Troubled Asset Relief Program's (TARP) special inspector general Neil Barofsky said this week that the Treasury Department, led by "pay czar" Kenneth Feinberg, is now pressing bailed-out insurance giant AIG to limit its plan to payout $198 million in bonuses. Controversy erupted in March when the public first learned of massive payouts to AIG executives who had a major role in causing the economic crisis. Many of the bonuses went to employees working in AIG's Financial Products division -- the very same employees that wrote the insurance contracts, or credit default swaps, that brought the company crashing down last year. In a report reviewing AIG's bonuses, Barofsky said that Treasury "should have made a greater effort to understand the scope and scale of AIG's bonuses," and they failed not only to be "reasonably aware of challenges of a financial sort that could negatively impact taxpayers' economic returns, but also obligations...that could negatively impact the credibility of the TARP and Treasury itself." The company argues that bonuses to the Financial Products unit are necessary because its employees "are uniquely qualified to take necessary steps to pay back the government."

WALL STREET VS. MAIN STREET: While Wall Street is raking in record compensation, decreases in workers' pay throughout the country "are occurring more frequently than at any time since the Great Depression." The Bureau of Labor Statistics' index on total weekly pay for 80 percent of the nation's workforce "has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay," the New York Times reported this week. "What infuriates people is when bosses at bailed out companies...continue to rake in millions," said House Oversight and Government Reform Committee Chairman Edolphus Towns (D-NY) at a hearing on AIG bonuses, adding, "It doesn't seem right that the people who caused this tragedy should be so richly rewarded." The Wonk Room's Pat Garofalo writes, "[M]ost insulting about this resurgence in pay is that Wall Street's return to profitability has been driven, at least in part, by 'the continuing effects of various government aid programs.'" While Feinberg has the power to regulate compensation packages from those companies that have yet to pay back their loans, there is no regulatory regime in place to rein in the rest of Wall Street.

TAKING ACTION?: Last night on MSNBC, Rep. Barney Frank (D-MA) noted one of the worst cases of excess on Wall Street. If bankers "take on the risks and the risks pay off, you get a lot of money. But if you take a risk and the risk blows up, you don't lose any money. In other words, we give people the ability to take risks with everybody's money but their own." The House recently passed Frank's "say-on-pay" bill, which would mandate that a shareholders hold a non-binding vote on their company's pay packages. Despite the company's record bonus pool, Goldman CEO Loyd Blankfein said in September that anger over bankers' pay is "understandable and appropriate" and called for a ban on multi-year, guaranteed employment contracts, and more compensation in the form of deferred stock. Beyond Frank's relatively benign "say-on-pay" bill, a House committee is expected to vote this week on a measure that would regulate the $450 trillion OTC (over the counter) derivatives market, which includes credit default swaps. But Federal Reserve chairman Ben Bernanke has thus far only paid lip service to regulation as the Fed takes only a "flexible approach." Congress will soon probe executive pay at banks getting TARP money and the White House appears to have taken a tougher line on financial institution regulation, not only pushing a Consumer Financial Protection Agency, but calling for more regulation on compensation. "Pay on Wall Street can't return to the speculative era that we saw...right before the economic collapse," White House press secretary Robert Gibbs said, adding that "pay has to be based on a reasonable assumption of risk, not speculation."

ENVIRONMENT -- COAL INDUSTRY SPENT $10 MILLION OVER PAST 18 MONTHS TO HIRE FIRM TIED UP IN SCANDAL: Politico reports today that the American Coalition for Clean Coal Energy (ACCCE) -- a leading coal industry front group -- spent nearly $10 million over the past 18 months on lobbying efforts that ran through a scandal-ridden lobbying firm. ACCCE hired the Hawthorn Group, which used some of its money to hire Bonner & Associates, a lobbying firm that runs astroturf campaigns. Bonner was recently caught in a scandal in which it admitted that an employee forged 13 letters sent to Congress, purporting to represent groups like the NAACP that supposedly supported coal interests. The Associated Press reports that ACCCE knew that Bonner's letters were forged, but Bonner didn't alert lawmakers until afterward. The forgeries scandal is simply the latest in a spree of bad behavior by Bonner & Associates. The firm was caught defrauding the U.S. government, was paid millions to shill on behalf of Big Tobacco, and teamed up with the drug industry's lobbying group PhRMA to scuttle prescription drug legislation. The Select Committee for Energy Independence and Global Warming is currently investigating ACCCE, Hawthorn, and Bonner. Jack Bonner, the president and founder of Bonner & Associates, and ACCCE head Steve Miller will testify before the committee on Thursday.

President Obama is in New Orleans today, "his first post-inauguration visit" to the city. Obama will be there for approximately four hours and will visit "the only school to reopen in the Lower 9th Ward since [Hurricane] Katrina, conduct a town hall at the University of New Orleans" with Rep. Joseph Cao (R-LA), and "grab a to-go lunch order from Dooky Chase."

BBC's Newsnight program reported that the "Obama administration had already told the UK government it would soon announce a substantial increase to its military forces in Afghanistan." The White House immediately disputed the report. The administration is still considering sending fewer troops than requested by Gen. Stanley McChrystal.

House Majority Leader Steny Hoyer (D-MD) said yesterday that "he's not ready yet to support sending additional troops to Afghanistan." "Afghanistan has not been a successful venue for many great powers in the past," Hoyer told reporters, adding that he had "reservations" about whether the Afghan government "can create confidence within its people."

Most of the Arctic sea ice will be gone in a decade, according to newly released data. The Arctic Ocean will be "an open sea." One researcher explains, "This could lead to flooding affecting one-quarter of the world's population, substantial increases in greenhouse gas emissions from massive carbon pools and extreme global weather changes."

The Pentagon is fighting to secure the funding for its propaganda arm, the Information Operations program. The office requested $361.4 million more than it actually needed earlier in the year. "I just don't like the idea that the military is in the propaganda business," Rep. John Murtha (D-PA) told the press. "I don't like it."

"Almost nine months after the Obama administration took power, more than half of the 33 highest-level Treasury Department posts are still vacant." "Eight nominees are awaiting confirmation hearings before the Senate" while the administration still needs to "select or formally nominate candidates to nine more top-level positions." "It's a major concern," said congressional expert Norm Ornstein.

President Obama will push Congress to provide $250 payments to 57 million veterans, seniors, and people with disabilities next year, in an effort to offset the impact of there being no cost-of-living increase in Social Security payments. "These payments will provide aid to more than 50 million people in the coming year, relief that will not only make a difference for them, but for our economy as a whole," Obama said.

Three of the five members of the Nobel Committee reportedly had objections to the Peace Prize being awarded to President Obama. The Norwegian newspaper Verdens Gang reported that it had "spoken to a number of sources who confirmed the impression that a majority of the Nobel committee, at first, had not decided to give the peace prize to Barack Obama."

And finally: President Bush finally has a Blackberry. Twitter founder Biz Stone revealed the news and posted a picture of himself with the former president, writing, "[W]ill tweets be next?" Unfortunately for Twitter users who have enjoyed following former Bushies like Karl Rove, Dana Perino, and Tony Fratto, the former president "has no plans of tweeting."

Is corruption in Afghanistan relative?

Insurance companies behave like they think they're on an episode of The Sopranos.

The problem with smart bankers.

Teen pregnancies rise for the first time in over a decade.

The FBI threatens to deport a Muslim man for refusing to be an informant.

Sean Hannity thinks that George W. Bush should have received the Nobel Peace Prize.

Is it true that "Only the Rich Can Save Us"?

Rep. Alan Grayson (D-FL) wants to know where our money is.

"At the end of the day, the American people aren't looking at the stock market in terms of putting food on the table. They want jobs, and they want them now."
-- House Minority Leader John Boehner (R-OH), 10/14/09, downplaying the significance of the Dow hitting 10,000

VERSUS

"Certainly the stock market hasn't acted very well [since President Obama's inauguration]."
-- Boehner, 3/04/09

Think Progress

Rewarding Risky Business

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