May 11, 2011, 8:30 pm
By WILLIAM D. COHAN
One of the most frustrating facts of the recently abated financial crisis is that those who might have been partly responsible for it have got off scot-free. The only two people prosecuted criminally — the Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin — were found not guilty by a jury in Brooklyn. Other potential culprits — Angelo Mozilo, chief executive of Countrywide Financial, Joseph Cassano, chief executive of AIG Financial Products, and Dick Fuld, the chief executive of Lehman Brothers — were either slapped with a small civil penalty, in the case of Mozilo, or the Justice Department made the decision not to prosecute after months of investigation.
What’s worse, not only did bankers escape with no penalty, they walked off with millions of dollars in their pockets while American taxpayers got left holding the bag. Since the crisis was caused by greedy decisions made by one leader after another at various Wall Street firms and at other businesses, like mortgage originators and credit ratings agencies, that attached themselves to Wall Street like pilot fish on a shark, the dearth of prosecutions, or even attempted prosecutions, seems especially unconscionable. The least the Justice Department could do, in declining to prosecute, would be to make available the reams of documents on which it based its decisions, so that the American public can understand why prosecutors let these people walk. Without seeing what the prosecutors have seen, we are left with a sense of frustration and injustice.
Read more…
April 27, 2011, 11:55 am
By WILLIAM D. COHAN
As we await the verdict in the insider-trading trial of Raj Rajaratnam, the founder of the Galleon Group hedge fund, the following question comes to mind: Why would people who seem to have it all — wealth, prestige, powerful jobs and infinite access to others with the same — risk that, and more, to provide inside information to the Sri Lankan-born billionaire?
What could possibly have possessed Rajat Gupta, for instance, the former head of the prestigious consulting firm McKinsey & Co., to finish up a Goldman Sachs board meeting and within 23 seconds — according to tapes played at the trial — call Rajaratnam to share with him material, non-public information about Goldman’s financial performance? Why did Robert Moffat, an I.B.M. senior vice president and a leading contender to succeed Sam Palmisano as the company’s chief executive, and Anil Kumar, another senior executive at McKinsey, do many of the same things? (The two have pleaded guilty to various charges stemming from insider trading; Moffat has been sentenced to six months in prison, while Kumar is awaiting his sentence.)
Lucas Jackson/Reuters David SokolOr for that matter, why would David Sokol, a multi-millionaire and one of the men on the short list to succeed Warren Buffett, bother using the knowledge he had that Buffett was interested in buying Lubrizol, a large chemicals company, to make an extra $3 million that surely would have no effect on his lifestyle? (The Securities and Exchange Commission is reportedly investigating Sokol’s trading in Lubrizol but no charges have been filed against him; he has resigned from Berkshire Hathaway, Buffett’s company.)
Why can’t people who seem to have so much simply be satisfied with what they have, without feeling the need to risk breaking the law to get even more? Read more…
March 30, 2011, 8:30 pm
By WILLIAM D. COHAN
From the outset of the recent financial crisis, the government’s often-haphazard response was motivated by an overarching desire to re-establish the status quo on Wall Street as quickly as possible.
The thinking seemed to be that the sooner the surviving big banks got back on their feet and returned to providing the grease that keeps the wheels of capitalism churning, the sooner the broader economy beyond Manhattan would recover from its serious malaise and businesses would take the steps necessary to hire new workers — reducing a stubborn 10 percent unemployment rate — and to invest capital in new plants and equipment.
Not only did the government’s theory fail in practice — unemployment remains relentlessly and historically high and American businesses seem intent on hoarding, rather than spending, the $2 trillion in cash on their collective balance sheets — but it also lost a once-in-a-century opportunity to change the mores of a momentarily chastened Wall Street, which remains badly in need of substantive reform. This is more than a shame; it is prima facie evidence of how deep Wall Street’s hooks have been — and continue to be — into the powers that be in Washington (and vice versa).
For instance, for all its bluster and heft, the July 2010, 2,200-page Dodd-Frank law, which purports to force Wall Street to change its bad behavior, has of course done nothing even remotely close to that and merely reinforced the longstanding cozy relationships. Rest assured, while you are reading this column, Wall Street’s lobbyists and executives are busy cozying up to regulators at the Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation and others to make sure the regulations still being written in the wake of Dodd-Frank come out just the way they want them. Despite the hype, that law was yet another triumph for powerful forces determined to return the Wall Street/Washington axis to the status quo.
Read more…
March 16, 2011, 8:30 pm
By WILLIAM D. COHAN
In the next few weeks, hundreds of thousands of high school seniors around the world will begin hearing from colleges and universities in this country about whether they have been lucky enough to be accepted for admission.
But will it turn out to be a Pyrrhic victory if they get in?
At the elite, private institutions the odds of admission are long — a mere 7.2 percent of Harvard’s more than 30,000 applicants were accepted a year ago — and the cost for those not receiving financial aid is incredibly high. This year, tuition and fees at Harvard are close to $52,000, including room and board, a price that has increased at about 5 percent annually during the past 20 years, well above the estimated 2.8 percent annualized increase in the consumer-price index, one gauge of inflation. As far as tuition increases go, Harvard’s arc is a pretty typical one.
Generally speaking, in order to pay just Harvard’s tuition, someone would have to earn more than $100,000 in annual pre-tax compensation. Then there are all the other family expenses — among them, gasoline, the mortgage, food and medical expenses. Multiply all that by four, and then by other children, and very quickly the numbers get astronomical.
Which leads to a fundamental question: Despite the obvious appeal of being in such an intellectually rich environment and the chance to learn for learning’s sake, is the much-sought-after four-year education at the nation’s elite colleges and universities even worth it anymore?
Read more…
March 2, 2011, 7:40 pm
By WILLIAM D. COHAN
As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.
Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.
Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.
The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible. Read more…
February 16, 2011, 9:00 pm
By WILLIAM D. COHAN
The conventional wisdom has it that the final report of the Financial Crisis Inquiry Commission was a low-budget flop, hopelessly riven by internal political disputes and dissension among the commission’s 10 members. As usual, the conventional wisdom is completely wrong. Actually, the report — and the online archive of testimony, interviews and documents that are now available — is a treasure trove of invaluable information about the causes and consequences of the Great Recession.
For instance, on the exceptionally important but little understood role played by the increasingly lower prices Goldman Sachs placed on the complex mortgage securities on its balance sheet — which helped determine the fate of many of its shakier Wall Street brethren — the commission report, on page 237, is crystalline:
As the crisis unfolded Goldman marked mortgage-related securities at prices that were significantly lower than those of other companies. Goldman knew that those lower marks might hurt those other companies — including some clients — because they could require marking down those assets and similar assets. In addition, Goldman’s marks would get picked up by competitors in dealer surveys. As a result, Goldman’s marks could contribute to other companies recording “mark-to-market” losses: that is, the reported value of their assets could fall and their earnings would decline.
Read more…
February 2, 2011, 8:30 pm
By WILLIAM D. COHAN
The peripatetic Larry Summers is once again back at Harvard, teaching a class on American economic policy with Martin Feldstein and Jeff Liebman – two other prominent former government economists – and reacquainting himself with the joys of free speech now that he is no longer President Obama’s director of the National Economic Council, President Clinton’s treasury secretary or Harvard’s 27th president. What better time, then, than winter to check in with the lion?
Michel Euler/Associated Press Larry Summers at the World Economic Forum in Davos, Switzerland, last week.In an interview before he headed off to Logan Airport on a voyage that would take him to the World Economic Forum, in Davos, where he has been a regular for years (and where he would have an unscripted but amusing dinner encounter with Amy Chua of “Tiger Mother” fame), to Moscow (unless last week’s terrorist attack waylaid him) and, finally, to Israel (unless the dramatic events unfolding in Egypt forced him to change his plans), Summers expressed a surprising degree of optimism about the prospects for the United States economy this year. “I think a stronger and stronger foundation for continuing growth is being laid,” he said.
Summers said he thinks “for the first time in years,” the United States economy is growing at a rate faster than the consensus estimates. He believes GDP will grow at 3.5 percent to 4 percent in 2011, materially higher than the consensus rate of 2.5 percent. He said this is a bit of a watershed. He recalled how once upon a time he used to tell the finance ministers of other countries that until their economic forecasts were “too pessimistic” he had little faith in their countries’ economic prospects. The pessimism in the consensus forecasts now makes him optimistic. “Consensus forecasts are serially correlated,” he said, “so when you see upwards revisions you’re likely to see continuing upwards revisions.”
Read more…
January 19, 2011, 10:53 pm
By WILLIAM D. COHAN
We have been fully conditioned by now to expect that the rich and powerful will get the biggest slice of whatever pie is being served, while those less fortunate — and less well connected — will get the crumbs. But it still rankles when we witness time and time again how big corporations get deals the little guy can only dream about, especially when a little creative thinking could alter the status quo.
Take for instance the incongruity between what banks (and other creditors) are willing to do to allow troubled companies to avoid paying back money that should never have been borrowed in the first place versus what banks are willing to do for distressed homeowners who can no longer afford to make their mortgage payments. Why are banks willing to wipe out billions of dollars of the principal on loans made to corporations but — in most cases — give financially strapped homeowners the binary choice of either making the contractually agreed-upon monthly mortgage payments or face foreclosure and the loss of their home? Why do banks have a willingness to negotiate with corporate debtors but have shown only extreme reluctance to modify mortgages for struggling homeowners?
Read more…
January 4, 2011, 9:00 pm
By WILLIAM D. COHAN
Can Goldman Sachs, the profit-seeking missile of high finance, really make money by investing $450 million in Facebook, at a vertigo-inducing price that values the social-networking company at $50 billion?
On first blush, the answer would appear to be no. After all, in May 2009, the company was valued at $10 billion. Last August, Facebook was valued at $27 billion and now it’s $50 billion — for a company with a reported $2 billion in revenue and negligible profits. If General Electric, with 2010 revenue of around $150 billion, traded at a similar multiple of revenue, it would be worth $3.75 trillion instead of $200 billion. Facebook is now considered to be worth more than Time Warner, DuPont and Goldman’s rival Morgan Stanley. Read more…
December 9, 2010, 8:00 pm
By WILLIAM D. COHAN
While Wall Street’s moguls and whiz kids might not want to admit it, the best way to figure out what’s really happening in the economy is to read the daily newspapers. You’ll learn all you need to know there. And the zeitgeist is fairly bubbling these days with an array of stories that seem to be pointing to serious economic trouble ahead. We can no longer ignore the message that is being broadcast loud and clear: We must get our fiscal house in order and take meaningful — exceedingly painful, yes — steps to close the $1.3 trillion federal budget deficit. You can be the most zealous Keynesian economist on the planet and still know that at some point we cannot continue to have both guns and butter without serious repercussions. And we have clearly reached that point.
That’s why the news of the proposed tax-cut deal between President Obama and Congressional Republicans is so distressing. Adding $900 billion to the budget deficit — paid for with more borrowing — is the last thing we need if we want to show the world we are serious about fiscal responsibility. Do we genuinely think that the Chinese, the Japanese and the Persian Gulf oil barons will continue to finance our deficit, except at increasing cost to us?
As Bernanke fiddles and Obama caves in, our future gets bleaker and bleaker.
You can probably count on one finger the times that Paul Krugman, the Times columnist and Nobel-prize winning economist, and David Stockman, Reagan’s budget director, have agreed on anything. But they are in violent agreement about the fiscal irresponsibility of the tax-cut deal. In urging Obama to reject the deal because of his concern the tax cuts will likely become permanent, Krugman wrote on Monday that “giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.” Democrats in Congress should pull out all the stops and block the senseless tax breaks for the rich that they don’t need and that will add to our already unconscionable budget deficit; fortunately, it looks like some Republicans would join them. Stockman, in an interview with Yahoo Finance, called the president’s deficit commission a “side show,” said the tax deal proved that Republicans are unserious about cutting spending and warned of a coming “major upheaval in the world bond market.” Read more…
