Wall Street Partying in Davos as Bankers Overcome Crisis
By Christine Harper - Jan 24, 2011

As Wall Street chief executive officers flock to the World Economic Forum, they’ll be breathing a sigh of relief along with the Swiss mountain air: There are no panels on compensation or redesigning financial regulation.

After spending much of last year’s meeting defending the industry and debating proposed rules, bankers plan to focus on wooing clients and winning business, according to executives at three Wall Street companies, who spoke anonymously because they weren’t authorized to comment publicly.

The bankers will be coming to Davos, Switzerland, with a renewed sense of confidence. JPMorgan Chase & Co.’s profits last year were the highest in the bank’s history, and Citigroup Inc. returned money to the U.S. Treasury and reported its first full- year profit since 2007. Governments have so far opted against breaking up or levying extra taxes on banks deemed too big to fail, and the Basel Committee on Banking Supervision, which sets global financial-regulatory guidelines, isn’t requiring lenders to meet new capital standards until 2015.

“It will feel less acute,” said Anne M. Finucane, Bank of America Corp.’s chief strategy and marketing officer, who attended with CEO Brian T. Moynihan for the first time last year and is returning this week. “The level of angst should have dissipated some given that there is movement in the economy.”

Goldman, Morgan Stanley

Two years ago, after the 2008 financial crisis, the CEOs of Bank of America, Citigroup and Morgan Stanley stayed away from the annual forum. This year the only major Wall Street banks that aren’t sending CEOs are Goldman Sachs Group Inc. and Morgan Stanley, instead represented by President Gary D. Cohn, 50, and Chairman John J. Mack, 66, respectively.

That means banks will be spending on parties. JPMorgan upgraded its cocktail reception to the Kirchner Museum from last year’s event at the Tonic Piano Bar at Hotel Europe Davos. Bank of America’s Moynihan and the firm’s other top executives will meet clients for drinks on Jan. 27 at the Steigenberger Grandhotel Belvedere -- the same night Morgan Stanley’s Mack is hosting a private dinner at restaurant Gasthaus in den Islen. Standard Chartered Plc and Deutsche Bank AG are both hosting events at the Belvedere the following night.

Nomura Holdings Inc. is having a British journalist and a newspaper editor speak at a dinner for clients, the first such event the Tokyo-based bank has held in Davos, according to a person familiar with the planning. Barclays Plc will again hold its annual client dinner at the Hotel Schatzalp, and Credit Suisse Group AG is hosting two client lunches, one discussing financial regulation and the other focused on emerging markets.

‘Cup of Coffee’

As always, much of the action at Davos will happen at meetings and parties that aren’t on the official program.

“The most useful thing for us is really just to spend time with key clients over there, even if it’s just a cup of coffee for 20 minutes or so,” said William Vereker, the London-based joint global head of Nomura’s investment banking division.

For bankers like Vereker, in contrast with this year’s Davos theme of “Shared Norms for a New Reality,” the old reality is back.

“They’re out there to make money for shareholders and trying to do that the best way they can under a system they helped design,” said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg News columnist. “We’re just going through the same cycle again with pretty much the same incentives and power structures. Why would one expect anything different?”

Co-Chair Kochhar

One thing different this year is that none of the heads of big western banks is among the event’s six co-chairs. Chanda D. Kochhar, the 49-year-old CEO of ICICI Bank Ltd., India’s second- biggest lender, is replacing Deutsche Bank CEO Josef Ackermann and Standard Chartered CEO Peter A. Sands, who represented the industry last year.

Kochhar’s bank, unlike many of its western counterparts, remained profitable throughout the financial crisis and this week reported a record profit for the three months ending Dec. 31. Her salary, bonus, expenses and pension contributions for the year ending March 31, 2010, totaled 20.9 million rupees ($457,500), the Mumbai-based bank’s annual report showed, less than half the $1 million base salary paid to JPMorgan CEO Jamie Dimon, who is returning to Davos after skipping last year.

A survey released a year ago by New York-based public relations firm Edelman showed the percentage of respondents in India who said they trusted banks rose to 83 percent, while in Germany, France, the U.K. and U.S., trust in banks tumbled below 30 percent. Edelman is scheduled to release an update of that study later today.

Lessons Learned

Finucane and other senior bankers said the lessons learned from the financial crisis aren’t forgotten. They also said the reform process isn’t finished. Many of the rules required by the U.S.’s Dodd-Frank financial legislation have yet to be written, and Basel still has to craft rules for too-big-to-fail banks and capital requirements for trading units.

“The way that Dodd-Frank is implemented is still up for grabs,” said Jane R. Gladstone, who leads the financial- services corporate advisory practice at New York-based investment bank Evercore Partners Inc. and is going to Davos for the third time. “There is a chance that we still have some important sessions and regulatory meetings at Davos.”

This year the discussion at Davos will probably move to different topics such as economic stimulus, monetary policy and the role played by emerging markets, Finucane said.

Geithner, Cantor

Timothy F. Geithner is scheduled to be in Davos, the first time in more than a decade that a sitting U.S. Treasury secretary has flown to Switzerland for the conference. The leaders of France, Germany and the U.K. will also appear, as will seven members of the U.S. Congress, including Republican Majority Leader Eric I. Cantor and Massachusetts Democratic Congressman Barney Frank.

None of the U.S.’s main financial regulators, such as Securities and Exchange Commission Chairman Mary L. Schapiro or U.S. Commodity Futures Trading Commission Chairman Gary Gensler are on the list of participants.

“Last year there were a lot of conversations about who to blame, how to blame them, and how to re-jigger the industry,” said Yury Spektorov, a Moscow-based partner in Bain & Co.’s mergers and acquisitions practice. “It’s not a hot topic anymore. Some people probably learned their lessons, some probably didn’t, but they will discuss how to move forward.”

Back on Track

Goldman Sachs’s Cohn and Standard Chartered’s Sands are scheduled to participate in one of the first panels tomorrow, discussing “The International Financial System: Back on Track?” The discussion will also include Liu Mingkang, chairman of the China Banking Regulatory Commission, as well as London- based lawyer David R. Childs and hedge-fund manager Frank P. Brosens. That session is closed to the press.

JPMorgan’s Dimon, 54, will make a more public appearance the following morning on a panel titled “The Next Shock: Are We Better Prepared?” Dimon is the only financial-industry participant in that discussion, which also includes Israeli President Shimon Peres and the leaders of consulting firm McKinsey & Co., Alcoa Inc. and Paris-based advertising company Publicis Groupe SA.

Pandit, Diamond

Other appearances by top bank executives are less likely to focus on Wall Street and regulation. Citigroup’s Vikram S. Pandit is on a panel about expanding financial services to the poor; Bank of America’s Moynihan will talk about currency devaluations; and Barclays’s Robert E. Diamond Jr. will discuss the global economy in a session that features World Bank President Robert B. Zoellick and the finance or economy ministers from three countries.

Jonathan Chenevix-Trench, who spent 23 years at Morgan Stanley and went to Davos in 2006 and 2007, said the event could be more useful than ever if executives used the time with politicians and regulators to address unsolved problems in the financial system.

“There will always be client meetings, that’s what they’re there to do, so absolutely they’ll be doing that,” said Chenevix-Trench, 59, who co-founded London-based African Century Group, which invests in sub-Saharan Africa. Still, “we’ve not solved this conundrum of bankers making hay when the times are good and taxpayers picking up the tab when times are bad, and that model, everyone’s got to look at it very carefully.”

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I would dispute the idea that bankers are really making much money for their shareholders but, apart from that, the bolded bits are, imho, the important ones - Yeah, yeah, Dodd-Frank is still to be implemented and blablabla. But, bottom line, it's back to normal for the big banks. With maybe a bit more legal hoops and money spent on ticking useless compliance boxes.

It shouldn't be that way. It isn't meant to be that way.

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Based on the Australian and Canadian experiences, I suggest that what is required is not new regulations but new regulators - with sufficient budgets to attract professionals who can effectively apply the principles and have a fair chance of outwitting corporations who try to bend them.

Especially in the US the size of the lobbying and election funding industry is a major concern too. Regulators are hamstrung if the legislature gives in to industry urgings to loosen the rules.

According to a report in July 2008:

Over the past decade, both Fannie [Mae] (FNM) and Freddie [Mac] (FRE) made the list of Washington's top 20 lobbying spenders. They spent a combined $170 million to cultivate allies during that period, a bit less than the American Medical Association and a bit more than General Electric. At the same time, their executives have consistently led the mortgage-banking sector in campaign giving to members of Congress, contributing a combined $16.2 million since 1997.

The two firms were grossly undercapitalised for the size of their loan books and several attempts to address this problem died in Congress - with disaster being the ultimate result.

The Congressional Financial Crisis Inquiry Commission has reached much the same conclusion: the regulators simply didn't regulate:

Harsh Words for Regulators in Crisis Commission Report
BY BEN PROTESS AND SUSANNE CRAIG

The Congressional commission’s scathing account of the financial crisis casts regulators in a rather unflattering light, as the sheriff who didn’t stop Wall Street from becoming the Wild West.

In its exhaustive report released on Thursday, the Financial Crisis Inquiry Commission lambastes an alphabet soup of federal regulatory agencies – including the Securities and Exchange Commission, the Treasury Department and the Federal Reserve. The report blames the agencies for missing the mortgage bubble and for turning a blind eye to Wall Street’s excessive risk taking that threatened to topple the economy.

“The sentries were not at their posts,” the report said.

The report called out several top regulators by name, including former the Federal Reserve chairman, Alan Greenspan, who “championed” deregulation, the commission said.

The commission also cast regulators as unresponsive on the one hand — and clueless on the other. For instance, the same week that Bear Stearns collapsed, Christopher Cox, the S.E.C. chairman at the time, expressed “comfort about the capital cushions” on Wall Street.

As late as summer of 2007, with housing already past its prime, the Federal Reserve chairman, Ben S. Bernanke and the Treasury secretary, Henry M. Paulson Jr., “offered public assurances that the turmoil in the subprime mortgage markets would be contained,” according to the report.

Regulators have pleaded that their hands were tied – a bogus excuse, according to the commission.

“They had ample power in many arenas and they chose not to use it,” the report said, citing the S.E.C. decision to relax capital requirements for big investment banks as one example.

The S.E.C.’s “poor oversight” of the nation’s five biggest investment banks “failed to restrict their risky activities and did not require them to hold adequate capital and liquidity for their activities.” The commission noted that all five firms took enormous government bailouts.

The commission was particularly unforgiving of the S.E.C.’s handling of Lehman Brothers, which collapsed and filed for bankruptcy in 2008.

The agency “knew of the firm’s disregard of risk management,” the report said. “The S.E.C. knew that Lehman continued to increase its holding of mortgage securities, and that it had increased and exceeded risk limits.” The S.E.C. cannot play dumb, the report said, because the agency noted these facts nearly every month in official documents.

When the agency did try to crack the whip on Wall Street, lobbyists and their allies on Capital Hill rushed to complain.

Lawmakers would “harass” the agency when it proposed controversial regulations, Arthur Levitt, former chairman of the S.E.C. told the commission. Mr. Levitt described it as “kind of a blood sport to make the particular agency look stupid or inept or venal.”

When Congress becomes a captive of lobbyists, the game is over.

Quote:

When Congress becomes a captive of lobbyists, the game is over.

Indeed!

F

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An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

There's more to the tale than just the regulators not working or the politicians being in the pocket of lobbyists.

I think the politicians did really believe that gutting the regulators and revoking the various laws constraining banks was a Good Idea...

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5 essential truths missing from financial crisis reportJan 27, 2011 16:44 EST

5 essential truths missing from financial crisis report | Analysis & Opinion |

2008 financial crisis | Fed | financial reform | housing crisis | subprime mortgage crisis

When I think about what government officials and banking executives knew before the blowup of 2008, I think about the people of Fortuna, a small town nestled next to an active volcano in Costa Rica.

Like the residents of Fortuna, Federal Reserve and Treasury officials knew they were watching a soon-to-erupt volcano with the combination of residential lending, derivatives and banking abuses. The regulators, rating agencies and banking industry were clearly in denial about the worst-case scenario.

As the consensus conclusions of yesterday’s Financial Crisis Commission (FCIC) report showed, “the captains of finance and the public stewards of our financial system ignored warnings and failed to understand and manage evolving risks within a system essential to the well-being of the American public.” Human folly, greed and hubris caused this $11 trillion debacle.

Not only did regulators fail to regulate, certain tainted parties (AIG, Citi, Goldman, Bank of America) were rescued during and after the crisis. Although the commission has said it “has referred” certain matters to the Department of Justice, no indictments have been announced.

The most vexing part of the report is the realization that all the major players knew there were problems and did nothing to stem the blowup.
Alan Greenspan and the Fed knew about toxic predatory lending and subprime mortgages. One of the Fed’s only true watchdogs, the late governor Edward “Ned” Gramlich, warned of these lending abuses as early as 2000.

The “maestro” of disaster Greenspan even encouraged homeowners to take out risky adjustable-rate loans as he was measuring and reporting on how much they were tapping their home equity.

Because they knew regulators weren’t going to act until lava was flowing into their offices, players like Goldman gamed the system and not only got bailouts for their derivatives positions, they were able to make even more money during the confusion.

While I agree with the crisis commission’s major points, they missed some key details that still need to be addressed:

Fannie Mae and Freddie Mac were printing money.
The mortgage giants were originally created to insure home mortgages for the middle class. In reality, they were a profitable machine that enriched mostly their top executives and investors during their bull run. Using borrowed money, they resold and securitized their debt along with home mortgages with a 75-to-1 leverage ratio. That meant they only had $1 in capital to cover every $75 they borrowed. The market had this nod-and-wink understanding that Congress would bail them out if they got into trouble, which is exactly what happened. Now wards of the state sitting in a financial holding cell, these entities weren’t protecting the American Dream, they were printing funny money. They should be broken up and their portfolios sold off. If the government wants to stay in the mortgage business, guarantees should be based on real assets, not leverage.

The Fed was impotent.
The Federal Reserve Bank of New York, under now-Treasury Secretary Tim Geithner, discovered that Lehman Brothers had 900,000 derivatives contracts outstanding and decided to investigate — only one month before the firm collapsed! In the Dodd-Frank financial reform law, the Fed was granted even more power to regulate the banking system, a big mistake. The Fed is the banking system. It’s like pilots doing their own air-traffic control. If it wants to do the right thing, the Fed should start by dismantling the “too big to fail” doctrine and break up Citi and Bank of America.

You can’t over-regulate derivatives.
FCIC member Brooksley Born, who chaired the Commodity Futures Trading Commission (CFTC), had sounded numerous warnings about derivatives during her tenure. After the Clinton Administration signed off on deregulation of over-the-counter derivatives in 1999, the market exploded to $673 trillion without any regulation or transparency. There are still loopholes in financial reform that will not shed enough light on these dangerous vehicles that she said “were the center of the storm.” They should all be covered by stringent capital requirements and policed by the CFTC, which along with the SEC, needs real money from Congress to do its job.

Ratings agencies need to be policed.
They rubber-stamped some 45,000 defective mortgage securities with AAA ratings. They need a real government watchdog checking their work (paging the GAO). The ratings sheriff was in the saloon when the bad guys came to town.

Change the compensation system.
Every major private player — from the Fannie/Freddie execs to the Bear Stearns traders — had the same incentive. If profits go up, so does your bonus package. So every short-term move you make is geared toward making you rich from a quick commission on a subprime loan to goosing up the perceived quality of a mortgage securities tranche.

Greed will never be eliminated from the human character and the commission’s report didn’t explore the psychology of this flaw. Yet Congress should either enact a tax on short-term trading and speculation or force financial service companies to compensate based on other performance measures that have more social value. Otherwise, the volcano will blow again. The next time, though, there won’t be enough money in the world to repair the devastation.

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Originally Posted by Gilles de Rais

There's more to the tale than just the regulators not working or the politicians being in the pocket of lobbyists. I think the politicians did really believe that gutting the regulators and revoking the various laws constraining banks was a Good Idea...

Maybe, but everyone knows the banks own the place too.

This article from 2009 certainly agrees with you.

Quote:

Former IMF economist Simon Johnson in an article for The Atlantic last year explained that Wall Street "gained political power by amassing a kind of cultural capital--a belief system." People in Washington believed that those in Wall Street knew what they were doing and believed that the accumulation of wealth in the financial sector was a national good, Johnson argues.

The Quiet Coup
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

The Quiet Coup - Magazine - The Atlantic

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Yep. And I also like Fredfredson's article. IMHO, it still avoids blaming The People for borrowing too much (and the failing wages that lead them to use borrowing instead) but it is a good list of the organisations responsible.

My only dissension would be with the derivatives bit. By all means, make CDSs exchange traded - It would help avoid an AIG-rest of the world (GS, SocGen) situation but no more.

The real problems were CDOs. And tranching is actually a very smart technique to redistribute risk. But the problem was in the assumption: Trying to be scientific and using data from only the last 20-30 years (housing data doesn't go back further with the kind of details needed for modelling) lead them to assume a 2-7% historical default rate. When it climbs to 90%, it's no wonder you're suddenly in trouble...

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Quote:

IMHO, it still avoids blaming The People for borrowing too much

No doubt some were greedy and others were gullible, imagining that the value of real estate would always continue to increase. Others were talked into it by greedy marketers who were making fancy commisions lending somebody else's money to people with no income, no jobs, no assets and no hope of paying it back. The process was aided and abetted by rating agencies whose models made no allowance for the possibility that property prices might drop.

Tony Jackson at the Financial Times observes:

... the unpalatable fact [is] that shadow banking is a device for thwarting the regulators’ purpose.

That might seem unconscionable. If the reality, however, is that the mice are smarter and more agile than the cats – and in some respects more powerful – all that can be hoped for is some form of compromise.

In the end, there are only two ways of restoring sanity to a mad system. The first is that banks and their shareholders come to accept that the banking supercycle really is over; that the old returns are no longer achievable, and cranking up the risk is ultimately futile.

The second way, of course, is another and bigger crash. Fingers crossed, everyone.

Any predictions as to which and how soon? What about 2013?

Originally Posted by roadkill

No doubt some were greedy and others were gullible, imagining that the value of real estate would always continue to increase. Others were talked into it by greedy marketers who were making fancy commisions lending somebody else's money to people with no income, no jobs, no assets and no hope of paying it back.

That part cannot be regulated, imho. It's human nature to be greedy and stupid. All you can hope for is knowing that you're prone to greed and stupidity.

Quote:

The process was aided and abetted by rating agencies whose models made no allowance for the possibility that property prices might drop.

As I said, the fault was more with the default rate assumptions but, in any case, that's being a bit anal as the two phenomenoms are linked. And, IMHO, that's what should be regulated or, better, made public ASAP. The conflict of interest for the rating agencies is too great - They're getting paid by the emitters!

Quote:

The second way, of course, is another and bigger crash. Fingers crossed, everyone (...) Any predictions as to which and how soon? What about 2013?

I don't think we got a crash coming inasmuch as, right now, it's the gvts and Central Banks doing all the heavy lifting. What I do see as possible is a sovereign crisis which would then crater everything around...

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