New York Times columnist David Brooks, defending Mitt Romney against a new Romney-bashing ad from President Obama’s re-election campaign, describes private equity as a “reform movement”: "Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations. The process was brutal and involved streamlining and layoffs.
So let me get this straight. JP Morgan loses more $2 billion, reportedly thanks to the recklessness of a trader nicknamed “the London Whale” and “Lord Voldemort,” and all Morgan CEO Jamie Dimon has to say is “it was bad strategy, executed poorly”? Well, no, that isn’t precisely correct. Dimon also says he remains only “barely” a Democrat because the Democrats want excessive regulations, including the so-called “Volcker Rule” banning some types of proprietary trading.
Any honest discussion of Obama and populism arrives pretty quickly at two conclusions. The first is that Obama has become a more populist politician than anyone detected early in his presidency. The second is that, even so, there’s probably never been a less populist president who’s stirred up so much vitriol on Wall Street. The obvious question is why, and this forthcoming Times magazine piece on Obama's fundraising hints at the best explanation yet: For the next hour, the [Wall Street] donors relayed to Messina what their friends had been saying.
Thomas Philippon, a New York University economist, has reached the remarkable conclusion that despite having gobbled up the American economy—total compensation in the financial sector (profits, wages, and bonuses) now represents an unprecedented 9 percent of GDP—Wall Street is no more efficient at “transferring funds from savings to borrowers” than it was in 1910, when finance’s share of the GDP was about half what it is today.
In May 2007, when Barack Obama was but an upstart challenger of Hillary Clinton, he attended a gathering of several dozen hedge fund managers hosted by Goldman Sachs at the Museum of Modern Art in New York. It was not a fund-raiser, just a chance for Obama to introduce himself to the investment wizards who had helped turn the hedge fund sector into the most lucrative and alluring corner of the financial universe. And the first question for Obama was as blunt as one would expect from this crowd.
Speaking of the free passes Romney may be getting—and, for that matter, of financial engineering—there’s another slightly-dodgy Romney formulation that hasn’t gotten much pushback so far: the distinction between “venture capital” and “private equity.” Venture capitalists typically provide money to very young firms to help them get off the ground in exchange for an ownership stake. Private equity firms typically provide money to more established firms, often those that have run into problems, also in exchange for an ownership stake.
Any serious program for Wall Street reform should start with two words: “term out.” “Terming out” is a financial term of art, but its meaning is easily grasped. It simply means funding your business with long-term financing instead of short-term IOUs. To a far greater extent than is commonly understood, our financial sector funds its operations with extremely short-term borrowings. These IOUs must be paid back in a day, a week, or a month. By contrast, termed-out financial firms shun borrowings that come due in less than a year.
On Monday, a single, ringing court decision gave hope that Wall Street will finally be held to account for its role in causing the financial crisis. Federal District Court Judge Jed Rakoff’s opinion may soon force the SEC, the federal government’s investment regulator, to take big banks to court, rather than continuing to come to terms with them in out-of-court settlements.
Have any plans for this Saturday? The nearly 100,000 people who have pledged to take part in Bank Transfer Day certainly do: closing their bank accounts. The idea is to punish “Too Big to Fail” banks by instigating a mass exodus to smaller credit unions and community banks. Though not technically affiliated with Occupy Wall Street, it’s a practical expression of the anti-bank anger the movement has wrought. But if the executives at the country’s biggest banks have circled Bank Transfer Day on their calendars, it's probably not out of anxiety.
David Lazarus argues today in the Los Angeles Times that Bank of America has found a way to make money off Dodd-Frank. The financial reform bill directed the Fed to limit the "swipe fees" banks were charging merchants for the use of debit cards in retail transactions. Reform was needed because these swipe fees were about the same for debit and credit cards, which made no sense. With a credit card you're borrowing money, but with a debit card you're supposed to be spending only money that you have.