From East Bay Citizen
Nov. 16, 2011 | Members of the Peralta Community College Board of Trustees charged with overseeing over 45,000 students in the East Bay voted Tuesday night to acquiesce to the growing power of the Occupy movement by beginning the process of pulling its assets from large banking institutions.
The resolution, first introduced by Trustee Abel Guillen, asks the community college chancellor to provide the board a list of recommendations for beginning the move to smaller community-based banks and credit unions no later than the end of January.
For the full article visit: East Bay Citizen
With the U.S. trade deficit reaching the highest levels in three years, the unemployment rate hovering at 9.1 percent, and President Barack Obama announcing the second stimulus plan in two years, Americans are terrified of their country’s fiscal future. It should be no surprise that young protesters have camped out on Wall Street, venting their anger at the financial system. Against this backdrop of widespread discontent, the same financial institutions continue the same risky strategies that led to the crisis in the first place. If this continues, say World Policy Institute senior fellow Jeff Madrick and former Assistant Secretary of the Treasury for Financial Stability Herb Allison, these firms will keep finding ways to fail. For the U.S. to recover and avoid further financial disaster, the government needs to find a way to re-regulate Wall Street.
As the country struggles to get back on its feet, hostility and blame fall on Wall Street as the root cause of the banking crisis. Now, many Americans are demanding reregulation and the removal of Wall Street’s lobbyists’ hold on Congress. Madrick and Allison echoed these sentiments in a The Century Foundation and World Policy Institute talk on Sept. 16 where they discussed what the role of Wall Street really is, and what can be done to fix its dangerous shortcomings. Madrick, who wrote The Age of Greed: The Triumph of Finance and the Decline of America, 1920 to the Present, raises an important question in his book and in the discussion: What good is Wall Street? It’s a question “we should ask, and we were being afraid to ask,” Madrick says.
As the size of the financial industry grows, the original purpose of banking to allocate capital to its most productive uses has been forgotten not only by the bankers but by the public as well. According to Madrick, the current system that pushes the socially beneficial goals of the industry to the periphery only encourages greed. Now, banking shifts money around while rarely increase market efficiency.
Allison, who wrote The Megabank Mess on financial reregulation, takes a bolder step, claiming, “Trading has never made money on Wall Street.” Allison points to proprietary trading, where banks bet their own capital on movements in the markets, as a financial activity with no economic benefits. The profits, he claims, are illusory since they always will disappear, usually all at once in downturn. It can take months or years to find out whether the profit is real or the temporary result of excessive risk.
Before directing the Troubled Asset Relief Program (TARP), the government’s $700 billion financial bailout program, Allison worked as President and CFO of Merrill Lynch. At the financial firm in the 1990s, he once saw a trading desk lose more money in a day than the company had made in more than 100 years. Allison says the payment structure is partly to blame. “Traders are getting paid on a basis of carrying risks,” he says.
As Wall Street continues to evaluate profits and losses every afternoon based on the closing prices, traders are motivated to think in the short-term, ignoring uncertain or pessimistic long-term growth predictions. Defending their activity as an obligation to make profits for shareholders, banks actually fail shareholders when the market collapses. Traders are left with huge personal bank accounts, while shareholders and taxpayers pick up the losses.
Though the Dodd-Frank financial reform bill came out to prevent banks from taking too many risks, its effect is limited, according to Madrick and Allison. Some banks now issue bonuses in the form of restricted stock that can’t be sold immediately or cash that cannot be used for a certain number of years. Still, with continued loose regulation, the previous model focused on short-term profits is too lucrative for traders to stop.
On Wall Street, there is a widely held belief that “Greed is Good.” Allison says, “These banks had one goal, and they still do. Their goal is measured in profitability. If there is only one goal, there are no limits.” The pressure to generate profits immediately while ignoring long-term outcomes will continue to drive excessive risk taking.
Deregulation of Wall Street was once necessary for growth, Madrick says, but that need is long gone. Now that firms have consolidated into just a few players—many arguably too big to fail—the government needs to return to Wall Street with real regulations so they can’t ignore their social role of allocating resources efficiently.
But before the government can do this, Allison argues, officials will need to break free of Wall Street’s grip on the government. Major investment firms turn their money into power when their lobbyists go to Congress, preventing any government attempt at regulation. Only after the conflict of interest is resolved can there be any hope for the re-regulation of Wall Street.
This post was based on a discussion by Jeff Madrick and Herb Allison on Financial Regulation and the Future of Wall Street (brief bios for the two speaker can be found by clicking the link). The video recording for this talk can be found here as well. There was a New Yorker article by John Cassidy titled What Good is Wall Street: Much of What Investment Bankers do is Socially Worthless which inspired me and I strongly recommend if you are interested in the greed in Wall Street as well as Occupy Wall Street.
It is generally assumed that investors seek to maximize financial returns to themselves and/or their beneficiaries within certain risk parameters and timeframes. Returns may be derived from dividends, interest, earned income, or capital appreciation, or a combination of these. There is no stated utility, positive or negative, assigned to the societal (universal) effects of the form or characteristics of return generation. This single-minded focus on returns to the investing entity is problematic when it fails to consider the end beneficiaries. For example, a pension fund may derive financial returns from an investment in a real estate project that has uprooted and destabilized the retired employees who receive financial benefits from the fund. Does the financial return to the fund offset not only the financial, but also the personal costs to the beneficiaries? (pp 12)
This isn't intended to be the be all end all of investment theory, but to stimulate a discussion around the basis for making investment decisions. I for one think that this is a very important discussion to be having. Why do we invest money. Long-term institutional investors especially need to be thinking about how they make investment decisions and what other methods could me the needs of the investor and of society to be successful.
Interested in the theory behind investing? Take a look.
As they have been for the past several years, Chief Investment Officer David Swensen GRD ’80 and his second-in-command, Dean Takahashi ’80 SOM ’83, were the two highest-paid employees at Yale in the 2008-’09 academic year, with investments director Alan Forman coming in fourth. Third on the list was University President Richard Levin, who, with $1.5 million in salary and benefits, made about a quarter more than he did the year before.
Swensen’s salary and benefits totaled $5.3 million last year, almost a quarter more than the $4.3 million he earned in the 2007-’08 academic year. His deputy, Takahashi, took home $3.5 million, a 35 percent raise from the year before.
What the filings do not make clear is how much exactly the investments officers took home in 2008-’09, since their compensation includes deferred bonuses they will be paid in the future as well as past deferred bonuses they have now been paid.
The two men’s bonuses were based on the endowment’s long-term performance prior to last year’s disastrous negative returns. Future bonuses for Investments Office employees will reflect last year’s losses. (Facing a $300 million budget gap, University officials postponed major construction projects, cut back on spending across Yale and laid off nearly 5 percent of its staff.)
But those same University administrators — who have defended Swensen’s strategy over the past year even as he remained quiet — say that while Swensen may be paid well, it is Yale that has benefited the most from his time here. At $16.3 billion, the most recent figure available, the endowment is still worth much more what it was when Swensen came to Yale in 1985: $1 billion.
On Wall Street or even at other universities, they say, the several million Swensen makes yearly would be a pittance for an investor as renowned as he is. Endowment managers at Harvard have earned as much as $35 million recently, dwarfing Swensen’s and Takahashi’s pay.
“Here’s a guy who could make 10 times his salary,” former deputy provost Charles Long said of Swensen last April. “But his goal is to make as much money as he can for Yale.”
How much is too much? Yale's endowment has increased by a factor of fifteen since 1985, adding on average nearly $1 billion each year. And yet by taking home $5.3 million in a single year, even as budget cuts and layoffs hit the school, the #1 top earner is framed as someone who is making relatively little, "a guy who could make 10 times his salary."
Socially responsible investing, or SRI, is a strategy of investing that seeks to maximize financial returns just like every other investment strategy, but also attempts to maximize social good. SRI is becoming very popular recently, accounting for about eleven percent of the $25.1 Trillion of assets under management as of 2007 according to SocialFunds.com, but SRI is not a new concept. Religious institutions have engaged in SRI with their funds as well as encouraging their followers to invest responsibly for hundreds of years. Religious groups have attacked issues such as slavery and workers rights through investment decisions on a strictly moral ground.
In the 1960’s SRI began to grow with the use of negative screens. Negative screens are devices investment professionals use to restrict investment in companies that engage in various activities such as arms production, tobacco, gambling, and liquor. Negative screens have also been used in divestment campaigns, most notably to end apartheid in South Africa.
Although many people contend that negative screens and SRI is a bad financial decision because it limits the investors, recent data has begun to show that may not be the case. Many reports are emerging that show SRI funds outperforming non-SRI funds, and many investors are beginning to understand responsibility as a metric for financial success. Not only does responsibility represent a major risk to organizations due to evolving market drivers such as climate change and resource scarcity, but governmental changes also have the potential to catapult responsible companies into financial success with programs such as sustainable spending from the stimulus, corporate governance reform due to the crisis and cap and trade programs.
Since SRI is not only a moral choice, but also a financial benefit, more institutions will now hopefully recognize it as a necessity. Not only will this earn them better returns, but also make the world a better place!