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Mendacious Commercials Against Financial Regulation

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Annie Lowrey over at The Washington Independent has a nice post deconstructing  the latest series of advertisments attacking the financial regulation bill now being debated in the Senate.

I admit I hadn’t seen this lovely bit of propaganda until she drew my attention to it, and it’s interesting to examine the claims it makes. The first rule of propaganda is to attribute to your enemy your own actions and intentions. Thus, the commercial rather cleverly accuses the Senate of setting up an apparatus for “unlimited bailout authority”, and, astoundingly, claims that “Goldman Sachs is in favor of the bill”.

Neither of these statements is true, of course, but the implications go deeper than that. As TPM revealed earlier this week, the sponsors of the ad, a front-organization calling themselves “Stop Too Big to Fail”, are funded entirely by corporate dollars, including, yes, Goldman Sachs. This attempt to dust up public anger against the financial reform bill indicates Wall Street’s fear of it, and their willingness to tell any lie in order to see that the reform bill doesn’t pass.

Not that they really have that much to worry about. As George Washington remarks, the reform bill currently being debated is “All Holes and No Cheese“, noting that:

Dodd’s bill:

What it will do, however, is set up new protections for consumers, specifically to protect them from predatory lending practices, overdraft fees, byzantine contracts that require a Ph.D to understand, etc. The bill will also (hopefully) enact some barriers to the trade of over-the-counter (unregulated) derivatives, those delightful instruments that got us into this crisis.

As with the health care bill, I feel really ambivalent about this.

On one hand, the Dodd bill does almost nothing to prevent too-big-to-fail, it proposes some watered-down reform on derivatives trading, it doesn’t reduce the size or power of our mega-conglomerate banks, it doesn’t reinstate Glass-Stegall, and it does nothing to rein in the frankly absurd amounts of cash the bank executives make, whether or not they happen to crash the economy

On the other hand, this bill does provide some new consumer protection services, it bans proprietary trading (whatever that is), and it does create a new regulatory body whose specific charge is to watch over our mega-banks (as opposed to the SEC, which has a universal mandate).

Is this good enough? Can we do better? With the flood of Wall Street money flowing into campaign coffers, and with the November election only 6 months away, I’m inclined to say no. Maybe we should take what we can get. And keeping in mind that, unlike the health-care bill which had full industry support, the Dodd bill is being opposed by nearly every major bank, maybe it isn’t so bad after all. If the banks are against it, there must be something good inside this bill.

Update: Also see Nomi Prins’ article in Alternet entitled “Ten Ways The Dodd Bill is Failing on Financial Reform“:

It won’t constrain the Fed’s future bailout operations. It appears to limit the Fed’s ability to lend money freely to firms in trouble by “allowing” its system-wide support only for healthy institutions or systemically important market utilities. But what’s to stop the Fed from designating any company a “systemically important market utility”? That was basically the rationale behind the AIG bailout.

Update II: It’s also important to keep in mind that Chris Dodd, the bill’s sponsor, is heavily funded by some of the most odious Wall Street titans, including Citigroup (who gave him $110,000 this cycle), AIG ($87,000), Merrill Lynch ($61,650), Morgan Stanley ($44,000), and JP Morgan ($37,000). Hooray for transparency!

Written by pavanvan

April 29, 2010 at 1:00 pm

Blanche Lincoln Stands Up Against OTC Derivatives

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(Via Felix Salmon)

I’ve written negatively about Senator Blanche Lincoln in the past for her vote in favor of the Iraq War, her frightening views on indefinite detention and torture, her support of warrentless surveillance, and a host of other sins, but I think she deserves major credit for introducing a bill earlier this week that would ban over the counter derivatives:

“Speculators will not be exempted and all trades will be reported to regulators and the public,” Mrs. Lincoln wrote. In addition, any agency that is used for the trading of swaps contracts, including those dealing with energy commodities, will be required to register with the C.F.T.C.

This is exactly the kind of transparency and oversight that could have prevented the crisis, or at least made it softer. I want to stress that the layers upon layers of new regulation that Timothy Geithner intends to add (and which I discussed in the post immediately before this one), will not do anything for public transparency.

Blanche, you’ve voted for some pretty bad things in the past, but this is a bill I can get behind.

Written by pavanvan

April 16, 2010 at 8:50 pm

More EU/IMF Confusion

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The Times gets credit for scooping the new plans for Germany and France to help Greece after all. I guess all those big bad threats to leave Greece to the mercy of the IMF weren’t really serious.

In one sense, it really doesn’t matter whether Germany or the IMF ends up on the hook for Greece’s bailout (which is supposed to cost 22 billion Euros, or something like $38 billion). The point is that Greece is not going to be the last country who needs this kind of assistance. As I mentioned previously, Britain, France, Portugal, Ireland, Belgium, Italy, and Spain all have debt crises looming on the horizon. Whoever cleans up after Greece will likely end up mopping up all of Europe. So it’s natural that neither Germany or the IMF want to set the precedent alone.

Again, I cannot stress Wall Street’s complicity in this affair. They were the ones selling Greece absurd amounts of debt on one hand and then buying credit default swaps against that debt on the other. That’s bandit behavior, and they shouldn’t be allowed to walk away from this colossal imbroglio they created without any repercussions. I think it’s clear that Wall Street deserves to pay for some of this mess, if not all of it.

But herein lies the paradox! If Wall Street pays up to bail out Greece, it’s really the US doing it, since all five of the major bank-holding companies are still on TARP life support. So it’s really a no-win situation, unless you happen to be a major bank-holding company on government life support. Then you win.

Written by pavanvan

March 25, 2010 at 11:43 pm

Germany Flip-Flops on Greek Bailout

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Well, I certainly didn’t expect this. It looks as though Germany is going to rely on the IMF to bail Greece out should the dreaded moment arrive (hint: it will). This does not bode well for the European Union, and indeed, until now, many thought the only way to preserve the integrity of the Euro would be to treat this Greek crisis as an in-house affair. Resorting to IMF loans would do very little to assure investors that the EU is good for its members’ debt, as this basically signals to the rest of the world that Germany (virtually the only healthy economy left in the EU) is either unwilling or unable to shoulder the entire partnership’s burden.

Remember: France, Britain, Spain, Italy, Portugal, Ireland, and Belgium are all facing debt crises of their own, many just as deep, though not as visible, as that of Greece. Germany’s indication that it will not help Greece is effectively a pre-emptive warning to the rest of these countries that when their own respective economies collapse, not to come banging on Germany’s door. Bloomberg reports today that Greece’s Prime Minister has set a deadline for Germany to bail it out, before it goes to the IMF for help. Germany has already indicated that it’s going to let the IMF solve Greece’s problem, effectively rendering that threat moot.

This is big news for several reasons. With Germany, the last healthy EU economy, refusing to bail Greece out, we may be seeing the end of the European Union as a cohesive economic entity. The Euro has been taking a beating ever since fears of a Greek default arose (it’s down more than 10% since this crisis began), and it’s sure to drop further on today’s news. It is unlikely that Greece will default or be forced out of the economic partnership, but if the IMF gets its fingers into Greece, it will only be a matter of time before the rest of the EU comes to the IMF, arms outstretched. Greece will not be the last European country to undergo a debt crisis, as I hope I have shown.

If Greece accepts IMF help, it will be forced into far worse “austerity measures” than anything Germany would have imposed. “Austerity” is generally a euphemism for cutting off social services and indiscriminately firing middle class workers while the rich make off like bandits. Already these measures have caused massive riots and general strikes in Greece, and these are sure to continue if the IMF gets its way.

As always, one can draw a straight line between economic collapse and Wall Street. Many sources have already reported on how Wall Street helped Greece hide its debt for years, and, in fact, encouraged them to take on more debt via “securitized” trades.

But that isn’t all. Wall Street’s “innovative financial instruments” – its Collateralized Debt Obligations and other over-the-counter derivatives – proliferated throughout the European economy, and are at the heart of the myriad debt crises. They made billions selling Europe these worthless junk bonds, and now they’re slowly walking away, whistling, as though they had nothing to do with it. Greece should be demanding massive reparations for the unprecedented fraud of which they, and the rest of the EU, were the victims.

It’s difficult to see where this will end. The IMF bails out Greece instead of Germany – but then what? Portugal, Italy, Spain… then France? What if Britain needs a bailout? Does the IMF have such resources? Are they just going to print the money? Does anyone know what they’re doing?

Stiglitz calls Federal Reserve “Fundamentally Corrupt”

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Joseph Stiglitz is an economist’s economist. Over the past decade he has emerged as the strongest and most consistent critic of securitization, globalization, and corporate fraud. His seminal 2003 Globalization and Its Discontents is a must-read if you want to get a handle on what’s going on now, and I have the feeling if more people in the White House had read it, we wouldn’t be in the embarrassing position with relation to the banks that we now find ourselves (that is, of peasants to their liege.)

So when this guy talks about the Federal Reserve, I think one should probably listen:

“If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure,” Stiglitz said during a conference on financial reform in New York.

Oh, and,

“So, these are the guys who appointed the guy who bailed them out,” Stiglitz said. “Is that a conflict of interest?” he asked rhetorically.

“They would say, ‘no conflict of interest, we were just doing our job,'” he answered. “But you have to look at the conflicts of interest.”

Written by pavanvan

March 6, 2010 at 10:19 am

Cold Economist on Greece

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The Economist takes a coldly “rational” stance with its editorial exhorting Germany to “Let the Greeks Ruin Themselves“:

A bail-out, Mrs Merkel fears, would break the bargain Germany struck in accepting the euro: that the single currency’s members would never jeopardise its stability nor ask Germans to pay for anyone else’s mismanagement. That said, the currency union was hardly an act of martyrdom by Germany. In the past decade its firms have modernised and their workers have accepted miserly pay rises, boosting their competitiveness. In a euro-less Europe, its trading partners could have erased some of that advantage by devaluing their currencies. Instead, many of Europe’s weaker economies failed to reform and Germany accumulated gratifyingly large current-account surpluses. Nor has the crisis been entirely bad news. The euro has weakened by about 10% against the dollar since the beginning of 2010. Under the circumstances, that was not a harbinger of inflation but a welcome tonic for European exports—especially German ones.

I agree: it shouldn’t be Germany’s responsibility to bail out the “profligate” Greeks from their manufactured crisis. But, again, I want to stress that American banks were a driving factor (some might say a decisive factor) in allowing Greece’s budget to get so out of hand.

We need a systemic way of dealing with these European Union crises, because I guarantee you Greece won’t be the last. Spain, Portugal, Italy, Ireland, and even France are all in danger of being declared insolvent next. The only way we can get this straight is a meaningful audit of our major US banks, along with court-mandated payments to these European countries that suffered from their malfeasance. It’s absolutely criminal that they should get to profit from taking down whole countries.

As far as The Economist’s editorial is concerned, sure – let Greece collapse. Just so long as you know that decision will likely doom the previously mentioned countries at risk. We don’t want a Lehman Bros scenario where Greece is denied emergency funds, but once Spain starts to collapse they immediately get a bailout. That wouldn’t be fair. Letting Greece “ruin itself” means letting a raft of European countries ruin themselves. And they’re not even ruining themselves so much as they were ruined by the American banks.

Written by pavanvan

March 1, 2010 at 10:16 am

Greece to Get $41 Billion Bailout

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The Wall Street Journal reports today that Greece will get a $41 Billion “financing” package from Germany and France, who, I hasten to point out, aren’t exactly swimming in liquidity themselves.

The plan seems to be that Germany and France will soak up some of this Greek debt via public markets and state-owned banks, due to a EU bylaw that prohibits member states from owning the debt of other members. What’s astounding to me is that no one is asking Wall Street to pony up any of this cash. They, after all, are almost entirely responsible for this Greek debt crisis, and they made hundreds of millions of dollars watching Greece go down in flames.

Goldman Sachs alone, who was arguably the single biggest catalyst for Greece’s downward spiral, paid out more than $21 Billion in sheer bonuses to its employees. AIG, another  major player in this, paid out more than $100 million. I mean, shouldn’t some of this money go toward cleaning up the mess they caused? The Times printed an excellent series of articles on Wall Street’s complicity in this just one week ago.

Javier Hernandez  even reported that major bank shares swung upward on rumors of a pending EU Bailout to Greece. So they’re blatantly profiting from their crimes. I mean, how is this legal?

Oh yeah, I keep forgetting. The banks own Congress. They make the laws.

Written by pavanvan

February 28, 2010 at 2:34 pm

Banks Bet Hard Against Greek Debt They Sold

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The Times continues its reporting on the Greek crisis:

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Fabulous. So let me see if I have this straight: our banks sold Greece predatory loans which they knew Greece would never be able to repay – then they took out “insurance” on those loans, effectively betting against Greece’s solvency. Heads they win; tails Greece loses. It’s important to note that this is the exact same behavior they indulged in during the sub-prime fiasco. They sold loans to people whom they knew would never be able to pay them back, and then bet that those loans would default. If, by some miracle, the debtor was able to pay these banks back, they’d get a nice interest rate. If, as the banks bet, the debtor couldn’t pay them back, they’d get re-imbursed via the Credit Default Swaps. It’s a classic win-win for the banks – and a lose-lose for whatever poor sucker they entrapped.

Only now its happening on the level of entire countries. I want to stress that Greece is neither the first nor the last nation to default on account of the malfeasance of US banks. Iceland came before it, and Spain, Ireland, or even France are likely to come afterward.

It is clear that our banks are purely malevolent forces, who benefit only from the destruction of others, and that, for the sake of the world economy, they must be thoroughly audited and broken up. And it is equally clear that this will never happen.

Written by pavanvan

February 25, 2010 at 12:09 pm

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Wall Street Bonuses Increase 17%: A Banker’s Reaction

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A little part of me dies when I read stories like this. I mean, I know Wall Street “owns” Congress, as Rep. Dick Durbin was kind enough to inform us, and so the chances of any meaningful punitive action towards them are virtually nil, but still these developments never fail to outrage.

And through it all, one cannot help but wonder: What exactly do these bankers do to deserve their multi-million dollar salaries? People tell me they “work hard”, sure, but then so does a ditch-digger outside Kuala Lumpur, and no one pays him a million dollars. It isn’t even as though their work helps anyone, or at least not objectively. I’ve heard all manner of explanations that “the economy stops without Wall Street” – as though it hadn’t done that with Wall Street’s help.

The part most perplexing to me is how these bankers seem immune to shame for their theft. Surely they read the newspapers, every one of which carries countless stories of everyday citizens who had their lives turned upside-down by this crisis of their making. The Times had a particularly good one the other day about how millions face years of unemployment because of the crisis. The article is entitled “The New Poor“. Several of the people they interviewed had their savings wiped out and are now on the verge of homelessness. I mean, don’t they read articles like that and feel bad?

Apparently not. I recently spoke with a high-school buddy of mine (well, maybe buddy is the wrong word) who, after an economics degree at Duke, found a comfortable position at a prominent Wall Street firm.

“Yeah, I’m a fat cat”, he said, with an unmistakable note of pride.

I wanted to know how he felt about the new poor, particularly as the company to which he attached himself had a direct hand in causing the financial crisis.

He shrugged. “Those people deserved it. They should have been smarter with their money.”

I was appalled. “But your company sold them predatory loans! I mean, you guys willfully misled them.”

“Look”, he countered, “No one put a gun to their heads and forced them to trust us. They’re idiots. If they were smarter, they would have gone to school, gotten business degrees, and been in a position to know what they’re talking about. You play with fire, you get burned.”

“But then what’s the point of your business? Aren’t you in the business of handling the money of people who lack the knowledge to handle it themselves?”

He laughed mirthlessly. A cold look crept into his eyes. “Are you stupid or something? We’re in the business of making money. That’s it. Sometimes we make money by making other people money – sometimes we make money when other people lose money. That’s the bottom line.”

I was at a loss for words. “How can you be so callous?” I managed to stammer.

“Stop it with this gay shit. Like its my responsibility to worry about every poor loser who comes through my door. I’m only responsible for myself. Period. I don’t go around telling people to watch my back – I watch my own. They should do the same. I’m fucking sick of you assholes coming up to me and whining about all these idiots who lost money during the crash. Those retards deserved it. I looked out for myself – my company looked out for itself – and we’re making money. Those idiots didn’t look out for themselves. They expected someone else to do it. And look what happened.”

Nearly defeated, I asked, “So the banks have no responsibility for all these people who are now financially ruined?”

“If they want to blame someone, they should take a long, hard look in the mirror. These dickheads were happy enough with us when we were making them 15% per year, but now that things go sour they look for someone to blame. It’s their own damn fault. What, they think we’re in business just to help them out? Fucking retards.”

Conscious that I was beginning to sound like a broken record, I persisted. I just couldn’t believe what I was hearing.

“Well, you guys were ready enough to take the government bailouts. I mean, how can you justify that?”

He scowled. “Look, you have no idea what the fuck you’re talking about. What did you study in undergrad? Engineering? Leave this shit to the experts, troll. If the government allowed the banks to fail, the economy would have crashed. Done. The world would have been over. And all those bullshit sob stories you’re trying to sell me, they would have been 100 times worse. Anyway, we’re paying you assholes back, so I don’t see what you’re crying about.”

He left me with a bit of advice. “You really need to pull your head out of your ass. All this crying over others isn’t gonna get you anywhere. You’re what – 22? How much money do you make?”

I told him. He burst into laughter.

“See, that’s what I’m talking about! You’re gonna grow up to be one of these losers we take advantage of, if you aren’t careful. Here, what you should do – read some Ayn Rand. She’ll tell you all you need to know.”

And that, ladies and gentlemen, is the mentality of Wall Street, that collection of companies without whom we cannot survive.

Written by pavanvan

February 24, 2010 at 12:37 pm

Greek Street

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The Times has a pretty good rundown on Wall Street’s complicity in Greece’s current budget woes. The European Union has rather strict rules on the size of the deficit its member countries are allowed to have; but Greece, it turns out, has been under-reporting its deficit for nearly a decade. I wonder where they learned to cook their books?

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Oh.

We’re going to hear a lot in the coming weeks about Greece’s irresponsibility and how Wall Street callously enabled them like a heroin dealer that profits from a junkie’s weakness. And while these accusations are no doubt true, they miss the real point of the Greek debt story, which has to do with the paradox on which the European Union is founded. In fact, a crisis like this was bound to happen. Greece’s and Wall Street’s malfeasance are inexcusable, and certainly no one should try to absolve them from blame on this, but we have to ask ourselves: how long did Europe expect this partnership to last?

At the heart of the EU’s troubles lie the fundamental disparities between its member economies. Germany, as we all know, is an economic powerhouse, and produces the lion’s share of the EU’s GDP. France does well for itself, as do Austria, Sweden, Switzerland and a host of other countries. But the countries that aren’t doing so well: Greece, yes, but also Italy, Portugal, Ireland, and Spain are all  in a difficult and ultimately insoluble position.

Their economic fortunes entwined with that of the rest of Europe, they find themselves under enormous pressure to report spectacular economic growth. If unable to do so, their troubles extend to the other member countries, and, most importantly, cast aspersions upon the value of their shared currency – the Euro. So the incentive to fudge the numbers is tremendous.

The paradox of “Eurozone” (zone of countries that use the Euro) directly stems from this. Put simply, no country can leave the Eurozone after it joins, and at the same time, every Eurozone member has to post annual growth without fail. The Greek situation is a perfect illustration of this, but the point is that it could have happened (in fact, probably will happen) to several EU countries. Greece just happened to be the scapegoat because it had the biggest debt.

This handy chart from Der Spiegel should nicely demonstrate this point.

Even Germany and France, the so-called “EU powerhouses”, are technically breaking their own debt rules. But why doesn’t Greece just divest itself from the Euro, say it was too hasty in joining, and maybe re-apply for admission in a few years once it gets its economy under control? Well, it could do this  – and likely would, if France and Germany had their say – but such a move would precipitate a run on Greece’s banks, sink its economy, and leave it a European pariah for at least a generation. Think about it: if you had a bank account in a Greek bank in Euros, and the Greek Premier announces one day that your account will be transformed into Greek Drachmas on such-and-such a date, what would you do? Obviously you would liquidate your holdings and invest in some more stable Eurozone country. Germany, perhaps?

But at the same time, Greece’s economic situation is causing near-panic among investors and ravaging the Euro. The Euro’s value has dropped more than 9% in just two months. And therein lies the paradox. By staying in the Eurozone, Greece threatens the whole enterprise. By leaving, it dooms itself to economic collapse.

A recent interview with the EU Central Bank chief economist Jurgen Stark displays the confusion now embroiling the EU. It’s clear that no one knows what to do about this. For the time being, I suppose, Germany or France will have to pony up the cash to bail Greece out, but this does nothing but delay the central problem described above.

Written by pavanvan

February 14, 2010 at 4:02 pm

Money

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1_Wall_Street_and_Empire_Building

The Wall Street Journal reports in today’s issue that our financial apparatus stands poised to dispense the largest package of executive bonuses ever. All told, more than $140 Billion will be dispersed among those wizards of finance. They recieve their multi-million dollar paychecks at a time of extreme economic privation for the rest of the US. Unemployment still surges upward to an astonishing 18% of the working-age population, while median incomes have remained stagnant for the past fifteen years.

According to The Economist, the top 1% of earners in America receive almost 25% of the total income generated. This puts income inequality at a level not seen since 1928. But in the midst of such a wide gap between rich and not-so, it is impossible to have any reaction but gaping awe to the figures quoted above. For what does it truly mean that 1% of the population can amass more than a quarter of the country’s wealth?

What it means, unfortunately, is that the consequences of the stock market meltdown have been completely lost on those who perpetrated it. Members of our financial industry haven’t found themselves thrown on the street from foreclosure. A few have heard those bitter words:  “I’m sorry, but we’re going to have to let you go,” but they weren’t exactly living paycheck-to-paycheck before, and most handily found new jobs in a matter of weeks. They have not seen their paychecks shrink – indeed, most of their checks have expanded, if The Journal can be taken at its word. In short, then, the crisis represents to its architects little more than an abstract concept: a set of numbers and figures on charts or a grim human-interest piece on the nightly news. The actual effects of their malfeasance (economic privation, anxiety, fear, hopelessness) are as far away to Wall Street as the moon.

All this is dismal news for those of us who would like to avoid a repeat of last September’s performance. Indeed, these reports – for instance, of JP Morgan Chase’s record profit this year – belie the essential divestment between Wall Street and the rest of the economy. Not only do they make money when times are good, they also make it when times are rough, the people be damned. Given that the reckless lending and casino-like practices of these firms caused the economic devastation we see today, these bonuses represent the ultimate “moral hazard”. Financial executives and their employees now have literally zero incentive to act in the interests of the greater economy. They make money either way.

Written by pavanvan

October 14, 2009 at 10:36 pm