Saturday, January 3, 2009

Yves Smith on Wall Street Pay

Yves Smith has a 18 December 2008 post at her Naked Capitalism which scolds the NYT for "double-speak" among other things, link: http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html.
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"One of Wall Street's best-regarded young traders sustained a $1 billion hit recently, as the corporate-bond trading market has been upended by the credit crisis. ... Profits flowed, as the corporate bonds carried yields that were slightly higher than the cost of buying swaps protection. ... 'I don't think there's anybody around who expected the CDS-cash basis to widen out this much this fast,' said Brian Yelvington, senior macrostrategist at a research group CreditSights. A recent move by Deutsche to reduce borrowed money in its trading area also has added to the losses, by forcing traders to sell while the corporate-bond market has fallen, according to a person familiar with the bank. ... The trades that hurt Deutsche are similar to ones that led to losses at Chicago hedge fund Citadel Investment Group LLC, which was down almost 50% this year in its two largest funds through early December. ... [Boaz] Weinsten ... was an innovator of a strategy known as capital-structure arbitrage, which exploits discrepancies between the price of a company's bond and its stock, and often uses credit-default swaps", Scott Patterson and Gregory Zuckerman at the WSJ, 13 December 2008.

I ask, where was Deloitte & Touche, CPAs (D&T), which Merrill paid $57 million in 2007, while this went on? Didn't D&T understand the implications of Merrill's incentive compensation scheme on Merrill's risks and accounting? If you will, Wall Street was a "heads we get bonuses, tails the public gets our firm's bankruptcy" game. Merrill's 2008 proxy statement shows it has eleven directors. They include: Armando Codina, President of Flagler Development Group, a real estate investment company; John Thain, Merrill's CEO; Virgis Colbert, Senior Advisor to Miller Brewing; Alberto Cribiore, Principal of Brera Capital Partners, a private-equity firm; Aulana Peters, Gibson Dunn & Crutcher partner and Member of the International Public Interest Oversight Board of the International Federation of Accountants, former member of the AICPA Public Oversight Board, Former SEC Commissioner; Charles Rossotti, Advisor to the Carlyle Group, a private investment firm: John Finnegan, Chairman of Chubb Corporation; Ann Reese, formerly Principal in Clayton Dubilier & Rice, an investment firm. Do any of these people know anything? In 2007 Goldman Sachs said something about a 25-sigma event. Amazing. I don't think we'd experience a 25-sigma event once in a billion years! My 29 October and 30 November 2008 posts mention Wall Street pay.

Can anybody play this game? Any financial institution holding federally insured deposits should prohibited from engaging in this type of gambling.

7 comments:

Anonymous said...

Compensation schemes are incredible...

I wonder if the major IBs having gone to commercial bank world will reduce trading book risks?

Is AIG the only major none-IB financial institution to be a substantial counterparty to the big banks?

The system is unstable when so few institutions concentrate so much risk... BODs might want to consider this in addition to comp issues... yes IA it's "hello wakeup" time for BODs... easy street be gone...

Blissex said...

«Any financial institution holding federally insured deposits should prohibited from engaging in this type of gambling.»

What a funny hope! The USA have gone from Glass Steagall forbidding deposit taking banks from investing funds in investment banking etc. to Bernanke Paulson mandating it and subsidizing it.

Independent Accountant said...

Blissex:
Since you raised the issue, I think the repeal of Glass-Steagall was a mistake. The idiot bankers had enough ways to get into trouble without adding investment banking to their witches' brew.

Printfaster said...

My big issue is that Bear and Lehman should have demanded claw backs from all bonuses in the last two years, and any salary over industry median.

Furthermore, I would have made any rescue of AIG, Goldman, Merrill, Wachovia, or whatever, contingent on turning all of the last two years bonuses to the federal government. No bonuses returned, no rescue.

Anonymous said...

Furthermore, I would have made any rescue of AIG, Goldman, Merrill, Wachovia, or whatever, contingent on turning all of the last two years bonuses to the federal government. No bonuses returned, no rescue.

You're fogetting who is being rescued. It's not the management of the financial company. It's congress! They're the ones with the most to lose if the system stops working -- they could lose the ability to spend money they don't have.

W.C. Varones said...

I thought Yves was dude, dude.

Isn't Yves St. Laurent a dude?

Damn Frenchies always confuse me with their hermaphrodite names.

Independent Accountant said...

WCV:
Go to Naked Capitalism 1 October 2008. See Yves Smith (YS) on blogging heads with Meagan McArdle. YS is a female.