The Global Disconnect?
It was a telling moment at the height of the Occupy Wall Street protests.
John Paulson, the hedge-fund trader who famously made billions betting on the collapse of the housing market, was threatened by the demonstrators with a march on his Upper East Side home in New York last month. Paulson responded by putting out a press release that described his $28 billion, 120-person fund as an exemplar of the American Dream: "Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City."
Other captains of finance like to portray themselves as humble entrepreneurs. One owner of a multi-billion-dollar hedge fund grumbled in the midst of the financial crisis that he has to worry not only about making trading decisions but also about "all the hassles that come with running a small business."
With U.S. cities moving this week to crack down on Occupy Wall Street encampments - including the one in New York's Zuccotti Park - the staying power of the movement is in question. Whatever its future, it's clear that so far, the Occupiers haven't changed many minds on Wall Street over blame for the country's hard times. The cognitive disconnect between the protesters and the captains of finance is alive and well.
David Mooney, chief executive officer of Alliant Credit Union in Chicago, one of the nation's larger credit unions, used to work at one of Wall Street's top banks, JPMorgan Chase. There's a vast cultural gap between Wall Street and his new world, he says: Old friends from the Street, he says, now jokingly refer to him as a "socialist." A credit union is supposed to be run in the interests of all members, he says, while commercial bankers tend to see consumers as customers who can be "exploited" by layering on more fees.
Says Mooney: "I don't say this lightly, but the consumer is simply an income stream and exploiting that is the purpose of the banking organization."
In conversations with nearly two dozen current and former bankers, finance professionals and money managers across the United States, the prevailing sentiment is that the anger at Wall Street's elite is misguided and misdirected. Blame the politicians and policymakers in Washington, many of them say, for encouraging people to buy homes they couldn't afford and doing nothing to stop or discourage U.S. consumers from piling on more than $10 trillion in household debt.
"I think everyone gets what the anger is about... But you just can't say, 'Well I want all debts forgiven.' That is not happening," says one West Coast trader, who like most still working in the financial services industry, declined to be identified by name in this article.
The disconnect, says Jason Ader, a former top Wall Street casino analyst turned hedge fund manager, is in part a simple product of Wall Street's isolation from the hardship out there. Ader says he spends a lot of his time in Las Vegas, one of America's hardest-hit housing markets, and thus wasn't too surprised by this fall's anti-Wall Street outburst.
"I see plenty of despair in places like Las Vegas, where in some neighborhoods every other house is vacant or foreclosed and lots are overgrown by weeds," says Ader, who sits on the boards of Las Vegas Sands Corp and a small Nevada community bank called Western Liberty Bancorp.
But the 43-year-old Ader, who manages $200 million in his hedge fund, says it's a different story for many of the wealthy who work in finance in New York City and don't spend a lot of time in states with high unemployment and high foreclosure rates. Living in Manhattan or the Hamptons or hedge fund havens like Greenwich, Connecticut, can lead to a bit of myopia, he says.
"At first I had friends who were scratching their heads at the protests," says Ader.
To put it bluntly, many on Wall Street still see the events leading up to the financial crisis as a case of banks having legitimately sold something - whether it be mortgages or securities backed by those loans - that someone wanted to buy.
Thomas Atteberry, a partner and portfolio manager with Los Angeles-based First Pacific Advisors, a $16 billion money management firm, says his success "wasn't a gift" and he had to work hard to get where he is. Atteberry says he understands the frustration many feel about income inequality. But he said the problem isn't with those who are successful, but rather our "tax codes and regulations."
While some members of the financial elite say they are willing to pay higher taxes, they note the picture for Wall Street firms is not as sunny as some on Main Street might paint it. Wall Street banks already are beginning to shed jobs, and consulting firm Johnson Associates Inc. is predicting bonuses for those who remain will shrink by 20 percent to 30 percent.
Complaints over new financial regulations burdening Wall Street firms are a major reason blamed for the layoffs. Sit down with a hedge fund manager or a top trader and it won't take long before he or she grabs some spreadsheet that shows all the new rules and regulations coming out of the Dodd-Frank financial reform bill.
Many of America's well-to-do, not just Wall Streeters, say they don't feel particularly advantaged. A recent survey by marketing firm HNW Inc. found that half of the nation's richest 1 percent "don't see themselves as being part of that elite group." Also, 44 percent of those surveyed told HNW's pollsters they already pay too much in taxes.
Maybe it is just the ethos of Wall Street, where success is defined solely by who makes the most money, that makes it hard for financiers to feel they've wronged anyone. But in a time of 9 percent unemployment and 15 percent of U.S. citizens receiving food stamps, some Wall Street alums say the financial elite are doing themselves no favors by giving the appearance of shrugging off the current mood.
"I think Wall Street hasn't taken in how much anger there is out there and they haven't taken partial responsibility for the financial crisis," says Brookings Institution fellow Douglas Elliott, who was an investment banker for two decades before joining the liberal-oriented public policy group. "I think both sides - Wall Street and Main Street - misunderstand each other."
Some who get paid to advise the rich on how to deal with the media and the public are telling clients to pay attention.
Robert Dilenschneider, founder and principal of The Dilenschneider Group corporate consulting group, recently sent a report to his clients telling them that many of the protesters taking part in the Occupy movement are not a bunch of unemployed crazies and hippies.
"The CEOs in big board rooms in Paris, in Zurich and New York don't normally think about people who are demonstrating in parks," says Dilenschneider, whose firm advises some of the biggest companies in the world. "In the banking and financial area, we are telling our clients you have to explain more completely what makes up your business and why your profits are what they are."
MOM AND POP HEDGE FUNDS
Some of the disconnect is simply a matter of lifestyle and the fact that the super wealthy really do live differently from everyone else. Hedge fund managers and bankers fly around on private jets, live in palatial penthouse apartments overlooking Central Park and have second homes in the country.
In New York City, the average pay for those working in finance is $361,183, more than five times the average salary of $66,106 for all workers in the city, according to the New York State Department of Labor.
This disparity in income and attitudes was evident in the response of hedge fund managers like Paulson who portrayed themselves as humble businessmen. Says Wall Street historian Charles Geisst, "Hedge funds may be small businesses in terms of labor intensity, but in terms of capital intensity they are just the opposite."
A spokesman for Paulson said he had nothing more to add on the subject.
Former Wall Street practitioners say the Street does not lend itself to a lot of introspection. "The world of investment bankers and especially the trading floor region is notoriously hermetically sealed,'" says Kenneth Froewiss, a retired JPMorgan Chase investment banker and former finance professor at New York University's Stern School of Business. "The walls may be filled with screens beaming the latest news, but there is typically an obliviousness as to what is happening across the street."
There are exceptions, of course. Some are saying it may be time for the government which has bailed out the banking system to help millions of struggling homeowners.
One of those is former top Pacific Investment Management Co executive Paul McCulley, best known for his analysis on central banks and monetary policy when he worked at the world's biggest bond fund. McCulley, who retired a year ago from Newport Beach, California-based PIMCO to become a consultant with a public policy firm, enjoys the wealth he accumulated in his old role. He lives in a house by the water where he docks his two boats. But he says Wall Street went too far.
"Our society was ripe for a convulsion about social justice, and Occupy Wall Street was the catalyst for that," says McCulley. "New York can be very insular. It is not the real world and neither is Newport Beach."
Now that he's no longer working for PIMCO, McCulley is a bit more free to speak his mind. And he says the only way to jumpstart the U.S. economy is for the federal government to get behind a serious program to encourage consumer debt forgiveness and principal reductions on mortgages by banks. (tinyurl.com/3cbdjpk)
McCulley noted that mortgage firms Fannie Mae and Freddie Mac have been propped up by about $169 billion in federal aid since they were rescued by the government in 2008, yet there's a "a moral overtone" to the argument against reducing mortgage debt burdens for individual borrowers.
"Wall Street capitalism has given us a foul stench in our society," says McCulley.
The disconnect continues.
Just this week, top executives at Fannie and Freddie found themselves drawing fire on Capitol Hill for trying to distribute nearly $13 million in bonuses to key employees.
And the October 31 collapse of MF Global Holdings is prompting some critics to say Wall Street hasn't learned any lessons from the financial crisis. The futures brokerage house filed for bankruptcy after investors and traders became fearful that MF Global had taken on too much exposure to European sovereign debt in a bid to juice revenues.
The risky trade was put on by former New Jersey Governor Jon Corzine, a former Goldman Sachs Group chief executive. Last year, Corzine was saying Wall Street investment banks had taken on too much risk in the months leading up to the financial crisis. On the lecture circuit Corzine was calling for tighter regulation of Wall Street, even while his firm was borrowing more and more money to bet on some of the riskiest European debt. A Corzine representative declined to comment. (link.reuters.com/xad25s).
William Cohan, the author of several Wall Street-related books and a former Lazard investment banker, said MF Global was acting as if the 2007-2008 crisis never happened: "You would have to be living under a rock if you didn't get the message of the financial crisis."
I like Paul McCulley and he's absolutely right, Wall Street capitalism stinks. Let me be more blunt, having worked as a senior investment analyst at two of Canada's largest pension funds, I've met all sorts of Wall Street and Bay Street salespeople and invested in some of the world's best hedge funds and private equity funds. I've seen firsthand how Wall Street types operate. Most are good, honest, hardworking people just trying to survive, but far too many are slimy weasels who would sell their colleagues down a river for the almighty buck. Homo Homini Lupus! And in most cases, the Peter Principle holds as incompetent scumbags that rise to the top.
And what really angers most people is that these slimy weasels on Wall Street have the slimy weasels in Washington in their back pocket. As I wrote in a recent comment, wherever big money is involved, absolute power corrupts absolutely. No wonder some are now writing articles on how to steal like Wall Street.
But the problem is much more pervasive than Wall Street and Washington. They're the easy targets because we are reminded of their greed and stupidity on a daily basis. Gene Williams, a 57-year-old bond trader, nailed it as he joked that he was "one of the bad guys" but that he empathized with the demonstrators. "They have a point in a lot of ways," he said. "The fact of the matter is, there is a schism between the rich and the poor and it's getting wider."
Laura D'Andrea Tyson, professor at the Haas School of Business at the University of California Berkely, wrote an op-ed piece for the NYT, Tackling Income Inequality:
Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich’s “Aftershock” and Raghuram Rajan’s “Fault Lines”).
According to a recent report by the Congressional Budget Office, rising income inequality is a long-term trend that began in the late 1970s and strengthened during the last two decades. The report confirms the protesters’ belief that the rising gap between the income of the top 1 percent and the income of everyone else is a major factor behind escalating inequality.
In the last 20 years, inequality has been largely a story of a small elite – not just the top 1 percent, but the top 0.1 percent – pulling away from everyone else in every source of household income: labor income, capital income and business income.
The top 1 percent’s share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson’s “Winner-Take-All Politics”).
Why have incomes of those in the top 1 percent soared? Their occupations provide some clues. From 1979 to 2005, nonfinancial executives, managers and supervisors accounted for 31 percent of the top 1 percent, medical professionals for 16 percent, financial professionals for 14 percent and lawyers for 8 percent.
Together, executives, managers, supervisors and financial professionals accounted for 60 percent of the increase in the top 1 percent’s income, with a widening compensation differential between those in the financial sector and those in other sectors of the economy after 1990.
Superstar athletes, actors and musicians, often portrayed among the super-rich, accounted for about 3 percent of the top 1 percent from 1979 to 2005, far less than the less glamorous people (mostly men) who lead and advise America’s businesses.
Researchers have identified several reasons for the rapid growth in incomes for the occupations that make up most of the top 1 percent, including “winner take all” technical innovations that have changed the labor market for superstars in all fields; increases in business size and complexity; a growing premium for highly specialized skills; changes in the forms of executive compensation, including the rise of stock options and weaknesses in corporate governance; and the increasing size of the financial sector.
All of these factors have played a role, but there is no definitive evidence on their relative significance.
Growing inequality in labor compensation played a major role in increasing income inequality between the top 1 percent and the rest of the population from 1979 to 2007. Over the period, however, both the growing inequality in business income, including income from small firms, partnerships and S corporations, and in capital income in the form of dividends, interest and capital gains, as well as the rising share of these forms of income in household income, played a more significant role, especially after 2000.
According to the Congressional Budget Office, from 2002 to 2007 more than four-fifths of the increase in income inequality was the result of an increase in the share of household income from capital gains, with the remainder the result of an increase in other forms of capital income.Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed — and volatile — source of household income.
Large cuts in federal tax rates on capital and business income have been very beneficial to the top 1 percent over time. In 1978, a Democratic Congress and a Democratic president reduced the top tax rate on most long-term capital gains to 28 percent from about 35 percent. It was reduced again to 20 percent in 1981 and then raised back to 28 percent in 1987, where it remained for a decade.
While serving as President Clinton’s national economic adviser, I led a study by his economic team of the likely effects of reducing the rate. We concluded that a cut would decrease future tax revenue, would contribute to rising inequality and would not increase saving and investment as its advocates asserted. Despite these warnings, in 1997 the president agreed to cut the rate to 20 percent, as part of a budget compromise with the Republican Congress.
Then, with Democratic support, President Bush reduced the tax rate on capital gains and other forms of capital income to a record low of 15 percent in 2003. Under the “carried interest” provisions of United States tax law, this rate also applied to fees earned by hedge fund and private equity managers, a rapidly rising cohort within the top 1 percent.
As a result of these changes, along with President Bush’s across-the-board cuts in income tax rates, federal taxes as a share of household income fell for the top 1 percent. Over all, the Bush tax cuts were the largest — not only in dollar terms but also as a percentage of income — for high-income households and increased the concentration of after-tax income at the top. Far from curbing escalating inequality, the Bush tax cuts exacerbated the problem.
While the federal tax code is still progressive, its progressivity has eroded, with a significant percentage of the richest now paying a much lower tax rate than the merely rich and the middle class. (Warren E. Buffett pays a lower tax rate than his secretary because most of her income comes in the form of wages that are subject to both federal income tax and the payroll tax while most of his income comes in the form of capital gains and dividends that are taxed at 15 percent and that are not subject to the payroll tax.)
A credible plan to reduce the long-run deficit requires a significant increase in revenue. Polls indicate that the majority of Americans, like the Wall Street protesters, believe that higher taxes on the rich are warranted both to reduce the deficit and to contain mounting inequality. I agree.
Restoring the top income tax rates and capital gains and dividends tax rates to their levels under President Clinton, as President Obama has repeatedly proposed, would be useful first steps. Taxing some carried interest as ordinary income would make the tax system more efficient and curtail outsize compensation in the financial sector. Adding a progressive consumption tax would augment revenue while encouraging saving and discouraging spending on luxury goods, both by the very rich and by those down the income ladder struggling to keep up.
The majority of Americans, like the Wall Street protesters, also believe the corporate tax rate should be raised. I disagree.
For reasons I discussed in an earlier Economix post, I believe that this rate should be reduced – a position advocated by both President Obama and former President Clinton in his new book. Raising tax rates on capital gains and dividends to the levels under President Clinton would curb the growth of income for the top 1 percent and could finance a substantial cut in the corporate tax rate that would bolster wages and job opportunities for American workers.
Income inequality and lack of jobs are the real issues driving social unrest. People are hungry for jobs or just plain hungry. Reuters reports number of children in the United States considered poor rose by 1 million in 2010, with more than one in five of the youngest Americans now living in poverty. And Bloomberg reports that according to Wells Fargo, 80 is the new 65 for retirees, meaning that pension poverty is the new normal. Meanwhile the great retirement heist and the debt crisis continue to ravage US and global pensions.
In Canada, where taxes are comparatively much higher, gross inequality is not as much of a concern, but it's starting here too. People are having a hard time keeping up, racking up debts to make ends meet. The Globe and Mail reports that according to Royal Bank's latest housing survey, a majority will carry mortgage debt long after they become eligible for seniors discounts. Freedom 55? More like Freedom 75. And with the new giveaway to banks and insurance companies, the Harper Government just ensured pension poverty as the new normal for most Canadians (not just weasels at Washington who are disconnected!).
All around the world, I see a mess, a huge global disconnect. The financial meltdown is leading to a social meltdown. Nowhere is this more apparent than in Greece where the reputable British medical journal, The Lancet, shed light on the human toll of the financial crisis:
The Greek bailout is a sham and austerity is killing the Greek economy, leading the population down the road to serfdom. But faced with economic hardship, Greeks and the rest of the ''PIIGS'' have little choice but to endure austerity measures. However, policymakers be forewarned, if your sole focus is on cuts and taxes, offering no growth, no jobs, no hope, it will backfire and wreak social chaos. Worse still, if austerity is the only way forward, policy blunders will lead to another global meltdown.
The financial crisis in Greece is in its fourth year and, inexorably, has been taking a toll on its people’s well-being. The British medical journal The Lancet recently published an article that shows how difficult things have gotten in Greece. Violence, including rates of homicide and theft, has been on the rise; unemployment rose from 6.6% in May, 2008, to 16.6% in May, 2011, while youth unemployment rose from 18.6% to a staggering 40.1%. These none-too-heartening circumstances have been taking a heavy toll on Greece’s universal health care system.
Compared with 2007 before the crisis, more Greeks reported in 2009 that they did not go to see a doctor or dentist, even though they felt it was necessary. People said they could not afford care, that waiting times in overcrowded hospitals and clinics were too long and that they had to travel too great a distance to get care. Greek hospitals have had their budgets cut by 40% leading to understaffing and reports of occasional shortages of medical supplies including cancer medications. As a result, some people are simply choosing to wait to see if they get better before seeking care. People also report giving bribes to medical staff as not to have to wait in line at overtaxed hospitals and especially in public ones: Admissions to these rose by 24% in 2010 while, in the same year, there was a 25—30% decline in admissions to private hospitals.
From 2007 – 2009, the number of people eligible for sickness benefits declined. As further austerity measures are implemented, this number is likely to grow. More and more Greeks are turning to street clinics run by NGOs which had previously principally served immigrants. While 3-4 % of Greeks sought medical care from such clinics prior to the financial crisis, the Greek chapter of Médecins du Monde says that 30% now are. Unofficial data reveal that the suicide rate has increased by 25% in 2010; suicides had previously risen by 17% in 2009 from 2007.
In comparison to 2010, HIV infections have risen by 52%. 2011 saw 922 new cases versus 605 in the previous year, and mostly from infections from intravenous drug users. The Greek Documentation and Monitoring Centre for Drugs found heroin use grew by 20% in 2009. Budgets cuts in 2009 and 2010 led to Greece closing one-third of the country’s street-work programs. An October 2010 survey of 275 drug users in Athens found that 85% were not in a drug rehabilitation program. Indeed, The Lancet report says that “an authoritative report described accounts of deliberate self-infection by a few individuals to obtain access to benefits of €700 per month and faster admission onto drug substitution programmes.”
As of last week, Greece has a new prime minister, Lucas Papademos, the vice president of the European Central Bank until May, who has pledged that Greece will remain in the European Union and commit to the terms of a bailout deal demanded by European leaders and the International Monetary Fund. The question remains how more and more austerity measures will play out in a country whose people are already struggling so much to live on the little they still have.
What's going on in Greece can easily happen elsewhere, including in the richest countries of the world. In fact, it's already happening on this side of the Atlantic, the Greek crisis has gone global. It's time for the ''elite'' to realize that they're ''messing things up spectacularly'' and realize that the Wall Street disconnect is really a much bigger problem. It's a global disconnect and unless they stop pandering to banskters and start helping ordinary citizens, omens of a Greek tragedy will soon haunt us all.
Below, I leave you with a couple of Bloomberg interviews with Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, discussing Greece, the eurozone crisis, the US recession, Occupy Wall Street protests and U.S. banking regulation. Listen carefully to Mr. Angelides, one of the few politicians that gets it and understands the limits of austerity.
I also leave you with a video The Prism GR2011, a collective multimedia documentation of Greece in 2010-2011. You can watch more of these amazing documentaries on The Prism TV.