The Fourteenth Banker Blog

April 10, 2010

Sensational and Disturbing Headlines Today

Filed under: Running Commentary — thefourteenthbanker @ 6:11 AM

The Roosevelt Institute has a great story on Peak Oil and what it means.    I have some familiarity with Peak Oil and without going into detail, the key to mitigating a very negative effect from Peak Oil is innovation.    We have to become much more energy efficient and raise up new entrepreneurial activity that will create new industries and new jobs.    We are sailing into the wind.

Washington’s Blog discusses the explosion of government debt in the developed world.     The Bank of International Settlements forecasts US Debt/GDP at 400% in 2040 and this is not necessarily a pessimistic scenario.

James Kwak summarizes the Magnetar Hedge Fund criminal enterprise and includes a link to full article.

There was also news on Chuck Prince and Robert Rubin and the lack of adequate oversight of Citigroup and of Moody’s firing of analyst’ that warn on housing meltdown.

What is the point of this post?     Greed, foolishness, and willful blindness are all around.     It is essential that we have an honest banking system as we move through difficult times.    We do not have that today.

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7 Comments »

  1. “It is essential that we have an honest banking system as we move through difficult times.”

    Absolutely… but that is not enough. If you are going to have a banking system that is only given incentives to avoid risk and has no other purpose you will not make it.

    If banks when lending to a small business or an entrepreneur has to put up 8 percent in capital but when lending to anything rated AAA only 1.6 percent suffices or even zero capital when lending to the government you will just continue on the road to disaster since risk-taking is the only that can get you out of the hole and move you forward…

    And I speak about “you” only because I am not a US citizen.

    Comment by Per Kurowski — April 10, 2010 @ 6:23 AM | Reply

    • Point well made. I don’t thing the various regulatory and investigative bodies have scratched the surface on why banks do the things they do. The bankers operate within their environment in a way they believe is rational. The capital requirements you refer to are a big part of why money flowed excessively into housing and other real estate.

      Comment by thefourteenthbanker — April 10, 2010 @ 8:22 AM | Reply

  2. Most MBA programs have a class that deals with Operational Metrics. The point of the class is something along the lines of ‘The insanity of expecting behaviour “A”, while measuring and incenting for behaviour “B”.’

    Fundamentally, this is the problem with the large institutions that are charged with implenting the function of the distribution of the dollars printed by our Federal Government. They really shouldn’t be called “Banks” anymore, in my opinion, because what they primarily do, reward, incent, and protect….is not banking.

    These large institutions design massive financial rewards for behaviour that is fundamentally predatory, not fundamentally facilitative. Through the use of stacked, rubber stamp boards and the laws of corporate shielding for executives and employees, the responsibility for the affects of these predatory behaviours are shielded from the individuals exhibiting these behaviours. In fact, not only are the moral hazards removed from the predation, there are massive financial rewards given to those whose predation has crippled the very organizations they represent.
    Merrill Lynch paid CEO Stanley O”Neal 161 MILLION DOLLARS in 2007
    Citi Group paid CEO Charles Prince 68 MILLION DOLLARS IN 2007
    Citi Group paid new CEO Vikram Pandit 274 MILLION DOLLARS in 2008
    Countrywide Financial paid CEO Angelo Mozilo 37.5 MILLION DOLLARS in 2007
    Lehman Brothers paid Dick Fuld 74.5 million for his last 2 years as CEO

    Massive financial incentives. Zero personal accountability. Zero political or regulatory response to date which changes or penalizes predatory, non-banking behaviour at these large institutions. In fact, Hedge funds have been reclassified as banks (Cerebrus, owner of Chrysler) so they can receive further gifts (never to be repaid Federal Loans) to continue their behaviour. Result?

    Exactly the same game. http://www.nytimes.com/2010/04/01/business/01hedge.html

    5 guys received > 25 BILLION DOLLARS IN PAY for running hedge funds in 2009.

    18 largest institutions have massively increased their debt, while hiding that debt on their books (making a mockery of GAAP) for the last 5 quarters. http://www.ritholtz.com/blog/2010/04/surprise-big-banks-hide-risk-levels/

    This is the insanity of expecting behaviour “A”, while measuring and incenting for behaviour “B”.

    The system is not just designed to be gamed. The system is totally and completely gamed.

    Side note: I believe that the people running these big organizations are using this period of non-crisis to finish up their personal exit strategies. They are packing their bags to helicopter off their respective Titanics before the clearly visible icebergs in 2011 are hit.

    If you don’t own a helicopter, better learn to swim.

    Comment by Iambic Pentameter — April 13, 2010 @ 10:23 PM | Reply

  3. Peak Oil is near a myth in any reasonable timeframe ( due to large reserves discovered quite recently in various places ), but the real cause of the last decade’s ( last 5 years ) significant oil price rises endangering the world’s economy is Commercial Investment (bank) & Hedge Fund SPECULATION, likely in collusion with oil firms.

    Both are beneficiaries of the apparent probable manipulation in considerable magnitude.

    One can call that nonsense, the only real pressure on significant demand growth is from China. The proof in the pudding lies in the collapse in demand with the recent severe economic downturn, and yet gas prices remain near as high as ever?

    That glaring fact is simply due to futures markets speculation unwarranted by any conceivable demand at present.

    You can guess why this is done?

    Peak oil will happen some day, but recent new reserves found in deep waters of South America and the Gulf of Mexico and others sure to come, indicate that peak oil keeps getting pushed out so long as the new reserves actually get developed ( the actual development of which and in what timeframe, is unclear why some might be motivated to do so in a timely manner )

    Peak oil …. not a problem of any significance, yet going green still makes sense if we do not wish to drown in the melting arctic and antarctic ice, from significant increases in sea levels, and concurrent cooking the planet to largely destroy much of present agriculture.

    Food in the end matters more than oil, since large scale alternative renewable energy can be developed trivially ( no technological barriers of substance ), but loss of agriculture by an overheated planet is hard to compensate for in large scale FOOD production.

    Peak Oil is for mythmakers(and speculators). I’ll take food over oil any time.

    You can make energy from the SUN say in the southern California / Nevada desert to power all of the US just using SOLAR THERMAL power generation( it works and is proven and it is delayed for all kinds of wrong reasons, lack of vision, and vested interests counter to the public interest ). Enough power can be produced such that cars could go all electric as soon as manufactured in large scale, with existing battery technologies for both cars and nite time power reserves from the solar power generation.

    I will also point out that a required grid buildout – a super grid feeding many population centers from said hypothetical massive solar thermal power plants in SoCal and Nevada deserts, is known proven technology, with 750kv powerline transmission.

    This particular “mega project” is the present day imperative for a contemporary Moon Launch project analogy. Every technical argument to contrary has no technical justification, and greening the grid via smart meters etc, will not have anywhere near the same reduction in greenhouse gases. Smart meters are akin to another way to increase rates and blame it on the consumer, when the Smart Mater rates increase for all kinds of nonsensical “justifications”.

    There has been discussion of a comparable powering of Europe – via large scale solar thermal electrical power generation from the north west Sahara, with undersea cables in the Meditteranean.

    If one took out North America & Europe from significant electrical and automotive and heating greenhouse gas emissions, and then did the same in China and India, you’d have most of the greenhouse gas related global warming stabilized, even possibly likely reversed.

    Then if you mined melting seabed frozen Methane Hydrate for LNG production – Methane Hydrate presently being emitted in considerable amounts from parts of the southern arctic and elsewhere in the ocean, you’d be in perfect shape ( to prevent a Clathrate Gun warming effect )

    FWIW “Carbon Cap and Trade” is just another new derivatives market intended to line the pockets of people who do not deserve the money. Carbon regulation should be via taxes ( yes TAXES ) that are used to explicitly implement large scale grid power generation greening, not the “Greening of pockets on Wall Street”.

    Peak Oil, bah humbug

    Comment by anonymous — April 14, 2010 @ 1:25 AM | Reply

  4. The issue isn’t incentives, it’s how much incentive for what type of performance. Quantity vs quality investments is the real issue. A bank loan is an investment, for the bank, the borrower, and the bank’s shareholders. The wisdom in deciding the investment depends on quality (risk), as much as on quantity (number an volume). Quantity is easy to gauge and calculate incentives, but quality is much more problematic. Loan risk (quality) often does not reveal itself until many months or several years into the loan service.
    The investor (bank) must first a foremost be honest to himself. Quantity based incentives are worthless (or worse) if they’re not quality.

    Comment by Hagay Vider — April 14, 2010 @ 2:15 AM | Reply

  5. I agree 100%!! We need sound money in this country. Constitutionally mandated gold and silver works for me! Though I fear that’s not the solution you propose.

    Comment by BZ — April 18, 2010 @ 3:28 AM | Reply

  6. The real answer to all of this is to shut down the Federal Reserve and return to goverment issued, debt free money. Of course, this requires an end to the rule of the bankster gangsters. For that, we need populist reform, since our legislators won’t do it.

    http://www.swarmusa.com

    Comment by Margaret Henkels — April 29, 2010 @ 7:09 PM | Reply


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