Richard Posner on the Goldman Sachs Bonuses

Judge Posner, who in addition to being the co-author, with his Nobel Laureate friend, of the Becker-Posner blog is an Atlantic correspondent, has this piece today on the Atlantic's website about the Goldman bonuses. Worth reading the whole thing, but here's an excerpt:

Goldman Sachs, we learned earlier this month, may end up paying more than $20 billion in bonuses to its employees in 2009. The controversial bonuses that American Insurance Group (AIG) had wanted to pay had been intended to reward performance before the company collapsed, and most of the recipients appear to have had no involvement in the decisions that precipitated the collapse.

The Goldman bonuses, in contrast, were intended to reward Goldman's employees for their outstanding performance during the economic crisis. The performance was made possible by the government's having bailed out Goldman in September 2008, when it is believed that, upon Lehman's declaring bankruptcy, Morgan Stanley was 24 hours away from following suit--and Goldman Sachs 72 hours. It was saved by receipt of bailout money and, more important, by being permitted to convert from a broker-dealer to a bank holding company. That entitled it to borrow from the Federal Reserve -- unlike Lehman Brothers, which was denied a Fed loan because it was a non-bank. That was not a sound basis for denying it a loan, but Goldman would have been in the same boat, had it not converted.

So the argument goes: Without government aid then, no $20 billion-plus in bonuses for Goldman Sachs's employees in 2009? Maybe zero in bonuses, maybe indeed, no Goldman Sachs at all. Against that background, the bonuses seem egregious. It seems that the government drove a bad bargain when it bailed out Goldman, that it should have demanded a big chunk of Goldman's future profits.

Posner goes on to note that the majority of the firm's profits in the last year came from proprietary trading, an activity, he argues, that is of limited societal value. Posner posits some negative political and economic consequences of this.

The image above accompanied Posner's Atlantic essay and was credited to Chris Hondros/Getty Images.

An Interesting Investment Strategy from Goldman Sachs

I just found this by accident while searching for something else: US Hispanization: Long/short strategies. That PDF was dated October 23, 2007. Below are a few excerpts from it:

The Trend Continues... In November 2004, our report The Hispanization of the United States provided a context and investment framework to assess the growing influence of Hispanics in the US economy. Three years later, the theme retains its relevance, and we offer a long/short investment framework.

[...]

For domestically-focused investors and companies, gaining exposure to the rapidly growing US Hispanic population offers the best prospect for sales and earnings growth over the next three years.

See the graphic below, which comes from this PDF. Note the suggestions for Housing and Financials, and remember, this was published two months after the subprime crisis became obvious in August of 2007.

Does Goldman Sachs have two levels of clients -- one level that gets this advice, and a higher level that gets offered the opposite advice?

Today's NJ Corruption Arrests

From the AP, "3 NJ mayors, lawmakers arrested in corruption case":

By DAVID PORTER, Associated Press Writer David Porter, Associated Press Writer – 2 mins ago

NEWARK, N.J. – An investigation into the sale of black-market kidneys and fake Gucci handbags evolved into a sweeping probe of political corruption in New Jersey, ensnaring more than 40 people Thursday, including three mayors, two state lawmakers and several rabbis.

Even for a state with a rich history of graft, the scale of wrongdoing alleged was breathtaking. An FBI official called corruption "a cancer that is destroying the core values of this state."

Federal prosecutors said the investigation initially focused on a money laundering network that operated between Brooklyn, N.Y.; Deal, N.J.; and Israel. The network is alleged to have laundered tens of millions of dollars through Jewish charities controlled by rabbis in New York and New Jersey.

Prosecutors then used an informant in that investigation to help them go after corrupt politicians. The informant — a real estate developer charged with bank fraud three years ago — posed as a crooked businessman and paid a string of public officials tens of thousands of dollars in bribes to get approvals for buildings and other projects in New Jersey, authorities said.

Among the 44 people arrested were the mayors of Hoboken, Ridgefield and Secaucus, Jersey City's deputy mayor, and two state assemblymen. A member of the governor's cabinet resigned after agents searched his home, though he was not arrested. All but one of the officeholders are Democrats.

Also, five rabbis from New York and New Jersey — two of whom lead congregations in Deal — were accused of laundering millions of dollars, some of it from the sale of counterfeit goods and bankruptcy fraud, authorities said.

In rounding up the defendants, FBI and IRS agents raided a synagogue Thursday morning in Deal, a wealthy oceanfront city of Mediterranean-style mansions, with a large population of Syrian Jews.

A couple of thoughts on this:

Aside from these arrests being good news in the civic hygiene sense, this is obviously good news for Chris Christie's campaign to unseat Governor Jon Corzine, given that four of the five public officials arrested were Democrats, that one of Corzine's staff members is a suspect and was forced to resign, and that these arrests will remind voters of Christie's successful track record of prosecuting corruption as a U.S. Attorney in NJ. It will be interesting to see how many tens of millions of dollars the former Goldman Sachs chief Corzine will pour into his reelection campaign now.

The Syrian Jewish community mentioned in the AP article above was profiled a couple of years ago by Zev Chafets in a New York Times Magazine article, "The Sy Empire". That article focused mainly on this community's strict ban on intermarriage. It mentioned that fraudster Eddie Antar ("Crazy Eddie") was a member of the community, and that the community was affluent from its business dealings, but it didn't mention anything about the kidney business. Those of you of a certain age from the New York area will remember the original Crazy Eddie's commercials, but here's a clip of one of them from YouTube for the rest of you. The fellow who posted this video on YouTube noted that the man in the commercial isn't Crazy Eddie himself, but an actor named Jerry Carroll.

John Mauldin's Latest

A couple of items worth noting in John Mauldin's latest "Thoughts from the Frontline" weekly e-mail. The first relates to the effects of high frequency program trading on the markets. The second is about a topic we've wondered about here before (e.g., in this post), why Japan's government bond yields are so low despite that country's massive debt as a percentage of its GDP. Below are brief excerpts from Mauldin's column on both topics.

On program trading:

I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

The retail world doesn't get to play. This is a game only for big boys who can afford to pay for the "arms" needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.

Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea.

The comment that the stolen Goldman Sachs software "had the potential to manipulate the market" raises a fairly obvious question: did this software only have the potential to manipulate the market in the former employee/thief's hands (i.e., did it not have the same potential in the hands of Goldman Sachs employees?)? On to Mauldin's Japan comments.

"Land of the Setting Sun":

Japan's population is shrinking, and the number of workers per retiree is rising. Japan has the highest ratio of debt to GDP in the developed world. And that debt is growing by 7-8% a year, and does not include local debt. Interest rates cannot go lower. Savings are falling rapidly and will not be able to cover the need for new debt issuance, by a long shot. Within a few years, because of the aging of the population, savings will go negative. Social security payments are rising. GDP is shrinking, and export trade is off about 30-40%, depending on the industry. Machine tools are down 80%!

If rates were to go up by 1%, let alone 2%, over time Japan's percentage of tax revenue dedicated to interest payments would double to 18% and then to 40% and then just keep going up. It is conceivable that it will take 100% of tax revenues in less than ten years, at the current trajectory. Why? Because Japan is going to have to start to compete with the rest of the world to sell its bonds. Who but the Japanese would buy a Japanese bond at 1.3%? From a country that is rapidly going to 200% of debt-to-GDP? Doesn't really seem like a smart trade to me. And as the data shows, the ability of the Japanese consumer to buy more debt is rapidly waning.

The Japanese government is coming to a crossroads with no good exits.

Matt Taibbi versus Goldman Sachs

Here's Matt Taibbi's Rolling Stone feature article on Goldman Sachs, via Zero Hedge, "The Great American Bubble Machine: From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again". And here is Goldman Sachs's response, via Felix Salmon: "Goldman Sachs responds to Taibbi".

Incidentally, when I tried reading Matt Taibbi's article at Zero Hedge yesterday, the Scribd application wouldn't load, perhaps because it was overwhelmed with hits. So I headed to the Hackensack Barnes & Noble. I couldn't find Rolling Stone on the magazine rack, so I asked one of the Barnes & Noble clerks where it was. "Sold out," he said, "There was something important in it, I don't know what". I just started reading the article, so I don't have more to say about it, but you've got links to both sides of the story above. Feel free to add your thoughts in the comment thread.

Update:

A few thoughts, now that I've read Taibbi's article and Salmon's post on Goldman's response:

- There's some truth in Taibbi's article, but it's padded with a good measure of exaggeration. Goldman certainly participated in all the bubbles Taibbi mentions, and profited from them, but the dot-com bubble, the housing bubble, etc., would have happened without Goldman Sachs.

- Taibbi takes the hedge fund manager Masters at his word re: the commodities spike last year. Goldman is an enormous player in commodities, but one problem with blaming the commodity spike on paper speculation, or on firms such as Goldman getting pension funds to pour money into commodity index funds, is that the prices of commodities that aren't traded on futures markets or included in commodity indexes (for example, certain metals) spiked as well.

- Where the actions of Goldman employees and alumni deserve the most scrutiny is in relation to the bailouts of last year (and also the non-bailout of Lehman Brothers).

- Regarding this bit from Felix Salmon,

[Goldman Sachs public relations officer Lucas] Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government. At the same time, however, we’re supposed to have a government of the people, not a government of multimillionaire Goldman Sachs technocrats.

Two points: 1) I'd hate to think that any Goldman partners have soured on public service, but if they feel the need to do something altruistic, I'm sure no one will object if they decide to teach a high school math class or something after they retire with their managing director money. 2) Contra Salmon, I see no problem with multimillionaire technocrats in key positions in the Treasury department -- most knowledgeable finance types will have accumulated some wealth along the way, (even via side projects and consulting if they are academics). The problem is when so many of these multimillionaire technocrats come from the same firm. This is one case where there would be some inherent value in a little diversity.

BRIC Versus CRIB

In an op/ed in yesterday's Financial Times, Michael Hudson, an economics professor at the University of Missouri, ventriloquized the thoughts of foreign opponents of the United States, while warning of ominous consequences from the summit in Russia this week of the BRIC countries (Brazil, Russia, India, and China) ("Washington Cannot Call all the Shots"):

Many foreigners see the US as a lawless nation. How else to characterise a country that holds out a set of laws for others – on war, debt repayment and the treatment of prisoners – but ignores them itself?

[...]

It is no mystery to other countries how the US remains above the law. Foreigners see a financial system backed by American military bases encircling the globe. The IMF, World Bank, World Trade Organisation and other Washington surrogates are seen as vestiges of a lost American empire no longer able to rule by economic strength, left only with military domination. They see this hegemony cannot continue without adequate revenues and are attempting to hasten the bankruptcy of the US financial-military world order.

[...]

US officials wanted to attend Yekaterinburg as observers. They were told no. It is a word that Americans will hear much more in the future.

Mark Chandler, Global Currency Strategist at Brown Brothers Harriman, had a slightly different take on this summit recently ("Bric or Crib?"):

Brazil, Russia, India and China, now collectively known as the BRICs, will hold a summit in Russia on June 16th. Besides the Goldman Sachs invented moniker, these countries have very little in common except for the fact that they believe, to seemingly varying degrees of intensity, that they deserve greater influence in the conduct of world affairs than they currently have. And given the enormity of US power, as hard-core realists, they know any increase in their power and influence will come at the expense of America’s.

[...]

One of the most important reasons why the BRICs do not have the economic clout that they would like is frankly they don’t deserve it. Goldman-Sachs had a story (and more) to sell with its BRICs concept, but those same letters spell a real word, CRIB. The point is that the countries, outside of China, are not among the largest.

According to Bloomberg data, at the end of last year, China was the fourth largest economy ($3.2 trillion), behind the US, Japan, and Germany. This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.

With a GDP of $1.3 trillion in 2008, Brazil was the 10th largest economy, though it is roughly half the size of France, which is the 6th largest economy. Russia and India were neck-and-neck for 11th and 12th places with each having produced about $1.2 trillion of goods and services last year. Spain’s economy is nearly 20% bigger than Russia’s and India’s, and it is the 8th largest economy. Together the BRICs account for a little more than 12% of the world’s GDP, and China alone accounts for half of that.

Run Silent, Run Deep

That is, of course, the title of one of the classic submarine movies¹, but it's also a fitting description of the current investor relations tack of Alloy Steel International (OTC BB: AYSI.OB): as the company's stock price has dived, the company has refrained from releasing any information since its last 10-Q. Over the last few weeks, I tried contacting the company's CEO (who has designated himself the investor relations contact) via the company's website and then via his company e-mail address. After no luck, I trying calling him. Alloy Steel's receptionist in Malaga mentioned he was traveling overseas and, assuming he hadn't had a chance to check his company e-mail address, gave me his personal e-mail address and suggested I try him there. Again, no response. This week, after calling the company's headquarters again and learning that the CEO was again traveling overseas, I sent him the following message:

I understand from Melanie in your Malaga office that you are traveling overseas again. Given your heavy travel schedule and extensive responsibilities, I imagine you must have little time to answer questions from investors. Nevertheless, you have designated yourself as the investor relations contact for your company. Have you considered delegating this role to someone who might have the time to respond to an occasional investor e-mail or phone call?

And received the following response:

Dear Dave.
As a result of the market volatility and the short sellers that have been short selling our stock the board has decided to only release information through the normal reporting channels there will be no separate reports to any investor who we have no record of in our share register.

Kind Regards.
Gene Kostecki
CEO Alloy Steel Int.

Sent via BlackBerry® from Vodafone

This response didn't inspire a lot of confidence in the company's current situation. I can understand the reluctance to communicate with an individual shareholder on Reg FD grounds, but if Mr. Kostecki believes that the market's opinion of his company's prospects is unjustly negative, the best way to counter that would be to release information through "normal reporting channels" proving it wrong. For example, if the company picked up a major order recently, or an order in a new market, it could announce that via an 8-K (as it has done in the past). Since Alloy Steel hasn't released any such updates this year, it's rational for market participants to assume that it has no good news to report.

Judging from the CEO's e-mail above, the break-even numbers it reported last quarter, and its high inventory levels over the last two quarters, my guess is that it will post a loss for the quarter that ended on March 31^st.

I was going to end this post on a positive note, by including a link to Goldman Sachs chief economist Jim O'Neil's column in the Financial Times Thursday, in which he mentioned he had revised upward his growth estimates for China's economy this year and next. If O'Neil's estimates come to pass, that would be good news going forward for mining companies, and, by extension, for Alloy Steel. Unfortunately, after 20 minutes of trying, I was unable to find a link to O'Neil's column using the Financial Times website's search feature.

¹The all time champ of submarine movies is Das Boot, in my opinion.

Goldman Sachs 666

Another Goldman-related item in today's FT is this blog post by Tracy Alloway, "The Devil and www.goldmansachs666.com", which mentions the existence of an anti-Goldman Sachs website, GoldmanSachs666.com, run by a fellow named Mike Morgan. Here's Mr. Morgan's disclosure note from his site:

Disclosure: Yes, I am short Goldman Sachs stock. I believe this company is evil and should not exist. We need to begin to break up companies that have as much control over world finances as Goldman Sachs.

Ms. Alloway takes something of a cheeky tone in her post on GoldmanSachs666.com, but what Mike Morgan is calling for above isn't too far off from what Alloway's FT colleague John Gapper called for in his column on Goldman today¹:

More fundamentally, we now know unambiguously that Goldman is a “systemically important financial firm”. In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions.

Note that Goldman’s status is a choice, not a tag it has unwillingly been given. It could avoid this by shrinking itself into an institution like a private equity group or a merchant bank, which can take all the risks it desires because its partners lose everything if it fails.

¹The same column we mentioned in the previous post, "John Gapper Brings the Crazy".

"John Gapper Brings the Crazy"

Add the FT's John Gapper to Megan McCardle's crazy contingent¹ for questioning the political influence Goldman Sachs wields via its alumni in government. In his column today ("Don’t set Goldman Sachs free, Mr Geithner") Gapper writes:

Goldman wants to escape the burdens of political control while retaining the benefits of public backing. That does not seem like a good deal for the taxpayer.

There are obvious political risks in letting Goldman roam free while other banks remain bound by the troubled asset relief programme (Tarp). It would exacerbate suspicions that Goldman, with its long history of producing Treasury secretaries, gets special treatment. These were not soothed by the decision to pay off all Goldman’s credit default swaps with American International Group, now controlled by the state.

The bigger danger is the long-term precedent it would set. Goldman wants to bolt before Congress or Mr Geithner, who still operates as a one-man band while the nomination process for his senior staff meanders along, has the chance to change fundamentally how it operates.

So far, it has faced mildly irritating limits on how much it can pay staff but nothing on the scale of the 1933 Glass-Steagall Act, which imposed structural reforms on Wall Street after the excesses of the Jazz Age. It would never acknowledge it, but its political campaign is going just fine.

[...]

[Goldman CEO Lloyd] Blankfein criticised Wall Street’s past pay practices as “self-serving and greedy” but Goldman is still putting aside 50 per cent of revenues – $4.7bn in the first quarter – for the bonus pool. Inside, it may feel “humbled”, as Mr Blankfein said, but it looks like the same old bank.

The same, that is, except for one thing – Goldman is now backed by the US government. That is why Mr Blankfein wants to repay the Tarp money. Once it has repaid the $10bn, Goldman hopes to go back to paying employees what it wants, buying and selling more or less what it fancies and operating as before.

He is peddling an illusion. Even if Goldman repays the equity, the world has changed irrevocably because it is a government-backed enterprise.

The illustration above accompanied Gapper's column in the FT.



¹New readers can see this previous post for an explanation: "David Weidner Brings the Crazy".

"David Weidner Brings the Crazy"

Somehow I doubt we'll see a post with that headline on Megan McCardle's Atlantic blog in response to Weidner's MarketWatch column today, which questions the influence Goldman Sachs has exerted on the government's response to the financial crisis ("Government Sachs is in control"¹). Last month Megan used a similar headline when a Member of Congress raised similar questions about Goldman Sachs ("Maxine Waters brings the crazy"). In that post, Megan embedded the video below, of Rep. Waters questioning Treasury Secretary Geithner, and opined that,

She seems to get all of her questions off of the fringier conspiracy sites.

Some commenters dismissed Waters because of her previous comments, or because she flubbed some basic terminology in this video (e.g., referring to Geithner's deputy -- a Goldman Sachs alumnus -- as his "CEO"), but as I wrote in the comment thread of Megan's post at the time,

Maxine Waters is neither crazy nor stupid, as some here seem to think. She and her family members seem to have done quite well in business dealings trading off of her position²: she has to have some savvy to have been able to do that and not get in trouble with the law (at least so far). Since her family's success in business seems to have been from rent-seeking, she probably assumes that's how big business works too, which may explain her apparent contempt for corporate CEOs. In the case of Goldman Sachs, she may not be entirely off base. It's certainly not unreasonable to ask questions about the ubiquity of Goldman Sachs alumni in influential positions, and how that may have influenced government policies that, so far, have been very good for Goldman Sachs.

¹In his column, Weidner wrote,

Since the fall of Bear Stearns Cos. a little more than a year ago, Goldman has taken more than $20 billion in taxpayer cash through loans, payments and backstops.

[...]

In the last year, Goldman has benefited from Paulson's selective bailouts, a fortuitously timed ban on short selling, a liberal interpretation of bank holding company rules and soon, an easily gamed auction of distressed securities run by the government.

A conspiracy theorist might think this run of fortune has something to do with the former Goldman executives having influential roles in the Treasury Department.

²See this previous post for some examples, "Peering Under the TARP: Foul Waters"

"Unable to Read the Air"

In yesterday's Financial Times, letter writer Takashi Ito introduces a Japanese idiom to describe ousted Merrill Lynch CEO John Thain's recent behavior:

Sir, The hot new word in Japan is “KY”. An abbreviation for “kuuki-yomenai”, it literally means unable to read the air. For an ex-Goldman Sachs partner, John Thain was astoundingly KY. He decorated his office as he laid off Merrill Lynch employees, and then he asked for a $10m bonus when the whole country had turned against excessive executive compensation. There was also the little detail that his company was not doing that well.

The height of his KY was the fact that he was buying company stock the day before he was ousted!

Now a true believer (in Goldman superiority) may say that he was buying stock because he knew his departure would ignite the share price, but I am not willing to give Mr Thain that much credit. Anyway, the stock dived on the news.

How Tight are Goldman Sachs Alumni?

That question occurred to me when reading William Cohan's evisceration of Bank of America CEO Ken Lewis in yesterday's Financial Times ("The tattered strategy of the banker of the year"). In that piece Cohan wrote,

[W]hen he announced the Merrill deal, Mr Lewis boasted that he was able to move so quickly because his adviser, the ubiquitous private equity expert, Chris Flowers, had already done the due diligence on Merrill’s books and pronounced them much improved since John Thain, Merrill chief executive, took over at the company a year ago. With Mr Flowers’ apparent blessing, Mr Lewis agreed to pay billions of his shareholders’ money for Merrill’s worthless equity and in the process absorbed billions of dollars more of its debt on to his balance sheet at par. While Barclays was buying Lehman Brothers’ US assets for pennies on the dollar and Jamie Dimon at JPMorgan Chase had done pretty much the same in his acquisitions of Bear Stearns and Washington Mutual, Mr Lewis was paying retail prices for companies that had already been remaindered.

Now, not surprisingly, Bank of America’s shareholders are paying the price. Since Mr Lewis agreed to the Merrill deal during the fateful weekend of September 15, Bank of America’s stock has crashed to about $7 per share, down a whopping 80 per cent from the $34 a share the stock was trading at the day before the Merrill deal was announced, and 40 per cent so far in 2009. Bank of America’s total market value is now less than the $50bn it offered for Merrill’s stock last September.

Perhaps because Goldman Sachs alumni are ubiquitous in high finance, Cohan didn't note that J. Christopher Flowers is a Goldman Sachs alumnus, as of course is John Thain. One would think that, as an adviser to Bank of America, Flowers had a fiduciary responsibility to objectively conduct his due diligence on Merrill's books; perhaps Flowers did, and the math whiz was simply off by a wide margin. In any case, the result is that one Goldman Sachs alumnus (Thain) got to sell his new firm for what appears now to be an inflated valuation, thanks to an analysis done by another Goldman Sachs alumnus (Flowers).

Back to Cohan on Lewis:

Mr Lewis’s end cannot come quickly enough. There really is no excuse for his decision to do these ego-driven deals at the prices he did them. It is one thing to feel the need to do one’s patriotic duty; it is quite another to miss the mark so completely at the expense of your shareholders. It was probably just a matter of time, anyway, before he joined the other former “bankers of the year” such as Ken Thompson (2005), former chief of Wachovia, and Kerry Killinger (2001), former chief of Washington Mutual, on the junk heap of history.

The photo of Flowers above comes from Cityfile.

The Danish Economic Model

Today's Financial Times interview with Peter Sutherland, chairman of BP and also Goldman Sachs International ("Lunch with the FT: Peter Sutherland") includes this paragraph on the Danish economy:

“Yes, there are questions we should be asking ourselves, especially in the Anglo-Saxon economies. If you look at Denmark as an economy, you have higher marginal rates of tax, lower unemployment, a very high safety net support, and GDP per capita significantly higher than this country’s. This is the social model everyone was moaning about. But maybe it works rather well. What you also have, agreed with the unions, is a flexible labour market. Labour market flexibility is to my mind very, very important – far more important than the ability to earn very large sums of money.”

The labor market flexibility and low unemployment rate Sutherland mentions are key differentiators between Denmark other European countries with high marginal tax rates and generous welfare states; usually, the trade-offs in these countries (e.g., France) include inflexible labor markets (where, since it's difficult for companies to fire workers, they are wary of hiring new workers) and high unemployment. Sutherland's mention of Denmark brought to mind a 2006 Wall Street Journal article on Denmark's labor policies, "For the Danish, A Job Loss Can Be Learning Experience". Below is an excerpt from that article:

Most of Western Europe is fighting to hold on to its traditionally strong job protections while in some cases cutting jobless benefits, as the region struggles to compete in a globalized economy. Denmark has gone the other way.

The government allows liberal hiring and firing as in the U.S. And it has imposed limits on the duration of its high unemployment benefits. But it also invests more than any other country, as a percentage of its gross domestic product, in retraining the jobless -- a combination it calls "flexicurity." Its unusual mix of the free market and big government has helped Denmark cut its unemployment rate in half, from about 10% in the early 1990s to U.S.-style levels of under 5% now. The economy has been relatively robust, growing 3.4% last year. Meanwhile, France and Germany are at or above the Danish jobless rate of a decade ago.

Even though Danes are among the most easily laid-off workers in Europe, polls show the country's workers are the most secure about their future.

Back to the Financial Times interview with Sutherland, which concluded with this paragraph:

Just as I am formulating a response to this [Sutherland's invidious comparison of the "Anglo-Saxon" model to the Danish one], Sutherland takes the words out of my mouth. “I feel somewhat hypocritical because I’ve been a beneficiary of this” – and judging by the well-cut suits around us he is not the only one – “but I don’t think that has interfered with my thinking processes. I do think we need to reflect on a certain culture of excess.”

One could say Sutherland's lunch tab reflects a "certain culture of excess". From the FT:

Wiltons
Jermyn Street, London SW1

1 x wild Scottish smoked salmon £28.00
1 x Lobster bisque Newburg £13.00
1 x seared scallops £28.00
1 x grilled halibut £26.00
2 x spinach £10.00
1 x brussels sprouts £5.00
1 x fresh raspberries £12.00
1 x crème brûlée £10.00
4 x glass Chablis £32.00
2 x double espresso £ 10.00
2 x espresso £9.00
1 x mineral water £5.00

Total (inc. service) £211.50

"Government Sachs"

In Sunday's New York Times, reporters Julie Creswell and Ben White notice the ubiquity of Goldman Sachs alumni in government ("The Guys from 'Government Sachs'"). Does this represent potential conflicts of interest, or are these just the latest examples of selfless public service by Goldman Sachs alumni? The article is more even-handed than is typical for the Times. On the one hand,

“To the extent that they have a portfolio or blind trust that holds Goldman Sachs stock, they have conflicts,” said James K. Galbraith, a professor of government and business relations at the University of Texas. “To the extent that they have ties and alumni loyalty or friendships with people that are still there, they have potential conflicts.”

On the other hand,

For every naysayer, meanwhile, there is also a Goldman defender who says the bank’s alumni are doing what they have done since the days when Sidney Weinberg ran the bank in the 1930s and urged his bankers to give generously to charities and volunteer for public service.

“I give Hank credit for attracting so many talented people. None of these guys need to do this,” said Barry Volpert, a managing director at Crestview Partners and a former co-chief operating officer of Goldman’s private equity business. “They’re not getting paid. They’re killing themselves. They haven’t seen their families for months. The idea that there’s some sort of cabal or conflict here is nonsense.”

On the first hand again,

THIS summer, as he fought for the survival of Lehman Brothers, Richard S. Fuld Jr., its chief executive, made a final plea to regulators to turn his investment bank into a bank holding company, which would allow it to receive constant access to federal funding.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.

One week later, Goldman and Morgan Stanley were designated bank holding companies.

“That was our idea three months ago, and they wouldn’t let us do it,” said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. “But when Goldman got in trouble, they did it right away. No one could believe it.”

The article notes that although NY Fed president Geithner isn't a Goldman Sachs alumnus, "Goldman alumni have figured prominently in his ascent", including former Goldman Sachs chief Robert Rubin, who mentored Geithner when Geithner worked in the Treasury Department and Rubin was Treasury Secretary, during the Clinton Administration.

Goldman Sachs and Morgan Stanley Approved to Create Commercial Banks

According to the AP ("Last major investment banks change status"), today the Federal Reserve approved requests by Goldman Sachs and Morgan Stanley to change their statuses to bank holding companies and create their own commercial banks. This makes sense, since the large combined commercial bank/investment bank conglomerates (e.g., JP Morgan Chase) have proved to be more stable than the stand-alone investment banks (e.g., Bear Stearns, Lehman Brothers) during the current credit crisis. Something to keep in mind next time you hear a pundit blame the current financial crisis on the 1999 Gramm-Leach-Bliley Act, which repealed the provisions of the depression-era Glass-Steagall Act that separated commercial banks from investment banks.

Privately-held versus Publicly-traded Investment Banks

In the course of work for a client, I've had some discussions with senior executives at a decent-sized, privately-held investment bank. Since the company is privately-held, of course I don't know exactly how well it is doing, but judging by how it has expanded and made a lot of new hires over the last couple of years, I'm inclined to believe the company's executives when they say their investment bank has been doing well and has avoided the problems that have plagued larger, publicly-traded firms such as Lehman Brothers. I wonder whether this is true more broadly of privately-held investment banks, and whether there has been any research conducted comparing privately-held investment banks to their publicly-traded counterparts with respect to their stability, ability to manage risk, etc. Perhaps it's simply the case that firms with less capital available are forced to be more prudent in how they employ that capital. Perhaps there are relevant differences in culture between publicly-traded and closely-held investment banks. I do remember reading that this was a concern of some Goldman partners before the firm went public in the 1990s.

Two New Jersey Plutocrats Join Forces to Oppose Offshore Drilling

Apparently, record-high energy prices haven't had the same effect on Jon Corzine and Frank Lautenberg as last week's Pew Poll noted they have had on a somewhat more representative sample of Americans. NJ Governor Corzine, the former Goldman Sachs chief, and U.S. Senator Frank Lautenberg, D-NJ, one of the founders of ADP, got together with a couple of their less-affluent political colleagues in the Jersey Shore town of Belmar today to express their opposition to offshore drilling (The Record: "Corzine, others vow to fight offshore drilling").

On The Record's website, a lone commenter, "RamapoGuy" dissents from the Plutocrats' opinion on offshore drilling. After first noting that offshore rigs in the Gulf didn't spill oil even during Hurricane Katrina, he writes,

Alaskans get oil revenue checks each year..why can't we? We listened to the wackos in the 80's who said Nuclear energy would kill us all and now we are looking into Nuclear once more. If we would have ignored them back then, we would be in a better position today. We need to look at the current drilling technologies and start drilling something. We will always need oil so even if the oil is 10 years away, if we start exploring now, we will have it in 10 years. If we do nothing, we will have it never! Start drilling for oil and send a message to OPEC that we are starting to look elsewhere for oil.

Whom do you imagine has a better chance of getting his way on this, RamapoGuy or Jon Corzine and Frank Lautenberg? This is another reason to be confident in the secular bull market trend in oil continuing for another five years.