Category Archives: Finance Capital

What are these bankers thinking?

It appears that former Goldman Sachs executive John Thain forgot the lessons of teamwork and humility that were a part of the Goldman culture when he moved to Merrill Lynch. With the allegations that he spent $1.2 million on re-furbishing his personal office, he looks more like the felon Dennis Kozlowski of Tyco fame who once spent thousands of shareholders money on a dog-shaped umbrella stand!

With taxpayers spending hundreds of billions to rescue the banking system, outrage is surely justified.

But outrage is not policy….and it is policy that this crisis needs. It is becoming increasingly clear that we need to nationalize the banks to insure that the necessary reforms take place under the scrutiny of the public. In fact, that may be the only way to avoid the collapse of the system: if we try to buy the bad bank assets then it could cause a re-pricing downward of remaining assets. It also means the government gets the lemons while the banks keep the profitable assets.

Nationalization is only the first step – the second has to be a new system of governance including public trustees placed on the boards of our key banks so that we can insure that savings are allocated safely to those areas of the economy that need the money and can invest it wisely to create jobs and develop new useful technologies.

While discussion of nationalization has now surfaced in the pages of the Financial Times and today in the New York Times, one fears that the Geithner/Volker/Summers team will move too slowly to discard failed models.

Fed induces crisis of legitimacy?

Stanford economist and former Fed member John Taylor nails the central dilemma presented by the Fed’s aggressive intervention into the financial crisis: legitimation. 
The viability of capitalism, which generates volatility and inequality as a matter of course, depends heavily on the notion of “consent by the governed.” Absent that revolution or chaos fill the vacuum. Taylor notes that the massive buy-in by the Fed has meant, whether intentional or not (certainly not), that the federal government is now making industrial policy choices. 
This is really no different than the “pick the winner” policies that are at the heart of the east Asian model. Thus, the Fed begs the question, who does the picking? 
Presumably the governed…but where are they in the process?

Fed has abandoned monetary policy, critic says
| Reuters

GM in bankruptcy

This overview of the impact of a GM bankruptcy gives some insight into the complexity that all parties will face.
Left unclear is where the UAW negotiated VEBA debt stands. The VEBA was supposed to be bankruptcy remote but instead it is becoming an ATM for GM to help increase its leverage against creditors.
Of course, the UAW and GM failed to provide UAW workers any disclosure of the risk that bankruptcy entailed for the VEBA when GM workers needed that information – during the contract ratification vote.

GM in bankruptcy (The Deal Newsweekly)

Forget Madoff, SEC Ignored GM/UAW Bailout Risk

Earlier this year, I filed a complaint with the Securities and Exchange Commission on behalf of autoworkers pointing out that GM and the UAW had failed utterly to warn GM employees of the risk of bankruptcy and its impact on the proposed VEBA health care plan.

The VEBA was supposed to be “bankruptcy remote” – secure against bankruptcy risk but it turns out that it is being used to help GM survive bankruptcy.

The SEC complaint was based on my research note, Proposed GM/UAW VEBA: House of Cards.

Sure enough GM is now, in essence, in bankruptcy.
And GM workers and retirees still do not know what will happen to their jobs, their pensions or their health insurance.
That is what the SEC exists for – to protect investors and GM sold the UAW a $4.5 billion convertible note without disclosing the risk of bankruptcy. If the UAW had understood what I laid out in the research note, they likely would have taken a different approach to bargaining last year.
Senator Corker, from Nissan, is proposing now that the cash flows into the VEBA be turned into even more worthless paper, GM stock. Of course, no evidence exists that existing GM bondholders will agree to this. In any case, the auto workers have ALREADY taken a huge hit – the convertible bond is now worth far less than its original face value.
Bankruptcy, whether prepackaged or not, whether or not with a bridge loan from the U.S. Government, is not the way to go. As I proposed in A Way Out for the Auto Industry the way forward is creation a new Public Trust Company that could issue long term low interest bonds to purchase the assets of the Big Three and manage them in the public interest.