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Older baseball fans will remember Hank Sauer, a slugging outfielder in the 1950s. In 1952 he bashed 37 home runs, batted in 121 runs and hit .270 for the fifth-place Chicago Cubs. For his efforts, he was recognized as the most valuable player in the 8-team National League.


Two years later, Sauer slugged 41 home runs, drove in 103 runs, and hit .288, arguably a better year. The Cubs finished seventh. During the offseason, Cubs management mailed Sauer a contract calling for a $1,500 reduction, a pretty hefty haircut given the modest salaries in those days. Sauer returned the contract unsigned, suggesting that he had had a “pretty good year.” The general manager replied that yes, indeed, he had had a “pretty good year” but that the Cubs “could have finished seventh without him.” He eventually settled for another year at his old salary.


Thanks to New York Attorney General Andrew Cuomo, I had occasion to ruminate on this bit of baseball lore. Cuomo released a report yesterday to the effect that nine of the banks favored with TARP funds had deemed it wise to shower a total of $32.6 billion in bonuses on its employees. A fortunate few – almost 5,000 in all – got bonuses of one million dollars or more.


The geniuses running the large banks could take a lesson from the lowly Cubs management of the 1950s. Let’s dub this the Sauer Rule:

o If we could have lost all that money, collapsed the world economy and bilked American taxpayers to the extent we did without you, then you should be paid no bonus.

o If we could have avoided some of that without you, you’re fired!

Labels: banking, Recovery

Few Americans had ever heard of B. Ramalinga Raju before last week, but most people think they know what to expect of PriceWaterhouse. Raju’s Indian firm, Satyam (from the ancient Sanskrit word for “truth”), built a sterling reputation in providing consulting and outsourcing services to Indians and clients around the world. Ironically, Satyam was no truth-teller. It juiced the value of its shares by inventing assets, including a billion dollars of non-existent cash, and inflating its profits by a factor of nine. As it turns out, Satyam’s fabulous rise was just one more fraud, and Raju, his brother, and the company’s CFO are now under arrest. By contrast, PriceWaterhouse, Satyam’s auditor, insists it’s done nothing wrong.

Thanks to this latest scandal, we can see more clearly than ever that:

--No country has a monopoly on financial fraud. It’s a global problem.

--Even adults need adult supervision, especially when money’s involved. Self-regulation is all too often no regulation at all. When self-regulators fail to adhere to high standards, abuses can go on long enough before being detected that the consequences are dire, widespread and difficult if not impossible to remedy.

--It takes more than one person or a small group of unscrupulous conspirators to perpetrate a fraud such as Raju’s, Madoff’s or the others that keep coming to light. It requires gullible investors in search of the highest possible return, otherwise savvy institutional investors who willingly suspend their disbelief in financial results that sound too good to be true, auditors who don’t audit, and regulators who don’t regulate. These frauds are little more than genteel gangsterism or refined racketeering, not the work of mavericks on the make.
PriceWaterhouse in particular should be ashamed. If it failed to apply the most rigorous accounting standards to Satyam, the culprits within the accounting firm should be prosecuted with the full force of the law. If, as it claims, PriceWaterhouse did it by the book, then the book needs to rewritten – fast.

--In the US and around the world, more than a mere recovery is needed. Our aim must not be to reinflate the bubbles that have been bursting and reward the reckless and irresponsible with an intravenous drip of new capital . Rather, we need simultaneously to restart economic growth, restructure our economies to eliminate the sources of imbalance and excess, and rebuild confidence in our institutions. These goals are interactive and mutually supportive. The bottom line is that a sustainable recovery is probably unattainable unless we get on urgently with the work of restoring confidence in our banks, stock markets, auditors, and governments.

Satyam shows that the truth can hurt. But confronting the truth can set you free, opening up new possibilities for progress and growth with the highest standards of integrity.

Charles Blum

Labels: economic reform, Fraud, Recovery

As the new administration tries to formulate its economic goals, it seems to be consciously aiming low. At first, President-elect Obama hoped to generate 2.5 million jobs in his first two years. Later, he upped the target to 3 million jobs. That would be better, but it’s still a rather paltry number and would hardly constitute a full recovery for
the economy.

Consider the basic numbers:

--In November, according to government statistics, 10 million Americans were unemployed. That’s more than triple the current target for the next two years.

--The American economy has lost 2.6 million jobs since the peak in June 2007 for total private employment. In November 2008 alone, employment levels fell by 533,000. When December numbers are released, we may be close to or even beyond three million jobs lost in a year and a half.

--According to the US Department of Labor, the natural rate of increase in the work force is approximately 100,000 persons. Thus, every 24 months, 2.4 million jobs would be needed just to stand still.

--So, merely to get back to the June 2007 level will require 2.6 million jobs plus 100,000 for each month thereafter. Eighteen months later, we’re already 4.4 million jobs short – and digging deeper.

--By the mid-point of the first next administration the deficit compared to mid-2007 will be 6.8 million jobs.

When facing the worst economic crisis in 80 years, it may be good politics to lowball expectations. Of course, Obama isn’t the first politician to try to lower expectations. Recall that in far less challenging times Bill Clinton pledged to produce ten million jobs by 2000. It sounded bolder than it was (the natural increase in the workforce would have been expected to eat up almost all the 10 million jobs), and he overshot his target: while the civilian workforce grew by 14.5 million in his two terms, the ranks of the employed soared by 18.4 million. Unemployment fell by 3.9 million workers, pushing the unemployment rate to below 4 percent.

This is not an argument of a return to Clintonomics. On the contrary, America needs not just a cyclical recovery, but a genuine economic restructuring. We shouldn’t try to return to the way things were, but to go forward to places we’re never been. We need to become a goods-producing nation again. So much so that we can replace some imports with domestic production and produce in excess of our needs. That’s the only way to pay down our enormous debt to foreigners without a major inflation. My only point is that prudent politics and sound economics can produce two radically different targets. Should the natural caution of politicians triumph, the best chance we may ever get to revamp the economy may be wasted. Please, Obamistas, aim higher!

Charles Blum

Labels: Jobs, Recovery, U.S.Economy

Bernie Madoff literally made off with billions of unsuspecting people’s cash by promising consistent annual returns that were too good to be true. His $50 billion Ponzi scheme bilked a wide range of rich folks, including a Hollywood mogul, a wealthy US senator and several sports team owners. For some of them, the losses will be significant but not crippling; for others, their entire financial future has gone down the drain. Several charities let the allure of high returns undo the generosity of donors and their ability to perform their mission.

As huge as the scam was, it is not so surprising that personal greed overcame good judgment in a lot of people who might have and should have known better. What’s shocking is the extent to which reputable banks, insurance companies and other financial institutions fell prey to the same instincts.

That list is long and international: Belgium’s floundering Fortis Bank; France’s BNP Paribas which is supposed to rescue Fortis; Spain’s Grupo Santander; the Royal Bank of Scotland; Japan’s Nomura Securities; MassMutual’s Tremont; and more around the world.

Aren’t these the very institutions that are supposed to know all about risk? Don’t they make ordinary borrowers jump through hoops to provide detailed information and pledge collateral before lending sums that by comparison to the eleven figure fraud perpetrated by Madoff are paltry? Aren’t these the very organizations – the financial professionals -- that want to be entrusted with our money because they know best how to manage it?

By the same token, the performance of the Securities and Exchange Commission does little to relieve our fears. The SEC apparently was asked to look into Madoff’s empire in the 1990s and never launched an investigation. Aspiring crooks everywhere may draw the lesson that if the scheme is sufficiently complicated, your reputation impressive enough, and your political contributions well placed, the regulators can’t regulate and might not even try to.

The ongoing meltdown demonstrates that resolving liquidity problems may just be a matter of cash. Restoring confidence is another matter entirely in a financial system that has betrayed the values of honesty and integrity while celebrating “success” that turns out to be based on elaborate fraud and systematic abuse of trust.

Charles Blum

Labels: Confidence, Fraud, Recovery

This week China finally got around to offering its beleaguered citizens some of the largesse stored up in the State Administration of Foreign Exchange (SAFE). It cobbled together a mammoth economic stimulus package valued at $586 billion. In typical Chinese fashion, details are scarce.

A few things seem clear:

• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).

We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.

But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.

Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.

This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.

Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.

Charles Blum

Labels: China, mercantilism, Protectionism, Recovery