What person(s) or  organizations without much real world hard won experience, even conceived of this idea. It’s a Board’s job! The obvious answer: if a BOD can’t direct company management and its compensation committee doesn’t use correct principals, change the Board. These unusual solutions only become the “eventual problems”.

Nothing gets done efficiently, except the creation of inhibition and stultification.

I believe in the principals of Westphalian states–most particularly, it’s rules or dirigisme. But how do you have expanding GDP and job creation in the midst of all this complicated drivel. The regime goes too far.

 According to Euro News, one of the stated intentions was expressed as: 

 “… to avoid a repeat of the global financial crisis the G20 nations have decided to put the policies of seven of its members, the US, China, Britain, Germany, France, India and Japan under the microscope. The IMF will seek out imbalances in debt, trade, and budget deficits, although its conclusions will not be binding on members.”

 “The guidelines operate a little bit like a net which actually holds those of the countries that violate or do not respect the guidelines and the net is a little bit tighter for those countries that are considered of systemic importance because they represent more than five percent of the GDP of the G20”, said French Finance Minister Christine Lagarde.

 This regime or set-up raises questions here in the U.S.   Question one: Why are these particular entities, the BIS and FSB (which are made up of various central bank representatives) being vested with so much latitude and—when the central banks themselves exist to be of service to their States of origin?   Additionally, the central banks in many cases are owned by their private commercial banking members.    Question two: Although the IMF is performing better work than it did in the past (even though that past is quite checkered), is it really an organization in which we want to abdicate our faith to in terms of monitoring our own economy or in their parlance, “put… under the microscope” so as  to be judged?

 We see that the conclusions won’t be binding.    However, notice Minister Lagarde’s language above, “…the net is a little bit tighter…”   Is that the non-binding net for “violators” and “disrespectful” participants?    Would there be embarrassment or moral suasion (persuasion and pressure) for non-compliance?  What influence will this have on buyers of sovereign debt or on cross border trade agreements?   How does it affect the dollar as a reserve currency?   How will the Rating Agencies react to these analyses since they have had very little a priori vision (ability to analyze beforehand) in the past?   There could be many other serious unintended consequences.

 And so in the final analysis, principles of sovereignty could be being bypassed by international entities and coalitions, and without the approval of the United States Congress.  It’s an interesting system being put into place which has the force of a treaty, and yet does not need ratification.

The G-20 document references many component parts; one of which deals broadly, with compensation. This is the subject of the post by Professor Ferrarini and Ms. Ungureanu.

However, before I turn attention to my comment, I would like to make an observation. We still live in a world which subscribes to a Westphalian system (well discussed by Padoa-Schioppa in his intellectually breathtaking Per Jacobsson Lecture). Much of the declaration reads as if it were some form of treaty by sovereign governments. As these types of issues do not garner much press or interest for that matter, and are not very well understood by legislators (empirically evident in the U.S.), the liability extant is that it will meet with opposition when finally understood by those with responsibility. Surveying several legislators, economics and business professors, bankers and business chieftains in the U.S, it is interesting to note that 99 out of 100 have never heard of the BIS–much less one of its secretariats the FSB.

The idea of misalignment of compensation being a central cause (of the Turmoil of 2007) is a “red herring” of immense proportion. It’s tantamount to a medical doctor chasing the symptoms of a patient rather than dealing with the source of the illness.

The turmoil and consequent damage caused globally was primarily a failure of sovereign governments and central banks to monitor and understand what was occurring under their charge. This primarily was a U.S. problem of faulty legislation and poor use of regulation; but most importantly, monitoring in an holistic fashion. Putting forth the idea that “greed” (let’s call it what it is) can be regulated is unrealistic and counter-productive–as well as counter-intuitive.

It is a fact that Wesphalian systems are dirigistic and need to set rules and guidelines–especially in the insured banking sector. Yes leverage requirements, yes de-construction of too big to fail institutions offering too many diverse products and services, yes prudential supervision, yes reform of CRA’s, etc. But the attempt at moderating compensation from outside of the internal entity or organization by an authority that is not part of the actual Sovereign is a non-starter and will not gain traction.

The turmoil developed over a 25 year period; very specific events occurred in the timeline which led up the collapse. It’s time to revisit those events.

Comment by Stephen R. Ganns — April 13, 2011 @ 7:04 pm

Seems we need a distinction to be able to differentiate the parts of capitalism–which have somehow become fused. Digressing for a second, the societal considerations seem to be inherent in the Westphalian system of which we are a participant. That system is dirigistic–setting up the rules or guidelines–which are needed to make sure the impact to the society operates toward the greater good. Once the rules are in place, the system can operate freely.

It seems that the problem is one of definition and non-differentiation between Free Enterprise and pure Finance, or as it has been coined, Financial Capitalism.

The reason the distinction between Free Enterprise and Finance is so important today, lies in the fact that free enterprise or free markets have always generally been able to achieve a natural equilibrium based on supply and demand. However, speculative “financial” practices tend to force real production economies to become unbalanced. This generally creates the “boom and bust” phenomenon. Unfortunately, the two concepts still remain fused today and synthesized in the public’s mind within the definition of capitalism-just as Karl Marx intended it in the mid 1800′s when he coined the term as a pejorative or strictly negative term.

Free enterprise is an economic system in which markets are created by private businesses to sell their goods and services to the general public.

The basic components of capitalism’s current properties would include:

1. Real assets, property, facilities and equipment are privately held.

2. The economy creates equilibrium through the concept of supply and demand– essentially driven primarily by demand, those who need goods and those who have supply.

3. The concept of best use of natural and human resources and the marketing of those resources successfully to consumers to gain maximum exchange.

4. Limited government regulation exists as a dirigisme to ensure fair play and to prevent market manipulation.

5. However, it is worthy of note that this does not imply in any way an anarchy. Government would lay out the ground rules to keep the markets from being undermined or manipulated. This is completely consistent with Adam Smith’s “invisible hand” as taught in “…The Wealth of Nations”. Why? Simply because in his earlier work (which was continually revised), “The Theory of Moral Sentiments” which speaks of social responsibility, could be referred to as a “visible hand”, thus creating a binary and balanced system going hand in hand.

By finance or financial capitalism, we mean the use of capital or wealth to create more wealth including the charging of interest and speculations in different types of financial products such as various types of investments, equities, options or other derivatives. In defining finance by these particular uses, functions and habits, it can be seen that the nature of finance is not centrally (directly) involved in the actual production process. It is generally a facilitator, aiding production, as in providing capital for daily operations or expansion or consumption. This is finance’s true value.

Viewing the current turmoil of 2007, it can be seen that the “capital markets” have frozen dramatically, seriously hindering production, consumption and free enterprise. Question becomes: what would cause this imbalance to occur between these two forces?

We can solve for that.

Stephen R. Ganns

http://yaleherald.com/opinion/remaking-capitalism-for-the-greater-good/

Let’s review the recent events in Egypt against some of the data and principles of Sun Tzu.

Intelligence, and the use of agents were central to Sun Tzu’s strategies and methods. Today, this would constitute having a good and reliable “intelligence estimate” or assessment of the situation leading to predictions of a high probability. Another attribute of intelligence is that it is covert or secret–the elements of surprise and “mis-direction” contribute majorly to probable victory.

SunTzu laid out and codified many principles which would be too numerous to mention in this blog–although it would make a great subject for a written piece to analyze current events: the wars in Iraq and Afghanistan: the Turmoil in the Middle East, etc.–against his strategies.

Simple fact: these are campaigns, well thought out and planned, utilizing the workable principles of war. Yes, social media acted as a light speed facilatator, and yes a students organized the various tactical maneuvers the public sees on television. But make no mistake–these events were well thought out in advance, coordinated, timed, planned using intelligence far superior to the “opponent’s” intelligence. Any other assertion is simply folly.

Who had the accurate intelligence assesment in Egypt? Who has the accurate intelligence assessment in the other countries currently undergoing social unrest in the Middle East? Who’s winning the coordinated campaign? Who ’s using the correct principles of warfare? Who stands to gain from these events?

I guess eventually, we will know.

Highly recommended!

For example, in the world of global finance, I described a paper published by the Group of Thirty, a lecture deliveredby Thomaso Padoa-Schiopa as intellectually breath- taking.

I recently watched, on HBO, the production “Thurgood” starring Lawrence Fishburne.  It rose to the level of being magnificent.   It’s a must see piece of Americana, which lays out the persistence of one man–in search of excellence.

Super Anti-efficiency

“Markets can remain irrational longer than you can remain solvent.” J. M. Keynes.

“The current phenomenon occurring in the capital markets is aptly termed a “dislocation”, as the primary ultimate intermediary—as the process proceeds and as a matter of fact—will be the Central Banks, as proxies for the Sovereign Governments and institutions which they represent.

Efficient Market Hypothesis whether one subscribes or not, concludes that financial markets are “informationally efficient”. The current situation finds: these markets have gotten into their current state due to what might be termed a “super anti-efficiency”—in that data believed known or actionable was either not known or if known not acted upon. To be clear, the statement that the general markets in the main, were unaware and thus became stultified seems reasonable. But please note that in these premises, are included by reference the rules of fiduciary prudence as “should have known” or more importantly, “should have acted upon”.

What is manifest tends toward an abject systemic or asymmetric informational anomaly—coupled with lack of positive and clear-cut action. Was the notional value of “innovative” Credit Risk Transfer instruments and derivatives unknown? Were the off balance sheet operations of investment and commercial banks completely latent? Did Credit Rating Agencies have any semblance of true experiential and subjective understanding of the products being rated? Was the rapid vaporization of Enron not enough of a microcosmic event to warrant extrapolation?

From a subjective and visceral view, everyday actors for example, in Originate & Distribute model businesses and at all levels with the exception of certain investors, knew what was occurring at a daily functional level—however, sans any real understanding of the global-macro consequences. To say the least, the full picture was not widely known or if it was, not disseminated to the participants capable of realization and response.

Central Banks and Sovereign Treasuries, to be able to know and analyze macro consequences, must have access to accurate information and then the analyses are only as good as the data collected along with the concomitant ability to analyze, understand and predict distributive results and outcomes.In the final analysis, most did not perceive the true circumstance—save on an idiosyncratic micro level—and of those who did, either the full consequence was not appreciated or as inheritors, were confronted with an overwhelmingly daunting task. Thus, a condition of Super Anti Efficiency was born.”

Federal Reserve Proposed Rulemaking Addresses Dodd-Frank Systemic Risk Provisions

Editor’s Note: Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Arthur S. Long.

Sometime ago, I did some writing on the financial turmoil. In one article, a program was proposed which suggested various factors be looked at in order to logically reform Regulatory policies and regimes regarding the financial system in the U.S.

As time went on, I advised one Senator, a Banking Committee member, through the original TARP legislation.

I’m familiar with Davis, Polk and Wardwell through their excellent contribution to the comprehensive and detailed work entitled Enhancing Financial Stability and Resilience: Macroprudential Policy, Tools and Systems for the Future, produced and published by The Group of Thirty. I commented on and discussed that report with members of the working group who produced it and with the Financial Stability Section at Bank of England.

It’s obvious how imporatnt well ordered Regulation should be crafted. Does Dodd-Frank meet that set of criteria? Can it lead to a well ordered system? How does FSOC function? Who is the final authority? Harry Truman?

In an effort to deal with the concept of “too big to fail”, aren’t we really confronted with the idea of “too big to bail out?” What’s next–”too big to salvage at all?”

The fact is: that implicit in an unweildy system are things like human error, how to connect the dots, definitions of systemically important -non-bank financial companies, systemically important BHC’s, Dynamic Provisoning, Variable Scalars,various types of Capital(Core, Tier 1, Tier 2),etc.

By the way, without reform of the OTC derivatives markets, will we still be herding cats?

This is all in the correct area–but it needs to be simplified.

I hope we can monitor it and keep track of it all–without getting too big of a headache.