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A new normal and New York Magazine on financial reform

By Mike Konczal

I remember when everything was back to "normal." It was when John
Cassidy flagged
, on his blog, Ken Chenault, the longtime CEO of American Express, getting paid $80 million dollars. How has American Express been doing the past few years? Here’s Cassidy:

How has Amex done during recent times? From a stockholder’s perspective, not very well at all. In January 2001, when Chenault took over as CEO, the stock was trading at about $55. Today it is trading around $40. In the interim, it has had its ups and downs, but the overall trend has been negative. During the past three years, a tough time for the entire financial industry, the stock price has fallen by about a third. And this decline would surely have been a lot bigger if, during the depths of the financial crisis, the federal government hadn’t agreed to guarantee as much as $14 billion of Amex’s debt and inject $3.4 billion of taxpayers’ money into the company. As a result of the government’s actions, Amex’s stock rebounded sharply from a low of $10 last January.

You might think that Chenault would have suffered along with other Amex stockholders, and, to some extent, he did. According to a recent SEC filing, he was paid $33.9 million in 2007, $28.8 million in 2008, and a measly $17.4 million in 2009. Poor guy …

Back to normal. A new normal, of record financial profits, bonuses and CEO salaries. Wait, that was the old normal of the 2000s. What's changing?

John Heilemann wrote this fantastic piece, "Obama Is From Mars, Wall Street Is From Venus," about financial reform and Obama's presidency for New York magazine.

At its core, it is about the disconnect between Wall Street, which thinks that nothing needs to change, the Obama administration, who "are all technocrats who believe the system doesn’t need to be rebooted or downsized, merely better supervised" (a great description of this financial reform bill), and the American people who are suffering under 10 percent unemployment and all the rest of the brutal devastation of a financial crisis, a uniquely painful type of contraction to go through, and who desperately don't want to see another financial crisis happen here.

The whole thing should be read, especially with the idea of how each of the three groups consider "normal" -- the debate has often lacked a clear goal of where we need to get to as a people, and as such everyone is planting the normal flag everywhere.

A few quotes stood out for me. Over at Huffington Post, Shahien Nasiripour found a great quote by a JP Morgan economist: "Now that the financial reform debate is in the final innings, it's time for the grownups to step in." And notice this from the New York piece (my bold):

For Blankfein, Dimon, and other Wall Street bigwigs, the episode was worrying on two levels. “First, the White House decides in this blatant way to politicize the issue,” explains a financial-industry lobbyist. “Second, they overshoot the target and the thing gets away from them. It made people realize there’s no adult in charge. If Bob Rubin or Hank Paulson were Treasury secretary, they would have walked into the Oval Office and said, ‘Mr. President, I know you’d like to do this, I know your political advisers want you do this, but I’m sorry, you can’t do this.’ ”

There's no adult in charge. We need the grownups to step in.
Those who want to see the system seriously reform are infants, babies, children. Those within the system are the adults, grownups, serious, reality-based people.

This is good (my bold):

As summer turned to fall, Goldman, JPMorgan and the rest began furiously lobbying against the White House’s financial-reform bill as it moved through the House, and in particular against Obama’s proposal for a new consumer-protection agency. (In the first three quarters of the year, the industry spent $344 million on its efforts to soften the legislation.) Dimon, despite his frequent invitations to the White House, began complaining about a lack of access. “If you don’t want us to lobby, give us a seat at the table” became his mantra, punctuated with complaints about the paucity of people inside the administration with a Wall Street background. In September, he and Blankfein were conspicuous no-shows when Obama delivered a major speech on financial reform at Federal Hall — an absence interpreted by the industry and the White House as a signal of their growing displeasure.

As Simon Johnson always likes to note, when Teddy Roosevelt sent word that he wanted to break up JP Morgan's railroad trust, JP Morgan responded “If we’ve done anything wrong, send your men to see my men and we’ll fix it up.” In other words, "if you don't want us to lobby, give us a seat at the table" and we can fix it all behind the scenes. Nice how little changes.

But one of the city’s most successful hedge-fund hotshots offers a different surmise: “The majority of Wall Street thinks, ‘Hey, you lent us money. We did a trade. We paid you back. When you had me down you could have crushed me, you could have done whatever you wanted. You didn’t do it! So stop your bitching and stop telling me I owe you, because I already paid you everything! That fact that I’m making money now is because I’m smarter than you!’ I think that’s where you’ve got this massive disconnect. In simple human terns, the government is saying, ‘I saved your life, and all you did was thank me once. You should be calling me every day: Thank you. Thank you.’ The guy who saved the life expects more. And the guy whose life is saved says, ‘I already thanked you!’ ”

It's things like this that make me take the idea of a doom loop seriously. Not only do they not get it, they on some level will forget, if they haven't already, that taxpayers and the Federal Reserve needed to step in. And next time they'll be bolder with the risk taking. Will the current financial reform bill be able to stop that?

-- Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on twitter.

By Washington Post Editors  |  May 24, 2010; 4:46 PM ET
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Krugman mentioned the "grownups stepping in" thing a couple of weeks ago

Posted by: bdballard | May 24, 2010 6:32 PM | Report abuse

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