Do Bankers Deserve Considerable Bonuses in Today's Society?

In today's culture, the pay of bankers is unregulated and banks are able to reward their productive workers with bonus payments. Investment bankers can receive bonus payments that exceed their annual salaries. With many people currently suffering from the decision to bailout several banks when investments went wrong, we should be asking ourselves whether bankers deserve considerable bonuses whilst many are unemployed and whilst governments control a significant stake in several banks.
The case for bonus payments centres around the belief that these bankers have helped to produce considerable profits for their company and should therefore be rewarded. In addition, there is a theory that if bonus payments were removed, the top performers would leave for another bank that would reward them for their profit-seeking performances. However, considerable research has been undertaken by Boris Groysberg, a professor at Harvard Business School, who noticed that bankers that left one company for another experienced a drop in performance that lasted for at least five years. This leads to the question of whether star performers do so well because of their own ability or whether other factors have a significant part to play.
Many argue that investment bankers don't deserve substantial bonuses, especially when other professions such as engineers and doctors don't receive additional financial payments. However, the nature of investment banking is very different, where profits are volatile and alternatively people argue that bonuses provide the necessary motivation.
It is hard to argue that if you have had a hand in producing significant profits for a company that you don't deserve a reward. However, a significant problem occurs when you consider the opposite. When you contribute to a significant loss for a company, the opposite of a bonus does not occur. An investment banker will not reach into their bank account to correct a poor investment and the debt produced from this poor decision is saddled with the company. As we saw in the 2008 financial crisis, this can happen and when it does, governments and in effect taxpayers are left to bailout banks who have made poor investment choices.
Therefore it can be argued that investment bankers do not deserve considerable bonuses, as long as they are unwilling to reach into their own pockets to refill the bank's balance sheet when money is lost from a poor investment. This lack of accountability for poor investments does not justify bonus payments being rewarded for when times are good.
This is of greater importance when countries are suffering from a global recession caused by the poor decisions of several banks. While millions remain unemployed, it simply does not make sense for banks that have received bailout packages to continue with this type of financial remuneration.

Fiscal Responsibility and the US Election

This week we look at the Federal deficit, its causation and the fundamental shift in thinking that must take place here in the U.S. to avoid our own version of the fall of Rome. The United States currently owes more than $16,000,000,000,000. That's sixteen trillion dollars. That is our total debt owed. The government sells new bonds and Treasury Notes to collect enough revenue to cover the interest payments due on the bonds and Treasury Notes that have already been sold that are maturing. This also makes up the funding shortfall from tax collection. The creation of new debt to service old debt is a good idea in a falling interest rate environment. Think of it as refinancing your house at a lower rate. Alarmingly, we are still spending more than we make, which adds to the total debt and our not so distant nightmare.
Global interest rates are at unprecedented lows because other countries are refinancing their own debts using the same methods we are. This is exactly what is going on Europe as they try to save their economic Union. This is the, "easy money policy," that the news and politicians refer to. The whole point is to be the first one to fill the market place with super cheap loans before interest rates start to turn higher. This is printing money and currency devaluation. We are trying to repay the expensive money we owe from debts we've previously incurred with newly printed cheap money. It works in theory until interest rates begin to climb. Think of it as revolving credit card debt that keeps getting rolled over to new trial offers. Once the offers wear out, the holder is stuck with the balance at an incredibly high interest rate.
When this happens to John Doe, he calls a credit counselor who tries to negotiate a settlement with the lender. The alphabet soup of regulation, the ECB, IMF, EFSF and others are shifting the burden of Greece's debt from the country to the European taxpayers. According to The Telegraph, European taxpayers will own 85% of Greece's debt by 2015. This is why the fiscally responsible Germans are reluctant to help the spendthrift Mediterranean countries.
European taxpayers want Greece to pay both literally and figuratively. The European credit card counseling sessions include forcing the deepest budget cuts Greece can endure thus allowing them to make their credit card payments. This includes cutting medical care, pensions, education, highway and water systems, etc. This also causes riots in the streets.
The U.S. owes $16 trillion. Nearly $10 trillion (62.5%) of that debt has been sold to U.S. taxpayers. Banks, insurance companies, state and local governments, pension funds, mutual funds, savings bonds and the Federal Reserve depository system account for 8 out of the top 10 holders of U.S. debt. China and Japan round out the top ten at numbers 2 and 4 respectively.
The Congressional Budget Office (CBO) has been issuing warnings for more than a year that the debt path we are on is unsustainable, stating that our budget deficit, our annual shortfall, will surpass $7 trillion within the next 10 years. These deficits are compounded. We add this year's shortfall to the previous years' shortfalls to come up with our total deficit. Long story short, our country will continue to spend more than we make for at least the next decade. This is the path to a Grecian outcome.
The United States must get its financial house in order. We cannot afford to fund Medicaid, social security, unemployment, disability, education and defense when servicing our current debt load leaves $.10 of every dollar available for funding. Would you have a problem getting by if $.90 of each Dollar you earned went towards your debts?
There are solutions. Briefly, corporate taxes must be cut so that businesses are encouraged to remain in the U.S, rather than incorporating offshore. Small business regulations and employee expenses must be cut so that American entrepreneurs can get back to generating breakthroughs in innovation. Remember, Microsoft, Apple and Google were all small businesses once. Finally, the balance between the, "haves" and the, "have nots," must be addressed. I believe that those who make more spend more and should pay more. Benefit programs must be reduced. A consumption or, Value Added Tax (VAT) that places a greater portion of the burden on those who spend the most could equitably offset some of the social program cuts. It would slow domestic consumption and encourage domestic savings as well as proportionately distributing the tax burden by making those who spend more, pay more. We need to act, as we would have our representative government act. Save more, spend less and get our own budgets in balance before the global credit counselors impose their will on our earnings and our country

Markets Hinge on Greece, a Market Looking for Perspective

Greece Needs Money to Avoid Default, But Complications Arise
Europe's financial issues have all the ability to gravely affect U.S. propositions. We have witnessed in the past, starting just last December, a stable climb in equity values. This climb is certainly coincident with the European Central Bank's (ECB) release of billions in loans to European banks. Not only a form of quantitative easing, but in reality a thawing of frozen European bank liquidity.
Presently, equities are moving sideways or otherwise stalled-as if they hold suspense in whether an economic shoe will drop. Certainly such is the case. For Greece; its debt, the exposure of this debt to world banks, and credit default swap parties, all swing in the balance, only for all to wonder of net losses.
Firstly we have Greece's need to reduce its debt. Aside from simply cutting its fiscal budget, the call is for Greece to reduce its sovereign bond payments. To make the reduction, private bond holders have been identified as targets. Where the taxpayer supported ECB has negotiated an exemption from loss, private bond holders will take a loss. Private bond holders are primarily composed of European banks, tied to international money like Lehman.
Cuts to bonds are 53.3% of face value, as negotiated by the International Institute of Finance, lead negotiator for the private sector. A 53.3% reduction in outstanding bond payments (or redemptions) comes from an effort of Greece to cut its fiscal budget, on the debt side, by 170B euros. Cuts to bond payments are demanded by the Eurozone for Greece to receive its second round of bailout money. Greece needs a second bailout, of real cash, by March 20... to make a 14.5B euro bond payment.
Who Wants to Take Half Off Their Investment
Cutting Greek bonds by 170B euro seems fairly expected and anticipated. Greece's fiscal budgetary cuts, however, are still very slippery and hard to hold. Currently, the goal is to see if the 53.3% cut in bond asset value will be accepted by private bond holders. The agreement due date for private bond investors is March 8.
Greece is hedging its own participation in the bond reductions by saying that if 90% of bond holders don't agree to the cuts, it's not obligated to continue with the plan. Big questions remain in the event bond holder participation is in the 75% to under 90% range. Should such a range develop, Greece says it will consult with the public sector.
Naturally, the glitch is that private bond holders aren't really excited to lose 53.3% off the top of their investment. Add to it the lost interest over the period of the bonds, and some say 70%. For large investors, these issues are why credit default swaps (CDS) are purchased.
A CDS is simply insurance purchased against loss on an investment. Should a bond issuer default (Greece), the CDS pays a negotiated percentage of the purchase value of the asset. CDS platforms get the asset and you as purchaser get the negotiated payment.
A key event that leads to CDS payment is default. Defaults are called credit events. A credit event can occur when one creditor is given payment priority over another creditor....subordination. Another credit event can occur when a majority of creditors take a reduction in payment or terms of payment, involuntarily.
Credit Default Swaps Could Cover the Losses
Looking to lose money, obviously anyone bondholder will get curious about their insurance policy. Curiosity is addressed to the International Swaps and Derivatives Association, which monitors CDS's. Because CDS's are essentially insurance policies, CDS questions are analyzed according to contract law. This means that if certain terms are not addressed in the CDS agreement, they will be addressed by Agency interpretation, rules, statute, or court rulings. In the end, there are no statutes, rules or court decisions. Which leaves agency interpretation as the law.
Euro bond holders asked two questions of the ISDA about their CDS insurance:
1) If creditors (bond holders) take a reduction in obligated payments on a bond versus the ECB not taking a reduction, is that a subordination? That is, where private investors take a cut in principle, but the ECB's principle is the same, is that a subordination.
2) If creditors submit to a bond cut of 53.3%, in numbers sufficient to bind all creditors, (2/3 of bond holders of record based on the Collective Action Clause), does that result in a credit Event (default)?
Maybe Credit Default Swaps Work, Maybe Not
The ISDA answered both questions saying no credit event is implicated at this time. For the ECB question, ISDA officials said documents addressing the 53.3% bond reduction mentioned no subordination. Though in reality it's a subordination of creditors to other creditors, it's not according to the ISDA.
Binding all bondholders through the Collective Action Clause is another issue. The Collective Action Clause is a product of legislation recently passed by Greece having retroactive effect. It requires that once 2/3 of bond holders agree to a measure, such measure can be treated as a collective act, and imposed upon all bond holders. It's akin to collective bargaining, and its associated laws.
Should the Collective Action Clause be enforced by Greece, the bond reductions will not be voluntary at that point. By implication of the ISDA's decision, such enforcement of the clause by Greece will be a credit event triggering CDS payments.
Bottom line: 1) Greece needs a second bailout of 130B euros to make a March 20 payment on bond redemptions of 14.5B euros. 2) Greece needs to cut 170B euros of debt and the Eurozone expects it to come from private bond holders. 3) The International Institute of Finance negotiated at 53.3% reduction on behalf of private bond holders. 4) March 8 is the due date to see if private bond holders will take the voluntary reduction. 5) Should 90% of private bond holders not accept the reduction, Greece will have to make a move against public entities holding their bonds. 6) Should the Collective Action Clause be invoked, or Greece not meet the demand of cutting 170B euros, a credit event is likely and will trigger CDS payments.

Construction Decline Hits Affordable Housing

The slump in the housing market has had far-reaching effects. Home prices have fallen significantly on existing homes, especially because there are so many foreclosures on the market. It has also affected new construction, including affordable housing projects.
Because there are so many existing homes on the market, the demand for new housing just isn't there. The need exists, especially for low- and moderate-income families, but developers are having a hard time finding financing. Investors struggle to see the benefit of new home construction of any kind when there are so many homes already on the market. In addition, many new construction projects are sitting idle, having lost their financing.
A story out of Massachusetts shows just how dramatic the effect has been. New construction permits in the state fell to 7,260 in 2011, compared to over 9,000 in 2010. That's a 20 percent decline in just one year. Unfortunately, the drop in production is mostly driven by the drop in single-family home prices. Markets across the United States are nearly saturated, creating the strongest buyers' market in decades.
The decline in new construction has a wide-reaching economic impact. Lack of construction jobs adds to unemployment figures. In addition, the lost wages translate into lost tax revenue for cities and the state. It also means less money is being spent in the local economy, potentially causing job losses in non-construction-related industries.
Though the foreclosure crisis has caused a sharp decline in housing sale prices, it has had the opposite effect on rental prices. Because more families have been forced out of their homes, rental units are in high demand. Consequently, rental prices have been increasing and the number of available units has been falling. The need for affordable housing has risen dramatically in the last few years, especially rental housing.
Restrictions placed on existing affordable housing prevent owners of those using from raising rent to reflect market rates. However, because more people need low-income housing, available units are being filled quickly. All across the country, cities and states have closed Section 8 and other affordable housing waiting lists to new applicants because the existing lists will take years to cycle through.
The combined slump in multi-family housing production and increase in rental prices points to a market need that affordable housing developers are uniquely able to meet. Their experience successfully completing low-income housing developments, combined with their knowledge of the housing market enables them to present solutions that are both creative and financially viable.

Good Times For The Brazilian Economy

China is not the only country receiving so much attention among the world's emerging markets. While this country may have a larger profile as the world's second largest economy, Brazil is likewise making waves in the news headlines.
It is among the fastest growing markets today, bucking global trends and remaining resilient in the face of a global financial crisis.
While the developed world is in the midst of uncertain times, Brazil's banking system and its economy in general are receiving accolades for its robustness. One such accolade was given by the Financial Stability Forum last 2009 in Basel.
The Eurozone crisis and the slowdown in the US may temper the growth of this BRIC economy, but its fundamentals remain in-tact and poised for continued growth. To illustrate this, the International Monetary Fund (IMF) has predicted a year-on-year gross domestic product (GDP) growth of 3.6 percent for 2012. In contrast, the financing institution predicted growth rates of 1.8 percent for the US, 1.7 percent for Japan, 0.6 percent for the UK, and even a contraction of 0.5 percent in the Eurozone.
Brazil is rich in resources as it, along with the rest of South America, is considered to be the world's breadbasket. The presence of what is believed to be about 50 billion barrels of pre-salt offshore reserves near the southern coast of Brazil may also set the country up to be a major exporter of oil and gas. Potential oil discoveries are also currently being investigated in the northeastern side of the country.
Economic Development And Growth
More specific signs of economic development are also present.
Tourism in Brazil continues to be a significant source of income for the South American country, which enjoys enticing beaches and 290 days of sunshine all throughout the year. Brazil also has a large number of UNESCO World Heritage Sites, beaten only by five other countries in the list of 130 territories evaluated by the UN World Tourism Organization.
Likewise, major sporting events like the 2014 FIFA World Cup and the 2016 Rio de Janeiro Olympics have ushered in billions of dollars in infrastructure investments that would help the country's economy become larger in the long run through tourist inflow and job creation.
Brazil has also made extra efforts to liberalize its property markets and allow foreign entities to get access to them. Laws have been significantly relaxed in order to accommodate landlords and the real estate industry and they've simplified their labyrinthine sets of laws that was only stalling further growth.
As a result, analysts are now seeing an unprecedented rise in property prices, which has then positively affected the construction and mortgage sectors. Exame Magazine reports that apartment prices across the nation have risen by 24.7% in April 2011 as compared to the same month a year before.
Even then, Brazilians are still relatively debt-free. Secured lending in Brazil is only equivalent to about 5% of its GDP. Meanwhile, the US has 68%; Mexico, 11%; and Spain, 45%.