For public relations professionals, the protesters in Zuccotti Park in Lower Manhattan must inspire mixed feelings. The location works, and the crowd makes for good television, but crunchy sound bites are hard to find. The movement’s anticorporate rant lumps together complaints as varied as mortgage foreclosure wrongs and torture. And the idea of “a feeling of mass injustice” is less compelling than the Tea Party’s clear “taxed enough already.” Breakingviews offers a practical and sharper, if only partial, manifesto for Occupy Wall Street.
First, make banks safer, and let them fail. Bailouts have left banks with handsomely paid bosses, some of whom are resisting sensible reforms. Regulators and legislators should not be scared to require more capital, however much bankers complain. And the authorities need to push on with making it easier for collapsing institutions actually to go bankrupt. That way investors, not taxpayers, pay the price for reckless financial behavior.
Second, name and shame fat cat salarymen. The Securities and Exchange Commission is expected to start the ball rolling soon with a new rule requiring companies to disclose the ratio of a chief executive’s pay to that of the median employee. Management theorists used to suggest that the top executive was worth about 20 times as much as the average, but this multiple has rocketed in recent years. Disclosure might not change practices much, but it is a start.
Third, free legislators from special interests. Long, expensive and frequent campaigns have left some politicians enslaved to extreme supporters and most too heavily influenced by free-spending lobbyists. Unless senators and representatives start to care less about re-election and more about the common good, there’s little hope of real progress in narrowing the gulf between the haves and have-nots in America.
Fourth, and probably least realistic, change the United States’ two-party system. The Democrats and Republicans are unimaginative and entrenched by both rules and tradition. The political center ought to be fertile ground given the current dysfunction on fiscal matters, but why not the wings, too? If Occupy Wall Street can come up with a coherent platform, then — in honor of the epicenter of the protest — the “Z Party” has a nice ring.
Bank Profit Confusion
The parallels between the current market turmoil and the 2008 collapse become more striking by the day. The latest crisis throwback is the bizarre earnings boost created by banks’ deteriorating creditworthiness. UBS says this effect added 1.5 billion Swiss francs ($1.6 billion) to its bottom line in the third quarter. Accountants, rather than banks, are to blame. But financial firms are still inconsistent when reporting this perversity.
Since 2007, banks have had to report changes in the fair value of their own liabilities. When the market price of debt falls, liabilities are reduced from an accounting perspective, allowing the company to recognize a profit. Rising bond prices produce a loss.
For banks, this was particularly pronounced in 2008. As credit risk premiums on their debt soared, many booked large one-time gains: Morgan Stanley enjoyed a $5.1 billion profit that year. That reversed when risk premiums fell back. Now debt prices are tumbling again. For UBS, the resulting gain partly offsets the $2.3 billion hole left by a rogue trader, allowing it to report a modest, but psychologically important, net profit for the quarter.
Not all banks are straightforward about reporting these items. Some have shown a tendency to emphasize losses from this accounting effect while playing down gains. In the third quarter of 2007, Lehman Brothers quietly used paper gains on its debt to offset leveraged loan write-downs. And it took an analyst’s question to make Bank of America admit that $2.2 billion of its first-quarter 2009 revenue came courtesy of a decline in the value of Merrill Lynch debt. Banks like Citigroup and UBS include the gains and losses in the results of their investment banking arms, while Credit Suisse and HSBC, for instance, keep them out of divisional reporting.
Banks say they have little influence over the fluctuations. Goldman Sachs seems to be one of the few that has minimized the effect with hedges. And Europe is phasing out the accounting rule in 2013. But inconsistent reporting makes it harder to filter out the noise. With investor confidence lower than ever, that’s something banks can do without.
For more independent financial commentary and analysis, visit www.breakingviews.com.
