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An eye on Wall Street

7

Obama misses the target. Needs an eye-test?

‘Obama stands for ‘Change’, ‘Change we can believe in’ – these were some tall claims that were heard when Barack Obama took over as US President a year ago. Now the agenda of ‘Change’ itself seems to have changed.

Obama-Change

What was once the big bad world of Wall Street as seen from Obama’s eyes when he ran for President, does not seem bad after all – the notorious business of hedge funds have clearly fallen in the blind spot. Obama is fighting to limit the salaries of CEO’s, and now takes the battle further by making noise about restricting Proprietary Trading. Point well taken that Obama is taking baby steps before he can take on the big bad boys of Wall Street. But why is Obama not training his gun at hedge funds straight away?

Hedge funds are (in)famous for being the vehicle for high-risk high-return seeking investors (read, movers and shakers of Wall Street). The government has poor visibility and lax controls into hedge funds including its investors, the traded securities, the frequency of trading, the risks taken, the market impact etc.,. In other words they are very poorly regulated, if at all. It is this veil of ‘Hedge funds’ which is giving raise to (or protecting) high-frequency trading which the SEC is now looking into; the world’s top financial companies having been embraced and already are making millions of dollars on their own money (Proprietary Trading) or through servicing their clients (mostly, Hedge funds).

Is Obama afraid of the political fall out when Hedge funds show gaping holes in their governance and that most of the clients are close to the Government or other prominent personalities, and pose a threat to his Presidency when exposed?
Is he afraid of unleashing a can of worms that might roil the markets once again?
Does Obama need to review the goals and achievements from last year and make sure the agenda of ‘Change’ is really still on?

Joke of the year- Paulson calls CEO pay excessive!

warren-buffett-paul-henson

Henry Paulson told Warren Buffet in a TV interview [Videos – Part 1, Part 2, Part 3 ] that the current CEO payout is ‘out of whack’. When CEO pay is 400 times of an average employee’s salary, we completely agree with you. But wait a second. Is he the same gentleman who took home $18.7 Million cash (in six months of 2006), and stock and restricted shares worth more than $500 million when he moved on from Goldman Sachs? Bull’s eye!

Paulson doesn’t offer any reason for why he deserved what he got paid, but present day CEO’s shouldn’t be rewarded on the same scale. A purist would think that the rewards should be commensurate to the long term returns of a company and the quantum of risk and leverage using which those results were achieved. How will a CEO earning tens of millions of dollars ever share such a view?

When as a Wall Street veteran, Paulson miserably fails to make any intelligent reflection of the problem plaguing the system and to suggest any plausible course of action to get this ‘out of whack’ system back in working order, the problem itself is quite evident.

It is like the old saying “Do as I say. Don’t do as I do”.

  1. Vishal Sanjay says

    A brilliant post Madhav, I’m sure that the American economy is headed for a tumble and Obama is afraid to state the deteriorating state of the american economy, the Indian government made a wise move by buying gold instead of the dollar.

    Well when the high executive pays are concerned even Indian CEOs are good at it, Mukesh ambani takes a heavy 49 crore a year and Kalanidhi Maran of Sun network takes 88 crore rupees every year. What do you say about this? Is it a major concern.

    1. Madhav Shivpuri says

      Thanks Vishal.

      Yes, corporate governance is a global problem. In India I doubt if there is too much resistance the CEO’s meet from their board or their investors. In many companies spouses, family members and relatives are given top jobs irrespective of their qualifications.

      The promoters (founder, CEO, Chairman, directors etc.) own pretty large share of the company, pay themselves crores in salaries, get commission, stock options and what not. The employees, investors, directors nor regulators question the practice. Even research analysts do not question the executive compensation. So, when the ‘system’ is such, the retail investor who cares about such stuff hardly raises a finger. They may blog about it or complain in private but that’s about.

      The Indian Govt. has done a good job of regulating banks and markets, but accounting and governance standards are much behind US or UK. I am wondering when India adopts IFRS accounting standard (http://www.iasb.org/Home.htm) may be more transparency and governance may be required which would be a blessing to the investor who cares. Keeping my fingers crossed!

  2. Madhav Shivpuri says

    Spot on, Ankit. The world is not disconnected any more, not that it was even in the last decade. When the dot com bubble burst in 2001, people in India lost jobs, companies closed down and it took all of 4-5 years for the economy to get back on track.

    In today’s world US reigning in executive pay, restricting Proprietary trading, UK going to bat against executive pay threatening a 90% tax on bonus, even China’s capital reserve ratio tightening, PIGS (Portugal, Ireland, Greece, Spain) in heavy sovereign debt, Dubai World’s financial crisis also matter to India. All factors are not pertinent to the same degree but do have some impact at the macro level which is better to understand than not.

  3. balaji yadhav says

    Why would anyone care in India about whether Obama controls executive pay in america or not

    1. Ankit says

      Agree that it may not directly affect us, but it is no surprise that the U.S. economy causes tremors in the global economy too including India.
      It is a good perspective to get a hang of what is going on in the so called super power U.S. of A.More than that, the executive pay is a good lesson for companies all around the world.The perks need to be aligned to long term objectives and should not be laid out in platter for CEO’s who deliver short term wonders

  4. Ankit says

    Brilliant Post!! Infact, have been reading Paul Krugman’s take on the U.S. environment ala after Mr.Change took over.

    Be it health,finance and any other sector that Obama administration has made reforms, he has pointed out serious flaws.It is one thing to make tall claims and woo the voters, and another to take the consumer interest as t priority.
    The industry lobbyists are bullying the government big time especially in healthcare reforms.
    Its about time someone “Walked The Talk”

    1. Madhav Shivpuri says

      Ankit,

      Thanks for the compliments :-)

      Yes. As the world has witnessed, Obama is doing a matrix – bending, dodging and deflecting the bullets from the opposition. Hope going forward his actions keep up with the big dreams that the citizens and the world were shown.

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