How to Cover Wall Street

Today I learned a new phrase: Moral Suasion.

From Investopedia:

A persuasion tactic used by an authority (i.e. Federal Reserve Board) to influence and pressure, but not force, banks into adhering to policy. Tactics used are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats.

It would be nice if it worked. Consider these three news events from the week:

• Ecuador defaults on its foreign debts, leaves investors in the lurch.

• Despite a Freedom of Information request, the Fed still refuses to say which banks they loaned $2 trillion to, and what kind of tricky collateral they  accepted in return.
• The Bush Adminstration retreats from its old position on the auto bailout, and is now considering using TARP funds.

In each case, the persuasion tactic didn’t matter because actors are unpredictable.

What could Barack Obama’s plan to save or create 2.5 million jobs by investing in green buildings, schools, and transportation mean for Wall Street? Deals, deals, deals.

Check it:

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There seems to be a myth that bankruptcy for the (former) Big Three would spell Armageddon. Not true.

It is getting harder lately for companies to reemerge from Chapter 11, true. For example, this year Circuit City and Linen N’ Things were forced to liquidate when they couldn’t find a white knight.  Such a Chapter 11-is-the-new-9-scenario could be especially disastrous if the autos went under, and would drag their suppliers under the bus too. We can and should avoid this.

But giving a company like GM a blank check just because its CEO Rick Wagoner has ditched his jet and gone to Quiznos, well that’s a recipe for disaster as well.

There is another way. The government could sponsor the automaker’s bankruptcy. This way they win more concessions than with a bailout. Andrew Ross Sorkin lays out the plan.

“Taxpayers shouldn’t fork over a cent until shareholders are wiped out, management is tossed out and the industry is completely reorganized,” he wrote.

What say you all?

I’d love for Gotham to continue to take its slice of outsize Wall Street bonuses and throw it at health care, education and police as we did in the good years. Too bad the zeitgeist is elsewhere.

As Greg wrote, the Mayor gets 9% of his revenue from Wall Street, and the Governor relies on financials for 20%. Not to mention, bonuses have helped sustain New York City’s housing market and the not-for-profit community.

But these days America is hungry for a bit-o-vengeance, and Rep. Henry Waxman and Rep. Barney Frank are happy to comply.

Goldman Sachs and UBS have curtailed executive bonuses for the year, and other financial firms are sure to follow.

In fact, the very concept of a bonus has come under attack.

Researchers at the Center for Financial Studies (CFS) at Frankfurt’s Goethe-University released a study accusing bonuses of playing a significant role in leading us off the cliff of the financial crisis.

And Dan Ariely, a professor of behavioral economics at Duke, recently outlined his anti-bonus research on the op-ed page of the Times. Ariely’s subjects, one group from India and one from MIT, were given monetary incentives to complete cognitive tasks. Those offered the biggest bonuses in both groups fared worse than those given medium or small bonuses.

Ariely concluded that money “motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.”

The professor presented his results to a group of banking executives but they weren’t interested in examining themselves.

Fed chair Ben Bernanke said Wednesday to expect economic activity to “fall short of potential for a time.”

A bit of an understatement on the day that the Dow dropped another 733 points, eh?

Peter Goodman at The Times noted Mr. Bernanke also made this curious observation at his Economic Club of NY appearance:

The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem. And that problem, we’ve just recognized now in the current situation, how severe it is.

Just recognized? That’s right. I forgot the banks just kinda merged themselves.

Or has this all just been a red scare?

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