Audit Notes: The System, Gamed, Carried Interest, Deseret

Michael Hudson, who’s got a book out in a few weeks on how predatory-lending fed the financial bubble, responds to Chrystia Freeland’s New York Times Book Review piece (which mentioned Audit Honcho Dean Starkman—see his post on that here) on business journalism:

Freeland praised the work of investigative reporters who had exposed wrongdoing in the financial sector, but added that “the bigger, more complicated truth about the financial crisis is that it wasn’t caused by evil businessmen. The overarching story is one of systemic failure, not individual wrongdoing. It wasn’t the Bernie Madoffs who plunged the world into recession. It was low capital requirements, weak limits on leverage, over-the-counter traded derivatives, soft rules on mortgage lending and global financial imbalances.”

Freeland is correct that all these factors contributed, in a big way, to the making of the crisis. But her argument has some holes in it.

First, it doesn’t acknowledge that real people were behind the systemic failures. The financial crisis wasn’t an act of nature; it was a man-made disaster. Corporate executives lobbied hard to get regulators to weaken oversight of banking and lending, pushing for the “soft rules” that helped create the home-loan mess.

Second, it minimizes the role that deception and corruption played in the debacle.

There’s certainly a dog-chasing-its-tail quality, as Hudson says, to the idea that the system caused the crisis but not individuals. Who set up the system, after all? Regulatory capture, for instance, didn’t happen by accident.

And certainly the vast majority of folks trying to make their next million on Wall Street or in the subprime strip mall weren’t and aren’t “evil.” But Norma, say, didn’t happen because the folks at Magnetar were trying to do the right thing.

— Speaking of gaming the system, the WSJ is good to keep an eye on how Wall Street is timing its bonuses to escape taxes.

With the specter of higher taxes looming in 2011 and banks still reeling from last year’s U.K. bonus tax, executives at some financial-services companies are considering whether to pay year-end bonuses, traditionally doled out starting in January, sooner.

Managing directors at Credit Suisse Group in London learned last Wednesday that they would receive a late-summer reward that will restore at least some of the money they sacrificed last year when the bank cut payouts in response to the one-time U.K. bonus tax.

— Yves Smith points to a great column by Loren Steffy in the Houston Chronicle a few months ago on the insanity of carried-interest taxation.

Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn’t pay. It’s a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly.

Hey, you can’t blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. In fact, now that Congress is threatening to close that loophole, the private equity world has erupted with an anguished wail. Such is the reaction when the privileged few are asked to pay their fair share.

Hey, the newspaper industry could use a break these days, no? Think our lobby can ram that provision through Congress?

— Finally, the Deseret News is gutting its newspaper staff by nearly half. You’d think there would be no way for a self-respecting newspaper to put a happy face on that one. Pravda might have grimaced at the task. But here goes:

“Changes in the industry have forced some newspapers to fade or even close,” said Clark Gilbert, Deseret News CEO and president. “At the Deseret News, we choose to lead and innovate.”

Part of that leadership, he added, is the willingness to make hard choices.

“Today we have announced the reduction in our print work force by 57 full-time and 28 part-time employees, which reflects just over 43 percent of our work force,” Gilbert said…

At the same time, he said, the Deseret News is now positioned to print a daily newspaper into the foreseeable future and expand its reach and influence throughout the world.

Sure, boss!

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.