Audit Notes: Forced Fed, Bank Wages, Schroeder on Buffett

The press continues to rifle through the Fed’s discount window data dump, finding that

Some 70 percent of all loans made through the program went to foreign banks. Bloomberg reports on details revealed about the toxic collateral the Fed took in exchange for its billions in loans through a separate bailout program, the Primary Dealer Credit Facility:

At the height of the financial crisis, the Federal Reserve allowed the world’s largest banks to turn more than $118 billion in junk bonds, defaulted debt, securities of unknown ratings and stocks into cash.

Collateral of those asset types made up 72 percent of the total $164.3 billion in market-rate securities pledged to the Fed on Sept. 29, 2008, two weeks after the bankruptcy of Lehman Brothers Holdings Inc., according to documents released yesterday. The collateral backed $155.7 billion in loans on the largest day of borrowing from the Primary Dealer Credit Facility, which was created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed.

“The fact that the Fed was willing to accept that collateral was indicative that collateral was very hard to come by at the time,” said Craig Pirrong, a finance professor at the University of Houston. It also highlights “the seriousness with which the Fed viewed the situation,” he said.

The central bank apparently released the data “in a format that impeded analysis,” in the words of the Times. Heather Landy of American Banker has more on that, in a post about her old boss and our pal the late Mark Pittman, who sued the Fed through Bloomberg to get access to the information:

The information was made available on computer disks - wait, people still use those? ­- that reporters could pick up from the Fed’s building in Washington (or have mailed to them if they were willing to wait). Viewable on the disks were reams of documents captured in an overwhelming number of PDF files meant to be opened one by one.

How Mark would have delighted in all this, not because he would have looked forward to spending his day opening PDF documents and doing the painstaking work of translating them into plain English, but because he understood and appreciated the fact that institutions - be they financial, political or otherwise - have a natural propensity to obfuscate.

I got a chuckle out of this:

Mark taught me nearly everything I know about the credit markets. When I worked on the corporate finance reporting team he led for a time at Bloomberg, he warned me there was nothing he could offer to advance my writing - some editors are wordsmiths; Mark was not - but the one thing he could really teach me, he said, was “how to get people to tell you sh*t.”

Sounds like Mark to me.

— Jeff Horwitz of American Banker reports that the whole financial crisis thing didn’t affect bank employees’ wages at all.

But the financial crisis appears to have had little impact on pay. Total compensation per full-time employee rose at the same pace from 2007 to 2010 as it did from 2004 to 2007. In the later time period, profitability plunged and the KBW bank index fell by more than 50%.

That’s an average for all bank employees, not just executives. This is fun:

American Bankers Association data on salaries for specific retail banking occupations confirm the trend. Out of a sampling of 18 jobs benchmarked in 2007, 15 posted salaries two years later that had grown faster than the rate of inflation, with the median 8% salary increase more than double the rate. The only positions that didn’t show substantial increases were the ones that paid the lowest salaries already, such as head teller ($31,000) and loan servicing clerk ($32,000).


Employees of the largest banks realized the largest gains. The increases significantly outstripped inflation and can’t be attributed solely to shifts in pay schemes or recovering profitability. Banking in general shielded pay from its cost-cutting ax.

— Warren Buffett biographer Alice Schroeder calls him out in her Bloomberg column for downplaying the David Sokol scandal, and she points out that it would be wise for the SEC to look at all of Sokol’s past trades:

Not surprisingly, according to the Financial Times, the SEC is now beginning an investigation. Presumably, it will look into whether there are similar patterns of trading in advance of other acquisition pitches by Sokol to Berkshire, whether consummated or not. One specific transaction that has piqued the curiosity of onlookers for months is Sokol’s purchases of shares of Middleburg Financial Corp. (MBRG) since 2010. And even if the SEC concludes that Sokol did nothing illegal, the known facts suggest that what Sokol did was wrong.

It would be inexcusable for the chief executive officer of Berkshire Hathaway to front-run a potential acquisition this way. Why then, couldn’t the CEO of Berkshire admit it is inexcusable for one of his own senior managers to do so? Instead of condemning Sokol, Buffett gave him a pat on the back on the way out the door. Since when is it enough to merely uphold the letter of the law, especially at Berkshire? Whatever happened to Buffett’s famous saying, “Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless”?

It’s too bad that Buffett missed an opportunity to show moral courage, stand up for principle, reinforce to his employees what he expects from them, and, not least of all, to live up to his own public reputation.

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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. Tags: , , , ,