Tuesday, April 28, 2009

"There is no more Wall Street."

In February, Frontline aired a documentary "Inside the Meltdown," a documentary on the financial crisis.

I was very busy with work and missed it when it aired on TV, but watched it last night online. I recommend it as a great resource for anyone looking for information about the collapse of our economy.

At one point, Senator Dodd recounts the moment the Treasury Secretary informed an elite group of Congressmen about the situation. After being told that Congress needed to hand over vast sums of money or the global economy would collapse, says Dodd, "there was literally a pause in that room where the oxygen left."

We were all left gasping for air when we were told that "the system" was drowning in toxic assets and the great titans of capitalism needed socialism to save them.

Money from the feds was needed - vast sums of money, trillions of dollars had to go to these Wall Street firms to "bail them out" - no strings attached.

That was what Paulson told us in those early days of the crisis. And in those early days, he wanted to use federal funds to snap up the toxic assets.

The goal shifted not long after that terrifying moment that Dodd talks about - for whatever reason, Paulson decided to save the system through "capital injection." The capitalists on Wall Street needed the government to inject capital into their businesses to shore up their books; of course we all remember that some of the capital was used to pay the bonuses.

Some of these firms are declaring profits this quarter.

The toxic assets still hang like an anchor around the necks of these businesses, but still they declare profits and then justify more bonuses.

It's a mystery that I'm not able to solve - how you can drown in toxic assets and declare a profit all in one breath.

The Frontline website has an absolutely fascinating interview with Alan "Ace" Greenberg, a brilliant man, I suppose, a leader at Bear Stearns, the head of its executive committee at the time of the company's collapse, a man whose clear-eyed view of the business can't help but be obscured by the foggy tendrils of self-deception.

Greenberg joined Bear Stearns just out of college and remained there until the end. In this documentary, he gives the insider's version of the industry - past, present and future:

"There is no Wall Street. It's gone. There is no Wall Street. It's a street just like Broadway or Madison Avenue now. There are no firms on it. The model of the investment banking firm is gone forever. It will never come back, in my opinion. There are no investment banks.

There were three basic ways that people could make money in the brokerage business: They could be strictly stockbrokers doing commission business for people; they could give advisory service to advise the corporations who were going to merge; ... and the third thing was they could be a full-line investment banking firm, which means they risk their capital to help their clients accomplish certain things -- give them bridge loans, buy their securities, hold them for a while, resell them.

That third model is gone, because it's been proven without a question of a doubt in the last year that a rumor can put any of these firms at peril. You certainly saw it with us. You saw it with Lehman [Brothers]. Even the firm that I had the most admiration for, Goldman Sachs, found itself the victim of rumors. And Merrill Lynch did. And both of these firms had to convert over the weekend to banks, had to have infusions of capital because they couldn't withstand the self-fulfilling prophecies of the rumors."

I find that last sentence remarkable.

"...These firms had to convert over the weekend to banks, had to have infusions of capital because they couldn't withstand the self-fulfilling prophecies of the rumors."

It was rumors that killed the beast, says Greenberg.

Never mind that Bear Stearns had leveraged itself heavily to get into the mortgage-backed securities market.

Never mind that it was a market built up on a rotten, shoddy foundation of granting $500K mortgages to people who earned $40k a year.

Never mind that, as Greenberg acknowledges, "the whole question of what the inventory was worth caused more problems."

The inventory Greenberg is referring to has been labeled "toxic" by a host of people a lot smarter than me. But for Greenberg, the possession of the toxic assets was not the issue.

Bear Stearns was the victim of "rumors."

Greenberg also believes that "the government didn't bail out Bear Stearns. JPMorgan bought Bear Stearns."

That $30 billion "capital infusion" handed to JP Morgan to help them seal the deal - that's a loan that just might end up being a good deal for the feds:

"My understanding is these securities have gone down more than a billion dollars, not much more. So the Fed is out a little bit now. But don't think the Fed just wrote a check for $30 billion and it's gone. That isn't the case at all. They have securities that may end up being worth more than $30 billion, and whether they'd like to sell them or keep them is up to the Fed."

I wonder about the value of the toxic securities that brought down the US economy. Is there really profit to be made from them? If yes, then why the siege mentality coming out of the Feds last fall? Surely, Paulson meant it when he said told those elite political leaders that the feds needed to bailout these companies - or else.

What lessons does a man like Alan "Ace" Greenberg take away from a crisis like this?

"I guess it's a question of overexuberance and getting caught up in thinking the good times are here forever and they never are. The tech bust of nine years ago certainly wasn't a surprise to me. That was so obvious, much more obvious than this. I had no idea that people throughout the country were buying homes they couldn't even come close to afford. It just didn't occur to me that the banks or the mortgage brokers at the grassroots level were doing these things. Maybe I should have known. I don't know why I would, though. So these things, if they're not built on solid ground, they just disintegrate in a hurry."

In other words, when a company is built on a rotten foundation, even a rumor can blow it away, leaving the equality of nothingness, I guess, if you believe in the gospel according to Greenberg:

"There are no fat cats on Wall Street. There are no skinny cats, no fat dogs -- there's nothing. There's nothing left. There is no more Wall Street."

Monday, April 27, 2009

Crisis a Boon to Wall Street Execs...

According to a story in yesterday's NY Times, those who work at Wall Street firms "are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits."

I have to wonder - where is this money coming from?

Aren't these firms clogged up with toxic assets?

Didn't the negative balances on the books of these companies drag down the country's economy?

So why aren't profits for this quarter being used to recapitalize after the losses of last year?

Have we reached a point in American capitalism that only the taxpayer responsible for the losses on the books of the Wall Street firms?

Wednesday, April 22, 2009

Contemplating Life Under the Golden Dome...

"Love your neighbor as yourself," the Bible tells us, but if you're a member of the Catholic hierarchy like Cardinal Francis George of Chicago or Bishop John D'Arcy of Indiana, love means never having your president speak at Notre Dame.

Or at least, not having President Obama speak - because he's a pro-choice guy and that doesn't swing with the Catholic pro-life doctrine. I'm sure they love the president like they love themselves - they just don't want to hear him speak on hallowed, Catholic soil.

According to the Chicago Tribune, Cardinal George apparently called Obama's selection "an extreme embarrassment."

In a statement, Bishop D'Arcy wants Notre Dame to ask itself "if by this decision it has chosen prestige over truth."

Thankfully, the president of Notre Dame has not caved to the pressure (yet.) I want President Obama to speak at Notre Dame - I want him to talk about the morality of the pro-life stance.

And by that, I'm not talking about the abortion issue at all. I'm talking about the fact that this group of graduates is about to enter the job market at a watershed moment in our history.

A focus on life is needed at a time like this - the life of each and every graduate. How will these graduates live and work and spend the rest of their days?

Will people graduating in the worst economy since the Great Depression even be able to get work?

As these students move forward into their life, I want President Obama to charge them to live morally - within the principles of the Bible they worship as Catholics. To do unto others as they would have them do unto them. To not covet the things that belong to their neighbors....

There's a thought. Let's ask those graduates to think twice before racing out to get the iPod, the car, the granite countertop, the copper gutters, the stuff that the neighbor has.

I want him to ask these students to live their lives knowing that money is the means, not the end. That if something doesn't add up, then it's probably not right. That maybe it's better to leave a job than to lose their soul.

I want the president to remind these students that a focus on fattening the bank book at the expense of reason and sound business practices might be at odds with their God's rules of order.

Notre Dame's class of 2009 are graduating into a storm of controversy, much of which is out of their control. For them - for all of us - there is more to the issue of "choice" than whether or not to have an abortion. Out in the "real world," these graduates will need to make moral choices every day. Like the institution from which they graduated, they will be called on to choose between "prestige" and "truth" on many occasions.

They will learn that life can be a slippery slope when you're in the middle of it.

I want the president to remind these students that a Notre Dame education, built on the foundation of morality provided by the Catholic Church, can be the key to success in this life - in so many ways. I want them to understand that the life they lead is their's to choose.

Saturday, April 18, 2009

A Great Use for Toxic Assets!

I have previously expressed my puzzlement at Tim Geithner's desire to create a market for toxicity by using tax dollars to snap up the toxic assets clogging the pipes over on Wall Street. Of course, he'll give "the market" the chance to buy these "assets" too, but if there are losses to take, it looks like, under his plan, the taxpayers will take the biggest hit.

The guys over at Baseline Scenario are promoting a better use of these funds - let's use these toxic assets to fund the bonuses of the Wall Street executives who worked so hard to accumulate them.

I like this idea. I like it very much. The guys on Wall Street worked very hard - and earned so very much - as they accumulated these poisonous assets on their books.

Let that work pay off - use those funds to pay their bonuses - not taxpayer dollars from the feds. The good news - I'll bet there'd be no regulatory strings attached to those bonuses....

The Baseline Scenario folks aren't claiming credit for this idea - in fact, they're holding a contest to determine who originally came up with this brilliant use for Wall Street's toxic assets.

Check it out here.

Wednesday, April 15, 2009

Reality Bites: Or What Passes for Entertainment These Days....

I launch my computer this morning to learn that NBC, which used to make the nation laugh a lot on Thursday nights, has asked Rod Blagojevich, the disgraced governor facing federal corruption charges, to appear on a reality TV show.

It is a program in which "celebrities" are taken to Costa Rica, where they must endure "fun and comedic challenges designed to test their survival skills."

Oh NBC. Really?

I suppose at first glance, it seems like NBC's golden opportunity - the chance to bring a Kipling-quoting shyster to a jungle to see him spar for survival with other entertainment types.

(And with Blagojevich coming to the jungle from the swamps of Illinois politics, he's got to be the odds-on favorite of the bookies.)

But if you think about it, he's a man asking a judge to postpone his trial so he can get paid to frolic in the jungle.

Blagojevich is not a celebrity. He's a crook.

He's a man who was forced to resign his post after being caught on tape trying to sell Obama's senate seat. He's a man who came to office vowing to clean up the state after the previous governor was sent to jail for corruption - and is now facing federal charges of racketeering, etc.

Once upon a time in America, disgraced politicians were - well - disgraced. Nixon slunk off for years after he resigned the presidency, depriving us of the "entertainment value" that comes with such failure.

Once, people were scandalized when a politician ran off with the public trust.

Today, a reality show calls such a man a "celebrity" - and seeks his participation.

Must See TV?

I don't think so.

Here's the story, if you want to read about it yourself....


FromMSNBC.com

Blagojevich may sweat it out in jungle TV show
Ousted Ill. gov. seeks permission from court to appear on reality program
NBC News and msnbc.com
updated 3:27 a.m. CT, Wed., April 15, 2009
Rod Blagojevich has been invited to take part in a reality TV show set in Costa Rica.

Based on a hit British program, "I'm a Celebrity ... Get Me Out of Here!" is scheduled to premiere on NBC on June 1. (MSNBC.com is a Microsoft-NBC Universal joint venture.)

The show will see a group of celebrities left in the middle of the jungle, with viewers voting on who should stay or leave. The impeached former Illinois governor, who pleaded not guilty to federal corruption charges Tuesday, reportedly could earn as much as $80,000 an episode.

NBC confirmed it wants Blagojevich on the show, saying in a statement: "Rod Blagojevich will be a participant on the show pending the court's approval."

According to WMAQ, Blagojevich asked a federal judge Tuesday to allow him to travel if his bond was increased. The impeached governor reportedly believes the show could help finance his legal defense.

'Survival skills'
NBC Entertainment described the live show as "the ultimate 'Swiss Family Robinson' as 10 celebrities are dropped into the heart of the jungle to face fun and comedic challenges designed to test their survival skills."

NBC said participants would be playing to win money for their favorite charities, with the last remaining star winning the largest share of the donation.

The show will air throughout the month of June, NBC said.

Tuesday, April 14, 2009

The Men with the Golden Touch....

I read this in a story that appeared in yesterday's Wall Street Journal:

"Goldman Sachs posted a $1.7 billion profit today — and with it, Goldman set aside $4.7 billion for salaries and bonuses."

As with most of what happens on Wall Street, I find myself bewildered by the math involved here.

I'm just not clear on how $1.7 million in profit is transformed into $4.7 billion for salaries and bonuses. Apparently, the $4.7 billion number is 50 percent of their revenues for the quarter.

Good deal for the executives at Goldman. Still not clear what the return on the taxpayers' investment will turn out to be.

Monday, April 13, 2009

Goldman Sach - Golden once again!

The Washington Post is reporting that Goldman Sachs has had a highly profitable quarter:

"...Goldman said its profits were $1.8 billion, or $3.39 a share, compared to $1.5 billion, or $3.23 a share in the same period a year earlier. That was more than double the $1.6o a share, analysts had been expecting on average."

The company is now promising to return the TARP funds they were given when Hank Paulson, one of their own, was the Treasury Secretary.

Some experts, however, are not happy to hear that profitable financial institutions want to pay back the money. Seems it will expand that separation between healthy and diseased banks we've been so worried about. Diseased banks will remain diseased - and like lepers of old, they will be shunned and isolated, causing them to eventually collapse.

So the theory goes.

I wonder just how long these experts think the US government should keep diseased firms on life support.

I think Goldman should pay back the TARP loan with interest. But I wonder - will Goldman Sachs pay back the backdoor TARP payouts they got from AIG?

All in all, there's no doubt that the crash of the US economy has been good to Goldman.

Bonus Season at American Airlines!

Not long ago, I wrangled a bunch of parents to volunteer for the school's annual carnival. A lot of work, but it's a volunteer position that gives me the chance to talk with people I'd otherwise never get to meet.

One of the moms who helped out is a flight attendant at American Airlines. During some down time at the carnival, she shared her frustration about the great divide between executive compensation and the pay scale for the rest of the people who work for American.

She had no problem with executives earning significantly more than other employees - her problem was that the executives who negotiated hard for union concessions in a number of areas - including compensation - then turned around and paid themselves an enormous bonus.

The flight attendant was outraged that leaders who asked for shared sacrifice apparently felt entitled to remove themselves from the opportunity to sacrifice with the rest of the company. According to this story in the Washington Post, bonus payouts to American Airline execs have totaled more than $300 million in recent years.

You know it's a bad corporate environment when bile about such things spills out during the school carnival.

So it's kind of funny that one of the ads you can download on the American Airlines site is called "Team Building," in which a middle-aged man engaged in "team building activities" with co-workers is looking desperately to escape the torture. And he looks to American Airlines as the vehicle for "Making his escape. Sooner."

At least the ad agency for American understands how it feels to feel trapped by one's work environment. And someone in the marketing department at American has a wicked sense of humor, given the swirl of negativity surrounding the company's employee-management relations these days.

Spring's here - and it's bonus time again for the execs at American. Though the amount of the bonuses to be shared by the executives has not been announced yet, the employees have launched a preemptive attack in a variety of media. (I came across this ad in the Chicago Sun-Times.)

Click on it and you're taken to a "contest" where you get to match up four CEOs (Steve Jobs of Apple, Eric Schmidt of Google, Gary Kelly of Southwest Airlines and Gerard Arpey, American's CEO) with their annual salaries.

Guess who gets paid more than the three other execs combined?

If you guessed Gerard Arpey of American Airlines, you guessed right. His salary is more than $4 million a year.

The ad, paid for by the Transport Workers Union, asks you to sign a petition telling the board to forgo bonuses for AA executives this year.

If you've flown American Airlines lately, you've most likely had a challenging experience. According to an April 6, 2009 report in the Austin Business Journal, American Airlines flights had the worst on-time performance in the industry in 2008.

According to the company's 2008 10K, "the Company recorded a net loss of $2.1 billion in 2008 compared to net earnings of $504 million in 2007."

So if executive bonuses were at all related to company performance, the discussion of bonuses would perhaps be tabled for the year. Not at American Airlines, apparently.

Should executives at companies that lose billions of dollars get bonuses? That's the question we're all being asked to consider these days....

Friday, April 10, 2009

The return on our investment...

As part of Paulson's Troubled Asset Relief Plan, JP Morgan Chase received $25 billion from the feds last October, making it one of the largest recipients of TARP funds.

In his October 10, 2008 press release defining the plan, Paulson assured the public that "this is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything."

Paulson, of course, was referring to the investment costs of TARP - and apparently felt that his plan would be a good deal for consumers. As he said in his press release:

"We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure. Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole."

Back in those days, the housing crisis was the great issue confronting the Treasury Secretary - all those many loans handed over to consumers who had no money to pay them back - and all those many consumers stuck in houses that were now valued at less than the mortgage. It was a sticky conundrum for the policy makers.

There is another credit crisis looming - the credit card crisis - huge amounts of consumer debt piled high on credit cards. And consumers who signed up for Chase credit cards are wondering if Chase has pulled a "bait and switch" on them.

According to this story on MSNBC, Chase aggressively promoted a "lower than prime" balance transfer plan. Transfer your credit card debt to this Chase card, and they would be charged the very low interest rate of 3.99 percent until the balance of the debt was paid off.

Apparently they changed the terms of the agreement after people signed up for the program.

According to the MSNBC story, "last November, Chase notified about 400,000 people with these low interest cards their minimum monthly payment would more than double and a $10 monthly service fee would be added."

It seems that less than a month after they received $25 billion dollars from the feds to help alleviate the credit crunch, Chase decided to make it harder on consumers who were squeezed by their own credit issues.

The NY Attorney General's office has negotiated an agreement with Chase to end the monthly fee. Additionally, a class action lawsuit has been filed against Chase, seeking to push the minimum payment back to two percent, among other issues.

Is it bait and switch? It's up to the courts to decide. But I'm sure some of the TARP funds will go toward Chase's defense.

Friday, April 3, 2009

Greed or Stupidity: David Brooks answers the question....

David Brooks' recent op-ed piece in the NY Times takes a look at what happened to the global economy. Why has all hell broken loose? Was it greed or stupidity?

In that he is a conservative Republican, Brooks does not agree with the "greed narrative" being used to answer the question, most notably defined in "The Quiet Coup" by Simon Johnson. In this narrative, greedy oligarchs usurped our democracy and took over our government.

Instead, Brooks finds comfort in the "stupidity" narrative, in which "overconfident bankers didn't know what they were doing."

Brooks see logic in the idea that the steady stream of Ivy League MBAs that populated Wall Street were too stupid to understand what was going on under their noses in their businesses.

Too stupid to realize that they had no capital supporting their loan policies.

Too stupid to understand that the insurance devices they were selling were insufficient to cover the potential losses.

Too stupid to understand that selling $500K houses to people who make $40K is a bad idea.

Too stupid to understand how business works.

Brooks has a simple explanation for how we clogged up the pipes in such a catastrophic manner:

"To my mind, we didn’t get into this crisis because inbred oligarchs grabbed power. We got into it because arrogant traders around the world were playing a high-stakes game they didn’t understand."

What's working for Brooks isn't working for me.

When you are paid tens of millions of dollars in compensation, you've opted out of the "stupidity" defense. Your company has made an enormous investment in your intelligence - in your ability to be a savvy and profitable businessman - your very intelligence is why you get paid those big bucks. You earn your astronomical salary, the theory goes, by using your incredible intelligence to foster success, not to glom onto the latest trend in finance. Frankly, the herd mentality should never be rewarded with such enormous salaries.

And let's face it - the "best and brightest" are never too stupid when money is to be made. And they made plenty as they contributed to the downfall of our economy.

Wednesday, April 1, 2009

The Impact of Money on the Ability to Lead

Rick Wagoner, newly retired CEO of General Motors, is driving away from his career with a $20 million retirement package. That's what's being reported in the MSM (see here for one of the stories.)

Wagoner had been CEO at GM since 2000 - so had nearly a decade to make an imprint on the company. Prior to that, he had been COO and CFO for the company - meaning he spent at least 15 years in the C-suite at GM.

His company exists today thanks only to the largess of the American taxpayer.

And thanks to the brilliant retirement package he negotiated sometime ago, Wagoner will never again have to work a day in his life – nor will his children. His time at GM was spent building up massive generational wealth that the autoworkers who worked for him cannot even fathom.

(It's funny when Detroit talks about the expense of building cars, they never factor the enormous compensation package of the CEO into the equation.)

The employees built cars - the CEO built wealth - for himself. The auto workers could be out of a job soon, but without an income cushion to sustain them. The leader who led the company to failure walks away with astronomical sums of money.

American leadership is in crisis - too many leaders in too many sectors are looking to the government for significant financial support these days. And yet, through it all, American leaders are paid handsomely, regardless of performance.

And their pay scale has expanded dramatically in the last two decades. According to the book Pay without Performance, by Lucian Bebchuk and Jesse Fried, the increase in executive compensation has been unprecedented:


"Between 1992 and 2000, the average real (inflation-adjusted) pay of chief executive officers (CEOs) of S&P firms more than quadrupled, climbing from $3.5 million to $14.7 million. Increases in option-based compensation accounted for the lion’s share of the gains, with the value of stock options granted to CEOs jumping ninefold during this period. The growth of executive compensation far outstripped that of compensation for other employees. In 1991, the average large-company CEO received approximately 140 times the pay of the average worker; in 2003, the ratio was about 500:1."

John Thain is a corporate leader who has earned hundreds of millions of dollars in his career in finance.

Hundreds of millions of dollars.

$300 million in stock from his time at Goldman Sachs.

$4 million in annual salary during his stint as the president of the New York Stock Exchange.

When he came aboard Merrill Lynch in 2007 as its CEO, he received a $15 million signing bonus.

As the last CEO of Merrill Lynch before it was folded into the Bank of America empire, he presided over a company that ended 2008 with $15 billion in losses for the fourth quarter.

Thain's company lost $15 billion dollars in just the fourth quarter.

Apparently, this was news to the multi-million dollar man. Because despite such a poor performance for the year, Thain lobbied hard for a nearly $40 million bonus for himself. He would have settled for $10 mil, but then was forced, thanks to the outraged rabble rousers known as the American public, to forgo his 2008 bonus altogether.

Why do our CEOs deserve such huge sums of money? When people feel their work deserves tens of millions of dollars annually as proper compensation for their efforts, we shouldn't get bankruptcy in return.

And when a company invests such astronomical sums in its leadership, it should demand nothing but the best.

With so many CEOs huddled together today in a welfare line, hoping for government handouts to ensure survival, it seems that we're far removed from getting the best that America has to offer.