As if the economic recession wasn't hard enough on Americans, seeing the government spend billions to bail out Wall Street has made it all even harder for the average person to take. Yes, we all want to avoid global financial collapse. But the way the government rescue of the banking industry is playing out seems to be adding insult to injury.
Here are eight recent examples:
Wall Streeters can still expect big bonuses this year When the government agreed to bail out Wall Street, the goal was to provide funds to shore up banks' capital bases so they would start lending again. It wasn't to help them fund the bonus pool. But estimates run that as much as $70 billion will get paid out in bonuses to bankers this year. That amount equals 10% of the $700 billion bailout. Sure, the bonuses will be smaller than last year and fewer people will get them, but there will still be lots of six-figure payouts to go around.
A Goldman hot shot got the job of doling out all that money Neel Kashkari, a 35-year-old former Goldman Sachs whiz kid who believes in free markets, is getting the job at the Treasury Department of dispersing the government's $700 billion rescue. Is he really the right person for the job? Gawker has been merciless, publishing his high school yearbook page that features a Ferrari and lyrics from the rock band Rush. But lots of observers have wondered if a seasoned vet with a little more political experience might be a better fit for the task at hand.
I've never gotten a signing bonus. In my 20 years of work since graduating from college, I've been hired for seven full-time positions and it never really occurred to me to ask for one. Usually I was happy to get the position -- a new challenge! -- and a salary increase.
So, it grated a bit when l read about bankers at the defunct Lehman getting signing bonuses to stay at firms that acquired their divisions in bankruptcy proceedings. The Financial Times reported that Nomura, which bought Lehman's European and Asian divisions, gave bankers cash equal to last year's bonus if they agreed to stay at Nomura for a year, for example. The article covered a "scramble for talent" that took place when all those Lehman execs were suddenly available for hire.
Bank of America is also reportedly promising Merrill Lynch brokers a bonus as big as as 100% of the revenue they generate to stay after the deal is closed -- even though the sale was done to avert Merrill's demise.
Apparently even undergraduates are still getting signing bonuses when hired at investment banks, according to web site Banker's Ball. The average salary posted in the comments is about $60,000 with a $10,000 signing bonus (plus a target $30,000 or $40,000 year-end bonus depending on the position).
Around the world, governments are flooding the market with new currency in order to stem the tide of bank collapses and slippery stock market slopes. They are taking over financial institutions, absorbing debt, lowering interest rates, nationalizing some private companies, investing in others, and rebating taxes through stimulus packages to increase liquidity and spending.
So far all we can say is that the world is still open for business, but it is a different world. Even gold and oil are down significantly.
In concert with world markets, the stocks in my daring (maybe fool hardy) story I posted a few months ago Serious Money: Tempting fate with 10 financials -- buying into a pool of financial stocks at a time when the "hate 'em" factor was at a peak, or so I thought -- are down even more. I think I am turning into the web's leading glutton for punishment by posting such stories. However, while my stock ideas have taken a beating now and then, I hope my integrity has remained intact.
Nine of the ten financial stocks I wrote about are down or out at this point. When I last reported, the portfolio was losing 4.8%, and now it is losing 47% to date, not counting dividends. Only MBIA Inc. (NYSE: MBI) is up and there are question marks about this company too.
It's only been a few weeks since Henry Paulson begged Congress for $700 billion to bail out Wall Street, but Americans already seem to be coming to terms with the mountain of cash that they have had to lay out. Then again, one can only maintain self-righteous anger for so long and, with the onset of winter, finding ways to pay for heating and Christmas trumps the desire to set fire to the local bank. Still, as today's outrage becomes tomorrow's history, it is vital that America find a way to package this episode.
The first struggle has been to come up with a name for the Wall Street meltdown (I still like "Bernanke Panky"). However, as that plays out, it's time to begin finding a villain to blame. This is tremendously important stuff. For history to be written, complex events must be boiled down to a single cause, preferably an individual who can take responsibility for everything. For example, as every schoolchild knows, LBJ caused Vietnam, Hoover caused the Great Depression, and Nixon caused Watergate. Never mind that these men were the products of their ages or that history is a complex process. Children need villains, history demands explanations, and Americans crave resolution. Never mind that millions of homeowners signed up for mortgages that they couldn't pay, that millions of investors blindly purchased worthless securities, and that the groundwork for this disaster was laid by Democrats and Republicans demonstrating an impressive, albeit bipartisan, ignorance. History must be written and blame must be laid. Chances are, it will end up falling on one of the following people:
Much as I find it hard to muster sympathy for thousands of overpaid investment bankers forced to walk to the unemployment office in their designer shoes, the news that Lehman Brothers Holdings Inc. (NYSE: LEMQ) won't be paying them severance made me feel a little sorry for them.
According to Bloomberg News, the New York-based firm recently notified employees that they will not receive a payment on October 3 or after. The company reneged on a promise to the fired workers to pay them severance until August 2009. Workers who want the rest of their compensation will have to file a claim with the bankruptcy court. It will take years for the former employees to get paid through Chapter 11 and even then they might only get a fraction of what they are owed.
Bloomberg reports that it is not clear how many former Lehman employees have been affected. You can bet that members of Congress and the Department of Justice will be interested to know if Chief Executive Richard Fuld will receive a golden parachute once Barclay's PLC (NYSE: BCS) completes its takeover of the once-storied New York investment bank.
The Securities and Exchange Commission, or NAMBLA for short, is focusing its resources on an investigation of whether gossiping short sellers hastened the collapses of Lehman and Bear Stearns by spreading rumors.
The SEC is looking into a variety of rumors that spread in the days and months before the companies collapsed, including suggestions that some counter-parties had stopped trading with the firms.
Let's just say they did spread the rumors, which I don't believe they did (and, as an aside: if a company can be brought down by the corporate equivalent of 7th grade girls passing notes in class, perhaps it doesn't deserve to be in existence anyway).
It's a shame that the SEC is tossing its very limited resources into wild goose chases that serve to intimidate the people who were smart enough to predict trouble at companies like Bear and Lehman, long before either company was giving investors the full story.
In the end, the short sellers were proven right because Lehman was insolvent, and a buyer couldn't even be found at $1. You can only blame the company's management for creating that mess.
With Lehman Bros. in the midst of winding up what's left of its operations following its bankruptcy filing, chairman and CEO Richard Fuld has been kicked out of the corner office at Lehman's Manhattan headquarters -- and sent packing to to a 41st floor office at 1271 6th Avenue.
Lehman's building at 745 7th Avenue is now the headquarters for Barclays' investment banking operations. It has no use for Mr. Fuld. With a flair for drama, The Wall Street Journalsums it up (subscription required) this way: "Napoleon cooled his heels on Elba. The Dalai Lama lives in Dharamsala, India. And Lehman Brothers Holdings Chairman and CEO Richard Fuld Jr. will be banished to 1271 Sixth Ave."
Meanwhile former CFO Erin Callan -- who was pushed out as a sacrificial lamb back in July -- gave her first post-Lehman interview to Fortune, telling the reporter that Mr. Fuld had been brought to tears by the difficulties the company was facing.
If you're in the market for $15 million worth of Fuld's modern art collection, Christie's has got you covered.
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If not for the collapse of Washington Mutual (NYSE: WM) this week, I would probably not have posted this saga so soon after last Monday's report. However, since I was a shareholder of WaMu and thought there was value in it when I posted Chasing Value: Are you watching WaMu? I felt it was time to take my lumps.
I cannot go on ranting and raving about the failures and deceptions of others without making sure that I am forthright and transparent myself. I did post Chasing Value: Not -- WaMu one week later - ouch! but now WaMu is toast and so is some of my money.
Since I posted Serious Money: Tempting fate with 10 financials, the results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak, with each passing day investors have found something more to hate.
The portfolio is losing 4.8% to date, not counting dividends. Some of my colleagues thought it was way too early to get back into the financial sector; seems that way now, and one read me the riot act for reporting the story so soon on MBIA Inc. (NYSE: MBI) being up substantially.
In the wake of the collapse and bankruptcy of Lehman Br Holdings (OTC: LEHMQ), chairman and CEO Dick Fuld and his wife Kathy have begun selling off their prized collection of modern art. The couple has been consigning parts of their collection to Christie's, the renowned auction house. 16 post-war drawings have been consigned with a pre-sale estimate of $15-$20 million. At its peak, Fuld's stake in Lehman was worth just under $1 billion, but those shares are now virtually worthless.
What does all this have to do with Lehman, the proposed bailout of the banking industry, and the economy? Nothing really. But at least it's now clear that the insiders will be suffering alongside taxpayers and foreclosed homeowners: Fuld has to part with $15 million worth of post-war drawings!
Who's going to buy that art, you ask? Perhaps hedge fund manager David Einhorn, who was one of the few people calling Lehman's bluff a few months ago, will drop a few bucks to redecorate his office.
BusinessWeek offers an excellent critique of Treasury Secretary Henry Paulson's $700 billion plan to conduct a reverse auction of $13 trillion in financial toxic waste. But more importantly, it proposes a solution that could be just what we need to solve the problem -- recapitalizing the strongest banks and letting the weakest merge or fail. As I posted, such a strategy would not only solve the real problem -- a lack of capital -- but it would give taxpayers an equity stake in those banks. And that stake might be sold at a profit in a future economic recovery, helping us recoup our investment in this plan.
What exactly is the problem? Too much financial toxic waste and not enough capital to back it up. More specifically, financial institutions (FIs) holding the $13 trillion in mortgage-backed securities (MBS) and collateralized debt obligations (CDSs) only have about $340 billion in capital. So a 2.6% decline in the value of that toxic waste wipes out their capital. To estimate how much capital it would cost these FIs to write that down, I will assume that have already partially written it down -- to 60 cents on the dollar -- or $7.8 trillion. If its market value is even lower, say 20 cents, they would need to take a $3.1 trillion write-down to mark it to market -- leaving FIs with a capital deficit of $2.8 trillion ($3.1 trillion minus $340 billion).
Paulson's plan is deeply flawed since the reverse auctions -- which reward the FI willing to sell its toxic waste for the lowest price -- will either add misery to FIs or taxpayers. The FIs that sell toxic waste that's on their books at 60 cents on the dollar for, say, 20 cents on the dollar will be required to take a 40 cent loss. This will deplete their capital as I illustrated above and they will not be able to raise more.
How many billions are Paulson and Bernanke asking for? Seven hundred billion dollars. Now that's real money! And the administration is touting this new program as if they knew what they were talking about.
We have heard folks wondering how and why Treasury Secretary Paulson should be given the power and discretion to do as he sees fit with this bailout money.
We have heard people speaking about the pain and the injustice, along with the doubts and reservations about the concept of giving away so much money.
Actually giving this handout to companies that have demonstrated such corrupt thinking and irresponsibility (see SEC opens the gates and the world drowns) is a supreme injustice given that their decisions led to the collapse of once-mighty financial industry titans. See Lehman Bros 158-year sad ending for just one example.
Has anyone asked how the Treasury came up with that number? Can someone explain the difference between $700 billion and a blank check?
Let's be polite. It looks like John "Straight Talk Express" McCain may have misspoken when he said that his campaign manager did not receive money from Freddie Mac (NYSE: FRE). McCain said in a CNBC interview on September 21 that his campaign manager, Rick Davis, "has had nothing to do with [Freddie and Fannie Mae (NYSE: FNM)] since [2005], and I'll be glad to have his record examined by anybody who wants to look at it," according to the New York Times. He was either kidding, having a senior moment, or worse. It turns out that Freddie paid Davis "$15,000 a month from the end of 2005 through [August 2008]," according to the Times.
Although Davis did not do much for the money -- besides retain his ties to McCain -- his firm, David Manafort, got $500,000 from Freddie and $2 million between 2000 and 2005 as president of "the Homeownership Alliance, which [Freddie and Fannie] created to help them oppose new regulations," according to the Times. It's too bad because more regulation might have prevented the need to spend $200 billion worth of our money to bail out Fannie and Freddie bondholders like PIMCO's Bill Gross and China's People's Bank.
Sure, McCain has been trying to change the subject -- by creating, what I consider to be, false advertisements that accuse a former Fannie CEO of advising Obama. (This former CEO and the Obama campaign both deny the ad's claim, according to the Times). And while McCain's "verbal missteps" may disturb some, his pattern of working closely with those who deregulated the financial services industry links him to what put our economy in the tank. After all, his chief economic advisor, Phil "Americans are Whiners" Gramm, deregulated the Credit Default Swap (CDS) market that helped bring down Lehman Brothers and American International Group (NYSE: AIG).
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The FBI wants to know if there was any fraud in the actions that caused the collapses of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), AIG (NYSE: AIG), and Lehman. The agency may want to save its time. The probable cause of all the trouble was much more likely to have been stupidity.
According toThe Wall Street Journal, :Pressure is building for the FBI and regulators to hold top executives accountable for the crisis that has crippled the nation's finance sector."
The FBI is not likely to find criminal behavior. It is likely to find that executives at big financial companies did not understand the most complex financial instruments that they were buying. They did not understand the risk of the value of those instruments dropping if subprime mortgages began to default at historically high levels. These executives pushed to be paid well when the instruments were making money but have not had huge pay cuts now that the results from the investments are causing huge losses. It is none of the FBI's business that CEOs being kicked out of these operations are getting big pay packages.
One of the reasons that there was unlikely to be wrong-doing is that CPAs spend tremendous amounts of time going over the books of large banks and brokerages so that their audit firms are not liable for allowing fraud to make it into financial statements. They learned that lesson from Enron. Fannie and Freddie's books are subject to government scrutiny, which make fraud even less likely.
Looking for criminal actions at the company's is waste of FBI time. The agency probably needs the investigations to look good. They would not want to be accused of being caught sleeping.
As if the economic recession wasn't hard enough on Americans, seeing the government spend billions to bail out Wall Street has made it all even harder for the average person to take. Yes, we all want to avoid global financial collapse. But the way the government rescue of the banking industry is playing out seems to be adding insult to injury. 
I've never gotten a signing bonus. In my 20 years of work since graduating from college, I've been hired for seven full-time positions and it never really occurred to me to ask for one. Usually I was happy to get the position -- a new challenge! -- and a salary increase.
Around the world, governments are flooding the market with new currency in order to stem the tide of bank collapses and slippery stock market slopes. They are taking over financial institutions, absorbing debt, lowering interest rates, nationalizing some private companies, investing in others, and rebating taxes through stimulus packages to increase liquidity and spending.
Much as I find it hard to muster sympathy for thousands of overpaid investment bankers forced to walk to the unemployment office in their designer shoes, the news that 
The Securities and Exchange Commission, or NAMBLA for short, is focusing its resources on an 
If not for the collapse of 
How many billions are Paulson and Bernanke asking for? Seven hundred billion dollars. 
Let's be polite. It looks like John "Straight Talk Express" McCain may have misspoken when he said that his campaign manager did not receive money from 
Stock picks and pans for troubled times: RIMM, ED, ISRG, GLW, LEA, SLB, GOOG ...
Is Berkshire Hathaway better than S&P Index?
Closing Bell: Torch Passing on a Friday Rally
