Add to Technorati Favorites

Thursday, March 26, 2009

Without a roof over our heads - the state of America


The New York Times ran a photo series showing the makeup of homeless encampments sprouting up across the United States. These pictures and descriptions are taken from that series.

The first picture to the left underneath a clear, sunny California sky might look to you like a nice camping trip. The tents all look like they are from REI and then there's the idyllic American River to the left. But this picture is actually of a camp site made up of families and individuals that have only recently become homeless because of the housing crisis that has engulfed the United States.

They just popped up about 18 months ago. One day it was empty. The next day, there were people living there.” - Paul Stack, operators manager at outreach center


The next photo is of a young woman. According to the article this is Tina Garland, "an out-of-work truck driver, in the kitchen area of the tent she shares with her husband in Sacramento."

Think about this for a moment. She has skills but can't find a job. She is married but her husband is also unemployed. Their only recourse is a tent.

Is this the America we want?


Next up is a man sitting on a cot. According to the article, "Doug Brown, a freelance electrical engineer, moved to the shelter at Village of Hope in October after losing his job. He shares his tool shed with another person."

There's a pattern here folks. Skilled people are unable to find jobs. The American economy isn't working and the social safety net isn't able to help us avoid becoming homeless. So what kind of social safety net do we have?



Next up is a photo of a young man in his mid-20s standing by a fire. According to the article, "Daniel Kent, 27, has been living in a encampment called Taco Flats in Fresno for three months after running out of money."

We read in the history books that Americna in the late 1920s and 1930s was dotted with "Hoovervilles," homeless cities named after the presiding man in the White House, President Herbert Hoover. Who among us thought that we would see these kinds of tent cities rise again in our lifetimes?

America's social safety net is ill-prepared to handle the recession we are in. There are some politicians in Washington and in our state capitols that are taking note and hopefully they will put emergency measures in place to rectify this growing problem now. Why do only Wall Street investment firms and banks get bailouts?

This problem is big and getting bigger. And if you think it can't impact you, take another look at those pictures.

Monday, March 23, 2009

Sheila Bair - Ready for the Job


If Tim Geithner does lose support from Republican U.S. Senators (many are already calling for his ouster) the person to replace him as U. S. Secretary of Treasury should be Sheila Bair, current chair of the FDIC.

Her clarity of vision on why we are in this Wall Street created economic quagmire and incredible articulation about how we get out is second to none.

I found her recent testimony to Congress a breadth of fresh air. She is saying look, we know how to clean up and regulate banks at FDIC, Congress gave us authority years go. What has been lacking is the political will to regulate non-banks. And so non-viable financial institutions like Citi Group are hanging around thanks to tax payers while viable banks - which also tend to be smaller - are at a competitive disadvantage.

There is no one in the federal government who is presenting the problem and the solution as clearly as Sheila Bair. She should be in-line to be Secreatary of Treasury and the way to get her in-line is for President Obama to appoint her to one of the deputy posts now vacant.

U.S Govt Tries Again, This Time FDIC Gets Involved


W.C. Fields is supposed to have said: "If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

This quote came to mind today as I was reading the new plan announced by the U.S. Treasury of Secretary Tim Geithner to buy what has been dubbed "cash for trash", the trash being mortgage-backed securities.

The new plan now gets the FDIC involved - why jeopardize the stability of the FDIC? The only reasons I can think of are: 1) everyone else is already involved - U.S. Treasury, Fed Reserve, Fannie Mae, and Freddie Mac; and 2) it's a source of new cash, i.e., the FDIC's credit lines with the Treasury which ultimately means more sales of U.S. Treasuries.

But how much more borrowing can the U.S. do?

As President Obama said on "60 Minutes" last night: "The limit is our ability to finance these expenditures through borrowing. . . . If we don't get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying those Treasury Bills."

Private investors are cheering, sending the U.S. stock indices skywards today. And according to a source quoted in "The New York Times":

"One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday."
Now, the investors bidding up the stock market aren't the same ones buying U.S. debt. The stock market investors are happy today because the new plan gives them terrific leverage to make more money. Here's the example the U.S. Treasury gave today:

A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. TheF.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, the private investor contributes the remaining $6.
So for just $6, private investors will leverage $100 with backing from the tax payers. The only thing they have to lose is $6 but if that $100 loan package goes up in value to say $110, they benefit from $10 in profit. Of course some will go down too. But let's say it's 1/2 down, 1/2 up so that's $4 profit in this exmaple between the two, won't the govt get some of the upside? Well, AIG, Bank of America and other s paid out big bonuses but did they repay any of it to U.S. taxpayers? No. So the likelihood of any of the upside being shared is pretty low.

Wednesday, March 18, 2009

Does AIG Really Pay for Performance?

Excellent piece by David Leonhardt today unravels the myth of executive performance-based pay.

David writes about retention bonuses at AIG:

"Most amazingly, the A.I.G. bonuses haven’t even accomplished their stated goal. Andrew Cuomo, New York’s attorney general, said Tuesday that 52 employees who received bonuses had since left A.I.G."

As there is more sunlight coming in, long held beliefs about executive compensation are falling down around us. As I recently wrote about Silicon Valley, the 2-tier system of compensation that has sprung up in a weak IPO jackpot market (always illusory for rank and file employees) where bonuses are used to inflate compensation is taking a hit in this recession. Whether it survives depends on how and when shareholders and analysts weigh in.

Tuesday, March 17, 2009

Senator Grassley Offers Way Out for AIG Executives


U.S. Senator Grassley in an interview with an Iowa radio station Monday night said of the AIG executives that he'd:

"feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, 'I'm sorry,' and then either do one of two things: resign or go commit suicide." - Senator Grassley

Well, at least this is a start. Up to now all we've heard from our politicians in Washington is: it's a contractual thing, you wouldn't understand.

Monday, March 16, 2009

More on bonuses: Citi Chief takes $38.2 million in 2008


This just in from "The New York Times:

"Citigroup gave Vikram S. Pandit, its chief executive, a compensation package valued at more than $38.2 million for 2008, even as the bank posted five consecutive quarters of multibillion-dollar losses and turned to the government three times for help."

That's almost 1/4 of the amount AIG is paying to its discredited executives.

Are you in shock? Well, you should be. Let President Obama know how you feel: http://www.whitehouse.gov/contact

Saturday, March 14, 2009

U.S. Treasury Lost Track of 33% of TARP Bailout


According to the chairwoman of the Congressional Oversight Panel created for TARP, Secretary Paulson gave away 1 out of every 3 dollars to Wall Street banks with no record and no plans of getting any of it back.

Listen to the full interview with panel chairwoman Elizabeth Warren; it might set your hair on fire, but it also just might get you worked up enough to demand accountability from Congress and the President.

AIG to pay $100 million bonuses

[Correction on 3/15/09 - the total amount of bonuses as reported in the media went up by $65 million.]


Just as I finished a post on Robert Rubin's comments at a conference this past week about bonuses I read this headline on "The New York Times" Web site:

AIG to Pay $100 Million in Bonuses After Huge Bailout

What's more, according to the article, the bonuses will be paid to executives in the same business unit that brought the company to the brink of collapse last year.

U.S. taxpayers have already given $180 billion to save AIG, I guess in comparison to that $100 million is small potatoes.

Robert Rubin: "bonus was something of a misnomer" (an insider's view on bonuses)


Speaking at an economic conference this past week, Robert Rubin the former U.S. Treasury Secretary and chairman of Citi Group, responded to a question about whether Wall Street bonuses had contributed to the financial instabilities by saying this:

"Bonus was something of a misnomer." - Robert Rubin

Huh?

While I don't have the full transcript of his remarks, this notion that the term "bonus" is not properly understood is a concept making the rounds in CEO circles.

I recently heard it said that Silicon Valley executives needed to preserve bonuses while cutting salaries, retirement benefits, and even jobs.

What's going on here is a 2-tier system of compensation. Companies can hide true executive and high-earner compensation by calling it bonus. But now that bonuses are being called out on the evening news and the public sentiment has soured, companies are scrambling to defend bonuses as not something extra, tied to financial performance, but as part of expected compensation.

In the case of Robert Rubin, he earned $126 million during his time as chairman of Citi Group. During this time he presided over the spectacular fall of the bank that is holding on only thanks to U.S. taxpayers. Citi can defend his compensation by saying it was not tied to financial performance of the bank but instead based on Mr. Rubin's performance.

But what exactly did Mr. Rubin do to earn $126 million or an average of $12.6 million per year? In his own words:

“By the time I finished at Treasury, I decided I never wanted operating responsibility again.” - Robert Rubin
So if Mr. Rubin didn't have operational responsibility as chairman of Citi, what exactly did he do to earn millions?

After Mr. Rubin's comments this past week, maybe now we know how he can justify earning that kind of money. In his mind it has nothing to do with performance, rather it is an entitlement if you are a Wall Street banker.

Friday, March 06, 2009

2 Views on the Future of the U.S. Economy

View 1:
  • "There are going to be fewer stores, fewer factories, fewer financial services operations." - John E. Silvia, chief economist at Wachovia
  • "There’s been no place to hide.” - Stuart Hoffman, chief economist at PNC Financial
View 2:
  • "This country has never responded to a crisis by sitting on the sidelines and hoping for the best.” - President Obama
  • "You’ve got to use this moment to retrain for jobs.”- Andrew Stettner, National Employment Law Project
These quotes, all from an NYT.com article today, clearly show the choice we have. We are at a fork in the road. The economists and financial pundits of the boom years never thought the good days would end. Now that recession winds are blowing, all that is offered is doom and gloom.

Others such as President Obama and Andrew Stettner are painting a different view. Which will you choose?

If you are wondering what today's 651,000 job loss #s means for you, it depends on your view of the world. A crisis offers opportunity to those who look for it. This is not the time to be thinking like the economists, now is the time to get retrained and benefit from the retooling that is going on in the American economy.

[chart from NYT.com]

Wednesday, March 04, 2009

Merrill's Million Dollar Men

While the investment bank Merrill Lynch was drowning in losses last year and looking for a savior to avert going out of business altogether (Bank of American eventually bought them), the following received million dollar bonuses:

[source: "The Wall Street Journal"]
  • Thomas Montag: He was handed a $39.4 million pay package and Merrill stock awards valued at approximately $50 million. The stock awards were issued to replace stock he held in Goldman Sachs Group Inc., his previous employer.
  • Andrea Orcel: He got $33.8 million in 2008. His 2007 package included a special $12 million bonus for advising Royal Bank of Scotland Group PLC and other acquirers of ABN Amro Holdings NV, a now-troubled deal.
  • Peter Kraus: Given a $29.4 million contract and Merrill stock to replace his holdings in Goldman, where he used to work.
  • David Gu: He made $18.7 million in 2008, down from $19.8 million in 2007.
  • David Goodman: Merrill paid him $16.5 million in 2007 and another $16.5 million in 2008.
If you're wondering where your pay package is, contact your U.S. Representative or Senator.

Monday, March 02, 2009

U.S. taxpayer’s bailout of AIG: $180 billion


Today the U.S. Treasury announced that it is giving another $30 billion to the world's largest insurance company AIG.

Today AIG also had an announcement: a quarterly net loss of $61.66 billion.

Total amount now given to AIG: $180 billion.

The AIG funding eclipses the $50 billion that Citigroup has received from the U.S. Treasury, and the $45 billion that Bank of America has received.

From "The Wall Street Journal":

"The new deal, the government's fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG's value over a longer period."
In other words, the U. S. government is very afraid of AIG collapsing.

Meanwhile in other news, AIG's ex-CEO sued the company today.

Stock Market Keeps Falling and Falling

All U.S. stock market indices fell again today. The Dow is now well below 7,000, down more than 50% off its all time high. Lots of "smart" talking heads on TV are wondering about how low it can go.

Let's look back to 1929. The chart to the right shows that after hitting a peak on Sept 3, 1929, the stock market did not bottom out until June 1932, some 30 months later. When the carnage stopped, the S&P was off by more than -80%.

How low will the stock market go this time around? We're about 17 months into this bear or down market (peak in October, 9 2007) so we may not know for some time to come.

[Chart: NYT.com]