Category: Finance

We Need to Take Care of the Overpaid Part of “Overpaid and Incompetent” Too

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Floyd Norris notes that the recent collapse of Wall Street may lead to a reduction in pay for bankers of all stripes.

I would further add that this is a very good thing.

He cites a National Bureau of Economic Research working paper, Wages and Human Capital in the U.S. Financial Industry, 1909-2006, which notes that wages in the financial industry are at an all time high.

One of the authors the recent runup in wages to, “A new era of financial innovation,” and so the “The financial sector became once again a high-skill, high-wage industry.”

Talk about not getting the point. The stock brokers and bankers in 1929 were not highly skilled or intelligent, they had just figured out a scam that allowed them to get paid for putting the rest of the poor house, and the same applies to the investment bankers in 2007.

Banking and investment exploded as a portion of the economy in the late 1920s and 2001-2005 because it became an easy way to take people’s money. There was no real innovation, there was a simply pursuit of personal gain at the expense of the real economy.

Simply put, if you made robbing banks legal, the activity formerly known as robbing banks would explode.

Certainly, there was some additional talent attracted by this money, but the real attraction was that this was easy money for stupid people to make.

And anyone with half a brain, as Andrew Lahde so eloquently stated in his resignation letter could take them to the cleaners:

….. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America. …..

But the important thing to remember here is that the, “low hanging fruit,” continued to make excellent wages, and obscene bonuses anyway.

Too many people have been failing upward for years because who their daddy and mommy were, and a disproportionate number of them seem to be Harvard MBAs, like this guy.

People on wing pic courtesy of The Big Picture.

I Hope That He is Not Serious

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In his confirmation hearings, Timothy “Eddie Haskell” Geithner aggressively supported a strong dollar policy.

I understand that this is the conventional wisdom, because much of the money made in Wall Street comes from borrowing cheaply and lending expensively, because the strong dollar policy makes it an attractive reserve currency, but in the long run it’s unsustainable.

He probably had to say it. I just hope that he’s not another Bob “Under Investigation for Insider Trading” Rubin about this.

BTW, the Senate Finance Committee voted in favor of his appointment by 18-5 and sent him to the Senate floor.

Economics Update

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The weekly new claims for unemployment jumped last week by 62,000 last week, to 589,000, the highest level since 1982, and more than predictions.

The 4 week average was flat, and continuing claims were worse than predictions too, at 4.607 million.

If that weren’t enough housing starts fell by 15.5% to 550,000, which, according to Calculated Risk,is, “by far the lowest level since the Census Bureau began tracking housing starts in 1959.”

Mortgage applications fell by 9.8% last week, because interest rates bumped by 0.37%, and most of the action right now is ReFi.

Over in Asia, the Bank of Japan is buying corporate bonds, because the credits markets have frozen there, and China’s economic growth fell to a 7 year low for the 4th quarter.

Meanwhile, it looks like the humongous loss phenomenon is moving from the banking giants to the regional banks, which may have a larger effect on business output, since they do a lot less of the high finance and a lot more lending to mom and pop businesses.

In commodities, steel production fell 1.2% in 2008, the first annual drop in a decade, while oil was up a few pennies today.

In currencies the dollar was down vs. the Euro and Yen, but up against the Pound…but then again, everything is up against the pound.

Not Enough Bullets: MerrilllLynch

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Executives at Merrill-Lynch rushed their bonuses so as to beat the official takeover by Bank of America, December 29 instead of January or February.

The BoA deal closed January 1, and Merrill hurridly allocated, “about $3bn to $4bn,” for bonuses, despite a $21.5 billion loss in 2008.

I guess that this is because their base salaries, probably more than $¼ million/year on the low end, were just not enough to incentivize them, because there are just so many investment banks aggressively hiring, and they would poach their valued employees.

Delightful.

Obama Opposes Cram-Down in Stimulus

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Dumb move. With mortgages sliced and diced amongst dozens, if not hundreds, of investors, you cannot renegotiate terms in many cases, which means more defaults and foreclosures.

He’s not opposed to allowing bankruptcy judges to rewrite mortgages, he just does not want it in the bailout package.

That’s because he’s still pursuing the asinine goal of getting 80 votes in the senate.

He won’t get 80 votes for a bill that works, because Republicans cannot afford fiscal stimulus to succeed.

Financial Quote of the Day

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From an interview with Barney Frank:

FRANK: I have friends who said ‘well, Bank of America’s too big, shouldn’t we stop them from buying Countrywide?’ … [M]y answer was, I would have been happy if Syria bought Countrywide, because it was one of the most irresponsible institutions out there. Bank of America has done a very good job … I did not know until you just told me that Fannie and Freddie were doing that and I can pretty much guarantee you that we will have put an end to that within a few days.

ROTFLMAO

Barney Frank is a funny, funny guy.

Economics Update

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Most of the news today seems to involve currency and other nations, with the dollar rising against all major currencies, particularly the British Pound, which fell to its lowest level since 1985.

Considering the fact that the U.K. jobless rate and budget deficit has grown significantly, this should be no surprise.

On the other side of Europe, Russia is pulling back from Ruble support, engaging in what is called a “dirty” float, because they are burning through their currency reserves.

Meanwhile, S&P cut Portugal’s debt rating 1 step, from AA- to A+.

If you want to know the effect of this, you need only look at Greece, where the the rates that they have to pay on their bonds jumped following a similar downgrade. The spread over similar German debt went from 55 basis points (0.55%) to 325.1 basis points (3.251%).

In US real estate, the NAR index of builder confidence fell to 8, below the prediction of 9, with 50 being neutral. (!)

In energy, Oil is up.

Effectively Insolvent

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That is what Nouriel Roubini is saying about the whole US banking system:

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Note that he has the training to calculate this stuff, all I have is my gut.

My gut says that his prediction is optimistic, and as bearish as he has been, he has actually underestimated the scope of this problem by a bit so far.

By way of perspective, the US economy in 2007 was about $13-¾ trillion. This is a big number, though less than the roughly 8-½ trillion that the Treasury and the Fed have “lent” out in the past year or so.

Submitted to Marketplace

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They allows people to submit short (>400 word) commentaries for broadcast, so I sent them the following missive.

It’s highly unlikely that they would publish it, I have no professional background in the field, and I’m just not that good a writer, but what the hell.

Amputating the Financial Industry

It is clear that the economy is sick, and it is also clear that the two things that are most directly responsible for this are the finance industry, and real estate.

For real estate and construction, we have a classic bubble, where prices outstripped values, and the only real solution is for time and no small amount of inflation to put borrowers back above water.

The finance industry is a different matter. Between the Treasury Department and the Federal reserve, trillions have been spent to recapitalize this industry without a real thaw in credit.

If the economy is a body, it is clear that there is a serious illness in the financial industry, and the question is whether this is simply a bad infection, illiquidity, or whether this is gangrene, insolvency.

I would argue for the latter, and with advanced gangrene the only option is to amputate.

So, how can you amputate, when the finance industry is essential to the functioning of the rest of the economy?

The answer is that it’s not essential. Reasonable access to credit that is essential.

The question is not how to preserve Wall Street, it is how to make sure that businesses on Main Street can continue to operate.

The numbers to do this are actually relatively small, GM and Chrysler got $18 billion to continue to operate, which is a drop in the bucket compared to the more than 8½* trillion that has been allocated to the finance industry.

Even just using the $350 billion remaining in the TARP to set up a lending facility for small and medium businesses would go a long way.

In fact, it would go much farther than throwing more money at the Wall Street.

You could recruit a workforce quickly from the hundreds of thousands of rank and file financial professionals who have been laid off in 2008.†

This would have the effect of providing the grease to ease the wheels of the economy, without enormous expense of supporting what are walking dead zombie institutions.

Obviously, you would not want this as a permanent solution, but our economy is more like an octopus than a person, and so lost limbs regenerate over time, so if one were to add a small surcharge, which would render this facility irrelevant and unnecessary once a new finance industry, springs from real market needs.

Footnotes:
* Economic rescue could cost $8.5 trillion
† Layoffs in U.S. up 59% from 2007

Thoughts?

Economics Update

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The US dollar posted big gains today, driven in part by the inauguration, but more so by bank of Canada slashing its benchmark rate by 50 basis points (½%), to an all time low of 1%, and the Bank of England making noises that sound suspiciously like cranking up the printing press.

In real estate, the National Multi Housing Council’s Market Tightness Index fell to 11 in the 4th quarter, down from 23 in the 3rd quarter, so there is downward pressure on rental properties too.

Oil was up, but this was the last day for trading on this contracts for February delivery, which, coupled with the markets being closed for yesterday’s MLK holiday, puts a lot of noise into the number.

Nationalizing the Banks

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Well, it appears that we have Nobel Prize winner Paul Krugman, Portfolio’s Felix Salmon, and the Financial Times’ Willem Buiter’s all calling for nationalization.

Basically, all three of them say, and I agree, that that the banks are “zombie banks”, dead but still walking, and that the most effective, and the most cost effective for the taxpayer, solution is for the government to take them over and allow their problems to unwind.

They all agree that the idea of the “bad bank”, basically the Resolution Trust Corporation (RTC) from the S&L bailout, but without taking over the banks, is among the worst possible solutions.

Basically, if you buy these banks assets at market value, they are still insolvent, and if you overpay, the taxpayer loses and the banks are encouraged to do more stupid things.

To my mind, I would actually set up a government agency to directly make loans to business, and let the banks all hang…What I have repeatedly called “amputating the financial sector.”

I would add that with banks publicly declaring that they will take the money and not open up their lending, we need some serious tough love hate headed towards the banks.

Economics Update

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It really is beginning to look like the UK is going to be hit worse by this than the US, with Gordon Brown unveiling a new bank bailout, one which, shocker, requires the banks to lend the money out again, imagine that.

I would imagine that the catalyst for this action was that Royal Bank of Scotland posted a £ 28 billion loss for 2008.

Even more than the US, the UK seems to have banked on (pun not intended) finance being the future of their economy, and they are suffering as a result.

Spain, which created a boom on real estate, is doing worse with S&P cutting the rating on its debt from AAA to AA+.

The downgrades to countries like Spain, Portugal, Italy, Greece, and Ireland are throwing a monkey wrench into the vision of the Euro Zone as a unitary institution:

Diverging bond yields hurt [Euro Central Bank President] Trichet’s argument that the ECB’s inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth. They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.

Autos are not great either, with France talking about a partial takeover its car makers in order to bail them out, and GM at risk of defaulting on its recent government loan, because it cannot find enough debtors to swap debt for equity.

Likely, the sticking point here is PIMCO, the worlds largest bond fund, which has just been hired to manage a Federal Reserve facility, so they are extorting GM, while at the same time, they are being paid to manage the Fed’s attempt to fix the problem of frozen credit.

It’s nice when you can generate demand for your services without having to deal with the market, I guess.

Meanwhile, in currency, the dollar was stronger today, largely on the UK bank rescue, and the Ruble continues its slide.

In energy, oil is down, largely on the end of Gaza fighting and the Russian-Ukranian gas deal, and retail gasoline is up again today.

I don’t expect it to go above $4/gal soon, but I think that sub $2/gal gasoline will be gone shortly.

Giving the Fed What For

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An exchange between freshman Congressman Alan Grayson and Federal Reserve Vice Chairman Donald Kohn, where the distinguished gentleman from Florida points out the Fed is spending around $4000.00 (actually, it total, it’s closer to $20,000.00 at this point when other programs are rolled in) of taxpayer money for every man, woman, and child in the US, and refusing to provide details.

The Fed is completely out of control, and has gone native, and believes that the financial industry is the economy, and Grayson shows just how corrupt the whole process has become in this exchange.

H/T The Washington Independent.

Economics Update

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You know that old saying about releasing bad news on a Friday, because everyone is looking toward the weekend?

It’s one of those Fridays.

Let’s start with Ireland, where the Anglo Irish Bank, the 3rd largest in that country has been declared insolvent and nationalized. I’m beginning to think that the “Celtic Tiger” is on its way back to poetic poverty, particularly now that places like Poland and Slovakia are cheaper labor markets.

In the world of recession/deflation, we have the CPI falling 0.7% and industrial production falling 2% in December.

I’m beginning to think that the US will start to resemble Ireland…Without the Poetry bit.

We also have a couple of updates courtesy of Calculated Risk, with Los Angeles Area Port Traffic falling sharply and office vacancy rate rising in Q4.

Note that there are predictions of a 30% drop in office rents, and that exports are dropping more than imports, so this is not a turn around on the deficit.

In retail, we have Toyota North America announcing cuts in production, and Circuit City is going to liquidate, as in, no more Circuit City, no kidding.

In currency, more bailouts to banks means more concerns about the dollar, so it fell today.

In energy, oil was up slightly today, but down most of the day, after the IEA predicted that demand would continue to fall, and retail gasoline was up again, which means that it’s gone up around $0.20/gal since New Years day.

Not Enough Bullets: Our Banking System is Imploding Edition

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Just 3 months after we threw $350 billion at the banking system, which was more like $9 trillion when you count what the Fed is doing, we have exploding bank losses threatening bank solvency, with one of the main contributors being, “the unexpectedly high costs of shotgun mergers arranged by federal officials last year.”

Thank you Henry Paulson, now we have Bank of America getting in line for a Citi style bailout, because the black hole that is Merrill Lynch is deeper than anticipated, among other clusterf%$#s.

As Atrios says, “Just nationalize the lot of them and end this.”

Economics Update

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Well, weekly first time jobless claims at rose to 524,000, and the 4 week moving average was down 8000 to 518,500, and continued claims fell slightly, from 4.6 to 4.5 million. (Scary graph pr0n on right)

I’m not sure how much of this is being effected by the short weeks of Christmas and new years, but it should sort out in the next few weeks.

Not unsurprisingly, the Federal Reserve’s Beige Book, a collection of anecdotal economic information reported by the various Federal Reserve banks, was really quote grim.

Unsurprising, considering that foreclosure filings rose 81% in 2008 over 2007.

Housing is not recovering in the near term, even with mortgage rates hitting another record low.

One of the reasons that there will not be a recovery is that commercial real estate is imploding right now, with the volume of loans for office space and rental properties defaulting or becoming delinquent expected to triple in 2009.

In international finance, S&P downgraded Greek sovereign debt, from A to A-, and the ECB cut its benchmark rate to 2%, an all time low.

Not surprisingly, both of these pushed the dollar up today.

The juxtaposition of economic weakness with a stronger dollar drove oil down too.