Andrew Cuomo, New York’s Attorney General, has outed a clutch of dysfunctional banks that took taxpayer bailout money only to bestow generous bonuses on their employees last year. “At many banks … compensation and benefits steadily increased during the bull-market years between 2003 and 2006,” Cuomo’s office said. “However, when the subprime crisis emerged in 2007, followed by the current recession, compensation and benefits stayed at bull-market levels even though bank performance plummeted.” As Captain Renault of the film “Casablanca” said: “I’m shocked, shocked to find that gambling is going on in here!” Renault, of course, knew exactly what was going on in wartime Morocco. Likewise, We the People threw TARP money at some of the world’s most blatant gamblers – financial institutions wagering clients’ and shareholders’ money. Surely we don’t now expect them to get religion and start behaving like so many chastened Puritans? Wall Street’s boom era culture is alive and well. After Cuomo’s report came out, “employees of major Wall Street companies were comparing notes about which companies paid the greatest number of large bonuses,” DJN reports. Who can blame them? Don’t we all want to know what the guy sitting next to us earns? Continue reading…
Bank Rescue Plan, Banks, Corporate Governance, Credit Crisis, Politics, Treasury, Wall Street, Washington / 1 Comment
Bank Rescue Plan, Banks, Corporate Governance, Energy, Executive Compensation, Politics, Treasury, Washington / 7 Comments
The WSJ reports Citi may owe star energy trader Andrew J. “Andy” Hall $100 million. Gasp!
That “gasp” is sincere, by the way. That’salottamoney.
When I read the Journal piece the green envy monster perched on my left shoulder, as she tends to do in such cases. I instinctively cheered the prospect of Kenneth Feinberg, Obama’s pay czar at the Treasury Department, ripping up government-controlled Citi’s contract with Hall. Or trying to, and thereby provoking a big public fight with fat-cat Hall for all of us to salivate over like so many Romans in the Coliseum.
Then I started thinking. And Ms. Monster faded away. Could Hall have actually earned the money via his purportedly profitable Citi unit Phibro LLC? Could he be one of a few Citigroup employees who actually delivers for the company and its shareholders?
Is there anything inherently distasteful or immoral in successfully matching risks with return, as Hall appears to have done for years, thereby delivering himself and his employer generous profits?
Isn’t he smart to have crafted a lifestyle described this way by WSJ colleagues Mike Siconolfi and Ann Davis:
“A far cry from the buttoned-down Wall Streeter, Mr. Hall leaves the office most afternoons to go rowing or to practice calisthenics with a ballet teacher. Outside the energy markets, Mr. Hall ranks among world’s top collectors of contemporary art, favoring often-shocking works that explore subjects including the human toll of the Nazis.”
I realize that the financial crisis was largely a result of banking types taking foolish risks and foisting them on far too many people who had stopped using their brains. Are we now to punish those who risk wisely?
As the WSJ writes: “Hanging in the balance in the Hall matter is an important source of profits for Citigroup, which is trying to rebound after a disastrous 2008. Phibro, with a small core group of traders, has generated hundreds of millions of dollars in profit for Citigroup over the years. This spring, after the new pay curbs were unveiled, Mr. Hall and others on his team threatened to leave if their pay was cut by the new compensation rules, people familiar with the matter said.”
Feinberg and the Obama administration have to be ultra-careful with this case and similar ones that will undoubtedly crop up. Hall will leave if his pay and reputational prospects dim at Citi. Goldman Sachs, hedge fund firm GLG – and a few other non-risk-averse players – would likely be happy to take the team. U.S. and U.K. taxpayers – now owning a slew of financial institutions – could find themselves (ourselves!) stuck with laggard companies completely at the mercy of independent entrepreneurial rivals.
Here’s what I’d like to see Feinberg and the government attempt to do: If popular politics mandate the effective removal of mega-earners like Hall – the mood across the country is fairly ugly at the moment – the Obama administration should permit creation of risk-incubator programs inside taxpayer-owned firms. They’d be aimed at tapping up-and-coming Andy Halls who have intriguing and important – and, yes, risky – ideas for new lines of business. The program would apply to financial and non-financial firms (such as GM) now owned by Uncle Sam, and could help preserve and nurture a measure of boldness and innovation within the companies.
Banks, Federal Reserve, Treasury, United States / 6 Comments
Dow Jones colleague Michael Crittenden has reported what ex-Treasury Secretary Henry “Hank” Paulson will say tomorrow in prepared remarks before a Congressional hearing. A lovely scoop. It’s worth having a look at the full text of Paulson’s prepared remarks on WSJ.com. You’ll see that Paulson adds little to our understanding of that “snarky bit of business in which the Fed and the Treasury were complicit, Mr. Lewis a slippery accomplice and the shareholders left holding the bag,” as Alan Abelson of Barron’s recently put it. In addition to shareholders, taxpayers were left holding a very burdensome bag as our esteemed leaders dug into their – er, our – pockets and forked out a chunk of money to prop up a very sick Merrill Lynch which Bank of America’s boss Ken Lewis had agreed to buy three months earlier without sufficient due diligence as to Merrill’s true financial health (or lack thereof.) Economic historians will forever debate the wisdom of the Bernanke-Paulson decision to push the BofA-Merrill deal through in December by threatening to topple the bank’s management (stick) and agreeing to pony up many billions of federal aid dollars (carrot.) But will historians ever figure out why why Merrill Lynch (and AIG) got saved but not Lehman or even Bear Stearns? “Our own guess is that the answer at the very least might reveal how haphazard the decisions were,” Abelson, musing about this very question, wrote in Barron’s. Indeed. Our leaders were scrambling and improvising and letting personal biases affect their decisions. (Paulson of course is a Goldman Sachs alumni, a veteran of the investment banking world. Who knows where his heart diverged from his head on matters of financial industry allegiance.) To segue into the Sonia Sotomayor hearings this week (stay with me, please): It’s utter foolishness to pretend that one’s life story doesn’t have a bearing on one’s professional decisions. As hard as one tries to be neutral, objectivity is impossible. That our political leaders have effectively forced Sotomayor to deny that her experience and background don’t tinge her judicial actions is yet another example of the farce our Congress has become.
Bank Rescue Plan, Banks, China, Credit Crisis, Derivatives, Federal Reserve, Treasury, Wall Street / 3 Comments
Fed Chairman Bernanke told lawmakers today that the Fed will likely propose a list next week to Treasury of the banks that are healthy enough to repay TARP funds. He added that the Treasury continues to work on how to value warrants it received as part of the original TARP financings. Which is another way of saying the Treasury has gone back to the drawing board on the valuation front because it has been criticized for undervaluing the warrants in a few transactions completed last month.
Bank Rescue Plan, Banks, Credit Markets, Economy, Politics, Treasury, U.S. Dollar, U.S. Treasurys, Wall Street, Washington / 3 Comments
Some well-respected Cassandras have formed a chorus in the past couple of days, convincingly describing the price sure to be paid for the huge U.S. fiscal deficit spending being rung up at a remarkable rate.
In their own ways, a leading bond investor and a past and present chair of the Federal Reserve have sounded alarms after markets already have gone about their practical work of turning troubling forecasts into current price action.
Bond guru Bill Gross spruces up his much read commentary on all things investable with personal references and quirky analysis. In his latest, he invokes the folk wisdom of an earlier generation’s popular singer – Tennessee Ernie Ford – to illustrate the depths of the problem faced by the U.S. government, which is piling up massive fiscal deficits in order to cushion the fall of the economy and the financial sector.
Before we get to the lyrics, there’s this telling quote from PIMCO Managing Director Gross’s latest missive in reference to Washington assurances that political leaders are aware that deficits at some point have to come down and come down hard. It’s “hard to comprehend,” Gross writes, “how that more balanced rabbit can be pulled out of Washington’s hat.”
Credit Ratings, Treasury, U.S. Dollar, U.S. Treasurys / Comments Off
Standard & Poor’s comments supportive of U.S. Treasurys’ AAA rating – reported exclusively by DJN – have just strengthened USD/JPY. They follow similar comments by Moody’s – Neal blogged about this Wednesday. In our story, headlined “S&P Says US Rating Not Under Threat,” a senior S&P analyst named Kyran Curry addresses recent market speculation that the U.S. could lose its triple-A sovereign debt rating. Curry says: “We don’t believe so at the moment. No. We will have more to say about that in the next few days.” As DJN’s Simon Louisson writes, S&P’s decision last week to lower its outlook on the U.K.’s AAA rating spurred a USD selloff amid speculation about the U.S.’s standing. Curry, who is responsible for Australasia, tells DJN his comments reflect “a global view” within the agency and in fact he has been accompanying S&P’s global head of sovereign ratings on a tour of New Zealand. Check out Simon’s story for more on what Curry said about the U.S. economy and its medium- and longer-term credit quality. He also weighs in on the dollar’s global clout and the Obama administration’s fiscal planning. His comments came after S&P lifted a threatened downgrade on New Zealand’s sovereign debt rating after the government took steps to cut its budget, among other things.
Steve Rattner is worth at least $188 million and as much as $608 million, the WSJ reports, citing disclosure documents Obama’s auto czar submitted prior to his appointment. The former New York Times reporter turned uber-financier was allowed to give a range rather than specify his precise value. Rattner also owned as much as $1 million worth of shares in Cerberus Institutional Partners LP Series 2, which is managed by Chrysler owner Cerberus Capital Partners. He sold his shares shortly after joining the Treasury Department in February, the WSJ’s Neil King Jr. writes. ”Rattner is a key player in the administration’s bid to rescue Chrysler through a Chapter 11 bankruptcy reorganization that will wipe out the value of Cerberus’s shares.”
Bank Rescue Plan, Banks, Credit Crisis, Financial Markets, Politics, Treasury, Wall Street, Washington / Comments Off
Reading through fresh coverage of Bank of America’s $35 billion capitalization deficit, it seems the big dilemma/decision looming for President Obama is: does the U.S. government want to convert its preferred shares in B of A into common stock and thereby give the bank the capital cushion the stress tests have deemed it needs? The free marketeer in me says: Noooo! We don’t want the government running another bank, much less a very big one. But it’s just not clear to me that government management could be any worse than the geniuses who’ve been in charge to date. Moreover, if a preferred-to-common conversion gives Bank of America the breathing room to sort out its capital financing rather than rushing to shed assets it might actually want to keep for the long haul – an interim period of government control might not be a bad thing. And, as my colleague Mo Hadi notes, the Obama administration won’t even have to change the bank’s name. “Bank of America” has a nice ring for a nationalized financial institution.
Bank Rescue Plan, Banks, China, Credit Crisis, Politics, Treasury, Wall Street, Washington / Comments Off
News flash: Bank of America will need $35 billion (BILLION) in additional capital – which is a lot more than people expected the so-called government “stress tests” would require. The news has given the yen a boost this morning in Asia and is pushing down U.S. stock futures. With Tuesday’s U.S. stock market already showing signs investors are losing confidence, expect a lousy Wednesday. http://online.wsj.com/article/SB124158058615290821.html#mod=testMod Continue reading…
The soggy sentimentalist in me finds it hard to believe Chrysler is on the verge in bankruptcy – the very same auto maker that flew so high in the 1990s when its minivans and sport utility vehicles were suburban fixtures, its vehicle-quality metrics reached enviable levels (for a U.S. manufacturer, that is); and its executives became Detroit’s industrial celebrities. Then again, the ill-timed Daimler acquisition – coming, as it turned out, as the auto market and Chrysler’s own fortunes had peaked – proved the ruination of this fine company. Left alone, its executives free to focus on adapting to changing customer tastes, a rising oil price, and a globalizing market, Chrysler would arguably have become another Ford Motor, capable of surviving the economic crisis. It wasn’t meant to be: Once divorced from its German parent, Chrysler could only flounder under private equity ownership amid an historic credit crunch. And so the WSJ is reporting talks between the U.S. Treasury and Chrysler’s bondholding consitutencies have broken down, “making it all but certain that the car maker will file for Chapter 11 protection Thursday, according to people familiar with the discussions.” http://online.wsj.com/article/SB124102375931669205.html#mod=testMod Continue reading…