Wall Street Arrogance

In a rare moment, Obama displayed his obvious displeasure at recent news that Wall Street banks paid employees $18.4 billion in bonuses for 2008, saying:

"It is the height of irresponsibility. It is shameful, and part of what we are going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility. The American people understand that we have got a big hole we have got to dig ourselves out of but they don't like the idea that people are digging a bigger hole."

At a time when taxpayers are being asked to digest two rounds of TARP at $350 billion each, an $825 billion stimulus package, and a $3 trillion plus "Good Bank, Bad Bank" plan, you wouldn't think this would need to be explained. The $4 billion payout to Merril Lynch employees (only a few days before their new owner, Bank of America, had to ask for more TARP money) illustrates the arrogance and greed on Wall Street.

By the way, the $18.4 billion is well below last year, but it's the sixth largest in history, and roughly equal to bonuses paid in 2004 when the stock market was soaring. It seems "pay for performance" is a foreign concept on Wall Street.

Obama really has his work cut out for him.

Good Bank, Bad Bank

Wall Street, the last bastion of capitalism, received good news today. The markets (especially financial stocks) soared following reports that the Obama administration is giving strong consideration to the so-called "Good Bank, Bad Bank" alternative to the financial crisis.

The idea is fairly simple. Remove all the bad assets from the banks and "sell" them to someone at prices well above the current market prices. You can guess who'll be buying the toxic assets. Think of it as a TARP (Troubled Asset Relief Program) on steroids.

The premise is that banks will take advantage of the instant improvement in their balance sheets, and increase lending. Of course, all the evidence from the first $350 billion TARP installment is that it won't actually increase lending, and the banks will continue to hoard the cash.

The estimated loss to taxpayers is somewhere in the $3 trillion to $4 trillion range. Details are sketchy at this point, and it's not clear what, if anything, taxpayers will get in return. This is really not a new idea, and was considered when the Bush administration proposed the first TARP program. The critical question then and now: how much above the market value of these assets will the government pay?

It's really not much different than nationalizing the banks, except taxpayers don't get to keep the "good bank" capital or assets, which virtually guarantees a massive loss. More important to Wall Street, those who own bank bonds and stock have their assets preserved, which would not be the case if the banks were allowed to fail. Essentially, this is a direct subsidy to stock and bondholders.

Naturally, Wall Street thinks this is a great idea: the solution of "privatizing gains, but socializing losses" is even better than real capitalism.

I hope President Obama can find a better solution.

It Ain't Kansas

Republican Congressman Todd Tiahrt (Kansas) acted just in time to have the "no jet" provision removed from the second TARP Bill, saying it "would place in jeopardy well-paying jobs in Wichita and across our industry and significantly also tarnish our image of business aviation."

So he must feel satisfied that his efforts came just in time for the largest recipient of TARP funds and loan guarantees, Citigroup. Today it was revealed that Citi is adding a brand new Dassault Falcon 7X for $50 million to its fleet of corporate jets.

Apparently, Citi is not only "too big to fail," they are also "too big to fly commercial." No word yet from Republican Senator Richard Shelby (Alabama) who gave the automakers such a beating that they drove into Washington DC last month, and have since announced plans to sell all their jets.

It's also worth noting that the almost $400 billion in financial assistance to Citigroup is quite a bit larger than the $17.4 billion package extended to the Big 3 automakers combined.

The workers in Merignac, France where the Dassault Falcon 7X is built would like to thank Rep. Tiahrt, the Republican Party, and the American taxpayers for their generosity.

Arrogance and Stupidity

Arrogance....

These days, it takes a lot to draw the attention of the media, but news of former Merrill Lynch CEO John Thain's excessive spending on decorating his office was too much to resist, especially since this is (indirectly) now taxpayer money. So here are just a few things he bought with your money:

$87,000 for an area rug.
$87,000 for a pair of guest chairs
$68,000 for a 19th Century Credenza
$35,000 for a "commode on legs"
$1,500 for a parchment waste can

Add on another $800,000 to hire famed celebrity designer Michael Smith, and you come up with $1.22 million.

Thain took the helm of Merrill Lynch on December 1, 2007 for an $83.8 million pay package (ranking him # 8 in Fortune's 2007 list of the 25 best paid executives in America), and while he wasn't decorating his office managed to lay off 4,200 workers in his first six months on the job.

During Thain's year at Merrill, they lost about $40 billion and wiped out 80% of shareholder equity, but in the Wall Street version of "pay for performance" this means bonuses! Amid public criticism, Thain abandoned his initial request for a $10 million bonus, but was able to sneak through $4 billion in bonuses for other employees a month early, to avoid any questions being asked by Merrill's new owner, Bank of America.

Stupidity....

It apparently never occurred to Bank of America CEO Ken Lewis to ask more about Merrill's toxic mortgages before offering to buy the company last September, but by mid-December he was getting nervous.

It seems Merrill was now estimating losses of $21 billion in the final three months of the year and forgot to mention it. Maybe this wasn't such a good deal after all. BofA only learned this after the December 5 shareholder vote to approve the deal, but they could walk away from the deal, which was scheduled to close on January 1, 2009.

His only other alternative was to find someone foolish enough to take this mess off his hands. So he flew out to Washington to talk to Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, who provided assurances that BofA would be moved to the front of the bailout line.

In mid-January, we learned that the Federal government had committed to provide an additional $20 billion in TARP funds on top of the $25 billion BofA already received, and guarantee 90% of an additional $118 in bad assets. BofA's shareholders have now lost more than 80% of the value of their stock at the time the Merrill deal was announced.

No Congressional hearings. None of the political posturing about excessive union wages the automakers had to endure last month. Just a behind the scenes deal by the Bush administration that was revealed to the general public more than a month later.

So, indirectly, taxpayers are paying for John Thain's $35,000 commode, $4 billion in bonuses to Merrill employees, and a lot more.

So who's stupid here? As they say in poker - if you don't know who the sucker is, it's you.