Pervasive Ponzi(ness)

The more I start to understand the methods employed by Wall Street firms to achieve profits, the more I am convinced that grandfather Madoff might not be the only one running a Ponzi scheme…

From here: After all, Madoff’s scheme -- at least in spirit, if not in its nefarious intent -- wasn’t much different than the business models at some of the nation’s largest failed financial institutions. Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.

Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.

Geoffrey Raymond's caricature of Mr. Madoff (ripped from Dealbreaker)

A plea (on the auto industry bailout)

The Republican senators in the Senate last night blocked the auto bailout under the following pretext: the demands for steep cuts in pay and benefits for the automobile workers were not met. Yes, following textbook style Republican governing, they have again asked the workers to make sacrifices whilst making no attempt to hold the management responsible. They have managed to turn this into a ‘the result of workers getting undue benefits is killing the US auto industry’.
At this point the auto bailout looks like a non starter in the Senate. The White House should act now and act decisively. The government must use the funds from the TARP bill to bailout the auto companies. No, I do not think the management at Ford, GM and Chrysler deserve the bailout, but I think the workers deserve it. There are a million or more that will be affected if this does not happen. Three months back Sec. Paulson managed to convince a doubting Congress to fork over $700 billion to save companies on Wall Street. Companies that make money off other peoples money. Companies that have no real infrastructure save people sitting at terminals and betting on outcomes that they scarcely understand. Companies that do not produce or manufacture tangible products save for pieces of paper whose values depend on other pieces of paper… ad infinitum. Detroit made decisions, pursued bad choices and was led by bad managers. As part of the bailout, the government should go ahead and change the management, restructure management benefits and legislate the closure of brands that make no sense. The government should not punish workers that have done nothing other than follow the bidding of managers who were short sighted. Moreover, from a pragmatic viewpoint, the fallout from a million people losing their jobs as a result of these companies going under could have severe repercussions not just for the economy, but socially and morally as well.


Another major argument laid out by the Republicans in fighting the bailout is a story claiming that an average autoworker rakes in $73 dollars an hour. That is a pile of garbage. A breakdown of how the $73 is divvied up here: (The representative image above has been ripped from the article).

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn’t made up. But it is the combination of three very different categories.

• The first category is simply cash payments, which is what many people imagine when they hear the word “compensation.” It includes wages, overtime and vacation pay, and comes to about $40 an hour.
• The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour.

• The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix — dividing those costs by the total hours of the current work force, to get a figure of $15 or so...

Please do not fall for the $73/hr number!! It is actually closer to $50.

The great Number Crunching game

The bailout numbers keeps getting better and better... (especially with the news announced today).

The bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

The bailout cost with the latest Citigroup addition is about $5 trillion.

Prescience

Even if I do not have a magic mirror to look back across the decades, I am sure it does not take great erudition to declare the following:

Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times”, citing, among other things, the government’s handling of the housing crisis.

And they are planning on bailing out Citi tomorrow. If prescience is anything, Peter Schiff had it right quite some time back. The scary scenario is that he does not project a very reassuring future ahead... (via The Dish).

The $4,284,500,000,000.00 bailout

It is common to hear about the bailout costs and the $700 billion number associated with the exercise. However, there are many elements of the taxpayer sponsored bailout quietly gobbling huge sums of money behind the scenes. Fortunately, I managed to stumble upon a website that is keeping a running tab on the total bailout allocations. CNBC estimates that the total amount allocated so far in this taxpayer financed orgy to be $4,284,500,000,000.00. Yes, that is right - we are putting over 4 trillion dollars into this.

Here is a graphical breakdown.

I see very little money allocated to the tasks involved in the government working with homeowners in helping them change their lending terms or mortgage conditions. Helping hurting homeowners (albeit a difficult and arduous task) will help us identify the quantum of wrongful mortgages, their hidden clauses and their knock on effects on the bundled securities that they back up. Of course, such an effort will involve not just the government, but a concerted attempt by the mortgage industry and banks in sitting down at the table with the aggrieved mortgage holders and working this thing though – but then that is hard work and it benefits only the common folks.

Instead, Sec. Paulson writing in an op-ed piece here tells us that the best way to address housing and mortgages which are at the root of our economic difficulties is "more access to lower-cost mortgage lending to slow the decline in the housing market and reduce the number of foreclosures".

What he is telling us is that as soon as lenders (i.e. institutions like banks and mortgage lenders) are bailed out, the economic situation should stabilize. Again he is brandishing the principles behind the failed, trickle down Reaganomics that have led to naught over the last eight years… His idea seems overtly flawed because the solution completely bypasses the segment that is hurting (homeowners) and rewards the segment that caused the hurt in the first place (banks/mortgage lenders who with obfuscated terms and conditions bilked fledging homeowners)... I see a long hard slog ahead…

Is Goldman Sachs pulling the wool over our eyes?

Today, Goldman Sachs, the bank that vacuumed in 10 billion dollars of taxpayer bailout money made a pathetic announcement: They said that they were trimming the bonuses of 7 employees. Here is what they said:

Our senior executive officers made this decision because they believe it is the right thing to do. We cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic problems.

I guess they could not have made it sound more condescending. Of course, other than the seven people singled out as 'top management', the rest of the firm is set to receive 7 billion dollars in bonuses (per last week’s news). Each of the firm's 443 partners is set to pocket an average of more than 5 million dollars as part of the annual Christmas windfall this year.

It might be better if the people at Goldman try not to pull the wool over the public eye with contrite sounding statements like ‘the top management at the firm are getting no bonuses’ – when it amounts to just 7 individuals. Individuals who might more than likely have some left over change from last years bonus packages that totaled more than 17 billion dollars.

Bonus pools of Wall Street firms up until 2006. In 2007, the total bonus pool was a whooping 36 billion dollars. 36 billion dollars would not have fit into the vertcal axis of the above graph. Source: The Washington Post - December 20, 2006

The great monthly flip flopping ritual

Former Goldman Sachs CEO and current Treasury Secretary Henry 'FlipFlop' Paulson is caught in a curious case of shape shifting. We are now able to soundly predict with a large degree of confidence the frequency with which the Treasury Secretary performs the flips and flops on the bailout package. Yes, the predictable recurrence pattern on plans to use bailout funds now happens monthly. See below.

In September: The $700,000,000,000.00 bailout bill was called TARP (or Troubled Assets Relief Program). It was sold to lawmakers as a mechanism to buy off troubled and toxic securitized assets off banks and lending institutions and thus ease the credit crisis sparked by the mortgage meltdown.

In October: Buying troubled assets was cast by the wayside and the Treasury decided to flip and put out a plan to buy equity stakes in American banks of their choice. Hank's alma mater Goldman Sachs saw a cash injection of $10 billion. Morgan Stanley got another $10 billion. Is it a matter of coincidence that both of them announced bonus pools of 7 billion dollars. No, I would not dare suggest that they used taxpayer money to pay their bonuses.

In November: Treasury flopped and now announces that they have decided that buying up equity stakes in banks are not working (or maybe worked just well enough for those banks to declare bonuses). The wizards yesterday announced that they are planning on using the remaining bailout funds to help companies that issue credit cards, make student loans and finance car purchases.

In December: Plans to unveil disbursement of as yet unknown cash injections to as yet unknown set of companies as Christmas gifts. Consumer retail stores, bodegas and kiosks might need to behave properly in line as they queue up to get a part of the largesse.

Curiously missing from the whole bailout equation was help for troubled and distressed homeowners.

United States Senator from the state of NJ Robert Menendez summed it up best:

In the month of August, over 9,800 homes entered foreclosure every day, if this statistic was that there were over 9,800 Wall Street executives that lost their jobs every day in August, we would have ended this a long time ago.

Sad but true...

On what we could learn from the Chinese regarding bailouts

Today was yet another great day for bailouts. Firstly, there was yet another bailout of the beleaguered insurance giant AIG, then there was news that the Treasury Department on the sly decided to give American banks a tax windfall of $140 billion and thirdly, there was news of a half a trillion dollar Chinese bailout. OK, now why am I mixing the Chinese bailout with similar measures taking place here? Well, it is indeed interesting to see how these monies are being put to use. To get a quick idea on the differences between the plans hatched by the Treasury as opposed to the Chinese in bailing out, it is instructive to see the details. Or, maybe it is even time to learn from the Chinese.

On what the Chinese would do with their bailout:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

On the sly tax windfall to US banks:

Late September, the Treasury Department issued a five-sentence notice that attracted almost no public attention. Administration officials had just given American banks a windfall of as much as $140 billion. The change to Section 382 of the tax code came after a two-decade effort by the Republican administration to eliminate or overhaul the law. Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

On bailing out AIG again and yet again:

The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the new revision announced today, the Federal Reserve said it would reduce that credit line to $60 billion. When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.

So just to get this clear:

• China spends its bailout money on actual projects like infrastructure additions that benefit its citizens and in turn keep the economy humming and productive.
• In the United States, the Treasury decides to award tax write-offs to banks that shelter their profits from taxation by acquiring shell companies whose real value indicates losses on their books, but then manage to offset imaginary losses with actual capital gains to avoid any payment of taxes.

More bailout lament

Looks like the bailout czar Mr. Kashkari and the uber bailout czar Mr. Paulson have given very little thought on the way they have planned to use the 700 billion 'bailout' dollars allocated to them by the congress. Initially they told us that they would use the money to buy troubled assets from banks at market or below market prices. In fact the name of the bill was TARP – Troubled Asset Relief Program. Suddenly, that did not seem like a good idea and just as Europe (and England in particular) was planning on loaning money to banks directly in the hopes of thawing the credit freeze that was enveloping us, our bailout czars decided to follow the same path. The only difference with the approach they took here was that they decided to dole out the money on an arbitrary basis to banks of their choice with little pre-conditions attached. 'Friends of Hank' got about 125 billion from the largesse that was announced without fanfare a couple of weeks back. This week they also announced that they have started doling out the remaining 125 billion (of the 250 billion first tranche that they had powers over) to smaller banks of their choosing. Apparently what these banks have been doing with the money is pretty egregious.

From here: In his column on Saturday, The Times's Joe Nocera told about a conference call that he had listened in on recently between employees and executives of JPMorgan Chase. Asked how an infusion of $25 billion of bailout funds would change the bank's lending policy, an executive said the money would be used to buy other banks.

Buying and acquiring other banks with private money is capitalistically 'noble' - it increases shareholder wealth and all is fine with the money making machinery. It is frightening when the big banks openly tell us that they are planning to channel taxpayer money (ostensibly given to spur lending and ease the credit crunch) into private acquisitions and takeovers of other banks. This not only makes the public and the Congress look like jackasses, it also begins to smack of a socialist mindset - government giving large amounts of money to large oligarchic institutions in order that they go ahead and use public monies to gobble up smaller ones.

And Sen. John McCain accuses Sen. Obama of spreading the wealth!!

Maybe we need some spreading of the wealth - II

Recession or not, Wall Street bonuses for this year tell us the usual story - it is a fixture that remains in spite of the turmoils and the bailouts.

• Goldman Sachs has set aside about $6.85 billion for bonuses, or an average of $210,300 for each employee.
• Morgan Stanley has $6.44 billion for bonuses, or $138,700 per person
• Merrill Lynch has $6.7 billion for bonuses and set aside an average $110,000 for each employee.

What is especially egregious is that these very same banks were given taxpayer money to shore up their finances a couple of weeks back - part of the bailout package put together by Sec. Paulson.

Just as reminder, the mean annual wage for the average U.S. employee is about $40,690. (according to the May 2007 Bureau of Labor Statistics report). Time here has an article today on how the bailout will actually boost Wall Street bonuses.

We could use some distribution of wealth here...

What the repackaged bailout really means...

Yesterday, Mr. Paulson in his infinite wisdom decided that we are going to scrap the original plan to buy distressed, toxic assets from banks and instead decided to invest about 250 billion directly into some select banks and financial institutions. The plan is to take an equity stake in the banks thus guaranteeing the taxpayer that we will see some kind of a return on the investment. In case none of these banks fail, the taxpayer will see a return on the investment. What was conspicuously absent in the plan was any form of regulatory framework, compensation ceilings or change in management teams.

If I were to explain in laymans terms what this kabuki play of a handout from the Treasury's perspective, this is what it might look like:

"Banks, here is an investment of taxpayer money that Secretary Paulson would like to make in your company. You were singled out just because of the fact that I know some of the CEO’s personally, you are a 'leading financial institution' and if I may use euphemistic phrases, ‘you are too big to fail’. You may take this money and do what you like. If you profit from our investment, the taxpayer gets a part of the profits. If you go under, I will just count this as a bad investment gone awry. Either way, you are free to do exactly what you did for the last 10 years leading up to the bubble and you are free to carry on doing the same thing - we really do not care. What this really means to the bottom line is that way you will be able to continue your high risk bets in overleveraged financial instruments that has become your de-facto business model, your stupendous compensation packages that the CEO's and the board have gotten used to and you get to keep your current management board that got us into this mess. Go ahead, let the good times roll!!"

This looks increasingly like a very wealthy investor indulging in high stakes investments in large blue chip companies.

OK, all this sounds very, very interesting, but what about that homeowner who is being foreclosed?

Oh, that individual. Hmm… Well, they need to fend for themselves. Hey, this is the free market.

Strangely, the government might be the solution...

On reading the following piece of news, that the next time the mavericky people tell me that government is the problem and not the solution, I might have to politely tell them that they suffer from an extreme state of delusion and might need checking into the nearest mental institution...

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials. Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

First, they tried bailing out individual companies, then they tried a large scale 700 billion dollar bailout, then they tied lending to the banks directly, then they tried buying up short term commercial paper. The latest today is to take up ownership stakes in large banks directly. This might just work. This will give the taxpayers a larger stake in the game, might actually produce return on taxpayer monies invested rather than the previous ideas that were designed purely with the private enterprise in mind. Yes, the ownership stakes idea put out by the Treasury might work, but the downstream effects of locked up credit markets will be long drawn.

The caller on NPR this morning had a term for the current crisis where one is witnessing stocks, wealth and capital simply vanish into thin air so quickly: He called it ‘evaporational exuberance’.

Flawed on many levels

Below are four news snippets that have hidden issues associated with the $700,000,000,000.00 bailout in the papers today: The first smacks of 'inbred nepotism', the second an instance of 'the fox guarding the henhouse', the third reeks of 'siphoning public cash to the CEOs' whilst the fourth talks about 'a clear conflict of interest'.

• The Treasury Department said that it would soon post help-wanted ads on its Web site for asset managers to run the bailout program and that because of the urgency, the hiring may be “through other than full and open competition.”
• Former Goldman Sachs employee, Neel Kashkari has been appointed the bailout czar and will lead the bailout. By the way, a useful way to pronounce this Indian last name is ‘Cash Carry’ per Michelle. Fitting indeed.
• Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities. The move would put more taxpayer dollars at risk. Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.
• Administration officials plan to outsource almost the entire bailout effort, which will largely rely on “reverse auctions” in which the government accepts bids from financial institutions that want to sell their troubled assets. The Treasury is accepting bids only from experienced investment managers, almost all of which are likely to be either sellers or buyers of mortgage-backed securities.

Is it any wonder that the economy is in shambles? Meanwhile, the presidential candidates seem to be busy launching personal attacks at each other. Nero fiddles while... The bailout looks more and more like a big 'up yours' neon sign out of D.C.

Photos of Kwang-Young Chun's mulberry paper on small polystyrene form sculptures at the Robert Miller Gallery (exhibition on from Sept 4 - Oct 11)

Bailouts and excise taxes for wooden arrows designed for children

From a three page 'give all ye have to King Henry' bill to a 451 page bailout behemoth (pdf) - the bailout proposal has come a long way and is being voted in the Senate tonight. I am actually tired of laying out its defects (I laid it out here, here and here). As reported by dealbreaker first, the section on excise tax for certain wooden arrows designed for use by children in the bill makes no sense. No, I am not kidding. If you go to page 300 and 301 of the bailout bill you will find it. Indications are that this is going to pass - warts and all.

Bailout angst on Wall Street continues - pictures

Stepping outside for lunch, one is greeted nowadays by signs that seem to exude a labor union type dispute in a factory setting. It was funny to see Main Street collide with robotic pin striped suits strutting around Wall Street...

An intrepid man and woman team from dirtymoney.com managed to climb up a couple of flagpoles behind the iconic bull in Lower Manhattan and plant an American flag with the words FORECLOSED? emblazoned on it. They seem to have climbed the narrow poles using makeshift harnesses and cords. Impressive and dangerous, I must say. The scene below them was fairly chaotic with at least a hundred police officers and emergency workers looking to find some way to coax them down the poles.

It was an interesting scene - a busload of fairly clueless Oriental tourists somehow descended from nowhere and added to the general pandemonium.

Finally, the guy gets off the pole after about a half hour. He was greeted by the waiting arms of the officers who were fairly helpless in dissuading him earlier...

He was promptly read his rights and handcuffed and whisked away. His lady compatriot had scaled down earlier and faced a similar fate.

Meanwhile at a building overlooking the Stock Exchange, an enterprising group of young women decided to don these masks and placards around their necks with the words 'Greed Kills'.

I thought the most interesting part of the afternoon was this old individual casually resting against a trash can with his flute enjoying his dulcet production while the girls were protesting with their death masks above him. He seemed to be out of the whole system - in his own world..

Market Reaction

Dow is up by almost 400 (10,738.28 at 3pm today). We need to take time and plan the bailout better. The world has not ended as was predicted by the scholars and pundits at the Fed / Treasury.. Maybe I am missing something or am very very stupid.

From Dealbook:

The Center for Responsive Politics, a Washington nonprofit group that studies money and politics, reports that on average, lawmakers who voted in favor of the bailout bill have received 51 percent more in campaign contributions from sources in the finance, insurance and real estate industries — or FIRE industries, for short — over their congressional careers than those who opposed the emergency legislation..

Quick Comment

Taxes will go up. Interest rates will go up. Inflation will go up. Prices of consumer goods will go up. Total US debt will go up. Budget deficit will go up. Dollar will go down.

Why should 300 million people be stuck with the bailout of a few people on Wall Street? I still do not understand how they came up with the $700,000,000,000.00 number other than Mr. Paulson telling us that it needs to be ‘sufficiently large’, we still have not heard a logical price or model for valuation of distressed assets from bruised Wall Street firms, we still do not have a proper regulatory system in place nor regulation to prevent such a thing from happening in the future, curbs on executive compensation are next to nothing currently and Mr. Paulson still remains King Henry.

The bailout done right is needed very much and will be useful for all of US. Ramming a half digested piece of you know what down the throats of the taxpayers is not.

Huge cow patty with a marshmallow in the middle fails

Looks like the debate will go on in earnest. I heard a little while back that the bailout failed to clear the House. My view is that unless the bill contains clear provisions for the taxpayer to get some money back, unless there are clear provisions for a sane re-purchase price of distressed assets from banks eager to unload their toxicity and unless there are clear rules to limit CEO pay, we will be in limboland for some time. Just my view, but a lot of these lawmakers are going home to get re-elected in a couple of months and it will be the little taxpayer that they will be meeting there. And judging from reactions online and off, the taxpayer does not like what they see - a clear bailout with little to no regulation or oversight...

“A huge cow patty with a marshmallow in the middle of it.” – Rep. Paul Broun’s (R-Ga.) description of the bailout plan. (From Politico)

I guess this is the cue for Mr. McCain to again dramatically suspend his campaign and then - dramatically do nothing...

King Henry's powers

Mr. Henry Paulson, the Treasury Secretary had originally submitted a bailout plan to the Congress that was all of three pages long and asked Congress to give him explicit authority to do what he seems fit with an arbitrary of amount of $700,000,000,000.00. Specific wording in the three page plan that amounted to hubris included the following:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Congress said that Mr. Paulson overreached and asked for too much and spent about a week crafting legislation that aims to curtail Mr. Paulson’s powers.

Well, here is what we have after the exercise. From here.

• Mr. Paulson can choose to buy from any financial institution that does business in the United States, or from pension funds, with wide discretion over what he will buy and how much he will pay.
• Under some conditions, Mr. Paulson can choose to bail out foreign central banks.
• Under the bill, Mr. Paulson is to buy the securities at prices he deems appropriate. Mr. Paulson may set prices through auctions but is not required to do so.
• Mr. Paulson is directed to “make such purchases at the lowest price” that is “consistent with the purposes of this act.”
• Mr. Paulson does not need the approval of the Fed chairman or the oversight board to buy financial assets not linked to mortgages.

Here is the kicker:

• Mr. Paulson is to be one of the five members of the board watching over his own actions...

That sure is a fine recasting of King Henry's powers...

What is good for the goose is good for the...

New Yorker's Andy Borowitz has an interesting take on why he is "too big to fail" and makes his case for a bailout.

This is the first time I have ever asked for a bailout from the Federal Reserve. I know what you’re thinking. Why do I deserve your largesse, and I do mean largesse, since I’m asking for five million big ones? The answer is simple. Like many of our nation’s financial institutions, I am simply too big to fail.

Folkert de Jong's sculptural tableau. The Shooting...At Watou; 1st July 2006 on display at the James Cohan Gallery (between Sept 6 - Oct 4th 2008)