How to Cover Wall Street

As George Orwell put it, “It is a feeling of relief, almost of pleasure, at knowing yourself at last genuinely down and out. You have talked so often of going to the dogs – and well, here are the dogs, and you have reached them, and you can stand it. It takes off a lot of anxiety.”

If that holds any meaning to investors at home and abroad, it’s to those anxiously waiting for the bottom:

The bottom of stock markets, the bottom of housing and credit markets, the bottom of ambiguous recessions muddled by GDP reports.

Perhaps Orwell would top even Warren Buffet as an oracle.

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College is arguably the best four years of your life. But, with the recent economic crisis, some are saying students will be lucky if they even get there. Lack of student loan money is the main problem, but there’s a whole other slew of issues.  Which makes me wonder…is the government doing anything about this yet? Should we maybe give, oh, I don’t know, a small portion of $700 billion to help fund students and colleges?

Somewhere, the next Bill Gates is sitting in a high school deciding that he doesn’t want to go to college because he can’t afford the tuition. Somewhere, a student who actually has an idea to invent something that will both produce jobs and make money (rather than just inventing new ways to make money on the stock market) isn’t going to go because she’ll decide that the closest college doesn’t have nice enough dorms. At least, that’s one theory out there.

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Merrill Lynch brokers are looking for the door.

Acquisitions are all about “give-and-take.” But it looks like Bank of America CEO, Kenneth Lewis, is going to have to give much more to Merrill Lynch brokers in order to keep them from defecting.

In an effort to keep Merrill’s 16,850-person brokerage unit intact, Lewis announced that brokers who do $1 million in business will receive bonuses equal to 100 percent of their yearly fees and commissions. The caveat? Those brokers will have to remain at Bank of America for the next seven years before they can collect.

Sure, Kenneth. Hundreds of high-rolling brokers are going to hang around Merrill Lynch for seven years just to validate your decision to purchase the brokerage. Like that’s going to happen.

Lewis’ decision to green-light these long-term bonus arrangements amounts to re-purchasing the one Merrill asset that made the $50 billion Bank of America deal worthwhile. But, with Merrill’s stock price down 76.06 percent from last year and bonus expectations down 30 to 50 percent from last year, top brokers are finding that they can make more elsewhere or on their own.

On Friday, four of Merrill’s elite — Bill Loftus, Bill Lomus, Kevin Burns and Jim Pratt-Heaney — broke away from the 16,850-person brokerage network to form LLBH Group Private Wealth Management. Others are actively being lured away by competitors such as Citibank, MorganStanley and UBS, some of which are offering bonuses in excess of 200 percent of fees and commissions.

Bank of America’s gamble may stave off a mass exodus from Merrill. But who really wants to trade their A-list brokers for a bunch of mediocre desk jockeys who would rather stay put than go after the big fish?

Top brokers will most certainly take their clients with them. Now Lewis has to start negotiating with his brokers to sweeten the deal or let them walk. Either way, BOA’s shareholders are going to lose money on the Merrill acquisition. And Lewis may, ultimately, find himself out of a job.

It’s been a bad month for hedge funds and private equity may soon share some of the pain. Faced with a swelling budget deficit and public anger over financial market excesses, Congress may reconsider the generous tax treatment private equity firms now enjoy.

“They might be next on the list,” said hedge fund specialist Andrew Wright of law firm Kirkland & Ellis in a telephone interview last week.

A move to raise taxes on private equity couldn’t come at a worse time for the firms.  Many have suffered as investments soured. Cerberus Capital’s private equity arm has been hurt by its stake in Chrysler and GMAC. The major pullback in bank lending will also diminish private equity’s ability to fund future deals that could be more lucrative. Meanwhile, investors who funded these venture in the past and took big losses might not have the same appetite for these risky investments.

That trend has already hit the hedge fund industry.  As capital flocked to safer investments in September, investors withdrew a record $43 billion from hedge funds, the most since the market began tracking outflows in 2000. As redemptions continue, Credit Suisse estimates 30% of the roughly 8,000 hedge funds will close in the next few years. Recent tax code reform, which closed a tax loophole that saved hedge fund managers $2 billion a year, will certainly accelerate closures as fund managers lose another incentive for keeping funds afloat.

Meanwhile, Congress has left tax perks for private equity intact. Victor Fleischer, associate professor at the University of Illinois who testified at Congressional hearings on this issue last year, said it was easy to reform the hedge fund taxation because the issue was already on the Senate Finance Committee’s agenda.

Changes in private equity taxation, he said, remain controversial.

Private equity firm managers usually receive a hefty 20 percent of the profits the firm generates. Their investors agree to this arrangement because management is supposed to be talented enough to produce outsized returns on their money.

“Ordinarily when this happens under the current tax code, the fee you get in exchange for the services you provide would be taxed as income,” said Fleischer in an interview today.

The tax code currently allows these private equity profits to be treated as capital gains because they represent profits on long-term investments. This is called “carried interest” and it is taxed at the capital gains rate of 15 percent, instead of the ordinary income tax rate that ranges from 28 to 35 percent.

Changing the treatment of these profits for private equity partnerships “will be under consideration again next year,” said Fleischer. “But changes depend on who is elected president. If it’s Obama, it is not only possible but likely” that the tax code will be changed to tax private equity managers’ income at a higher rate.

Either way, it could be a case of too little too late for the American taxpayer. With private equity set to have its worst year ever, there will be fewer profits to tax anyway.

The financial crisis has hit nearly every facet of our economy, from retail sales, to auto sales, to the housing industry. And, though arguably not as important, the economic future of America’s sports organizations aren’t exempt from the trend either.

From Nascar to the NBA, over to the NHL and all the way to the NFL and MLB, nearly every professional sports organization in the U.S. is expected to hit a downturn with the economy in turmoil. Decreases in ticket sales, merchandise sales and corporate sponsorships will likely cause some economic hardships for all sports organizations.

I can’t say I feel sorry for the owners or the athletes. Perhaps cutting down on multi-million dollar contracts is a way to save money? Or, well, here’s an idea that could work: PLAN AHEAD!

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Whether you are a twentysomething trying to fix her credit score, or an Amazon customer looking at self-help books, Suze Orman is probably a familiar face.  Now, with the Fed sending confusing, erratic signals to Main Street, who are Americans turning to?

Apparently, Suze.  And not just Main Street, but Wall Street too.  As recession has seemed more likely, both companies and banks have been pleading with her for endorsements– creating concerns among critics that she might have a conflict of interest.  Laundry detergent companies, the Got Milk folks, and banks like Wells Fargo have all asked Orman to consider endorsing them.  Orman has agreed to some products endorsements, but generally stays out of banking, believing it would be unethical to do so.  Some critics argue that she doesn’t watch her potential conflicts of interest closely enough, and should avoid commercial endorsements to protect her consumer watchdog image.

But could a milk mustache be a conflict of interest? The self-help guru doesn’t think so.  Orman picked up $25k for agreeing to don a foamy smile.  In times like these, a Suze Orman cameo might be worth more than, let’s say, a Sarah Jessica Parker endorsement.

Sarah Who? As the economy crumbles, a Suze Orman endorsement is where it's at.

Sorry Al-Naimi, today was a killer.

Was it only earlier this year that consumers were clenching their jaws as analysts talked about the future of $150+ barrels of oil? Today, oil hit a 14-month low at $69.85, perhaps a small oasis for the average joe (six-pack or plumber?) in a desert of sour economic indicators.  But will falling oil prices really help consumers so much? And how did the price of oil get so low?

With winter around the corner, people might get a break with lower energy bills, and may find it a little easier on their pocketbook to drive to see their families over the holidays.  Although cheaper gas might change this, national oil demand is at its lowest level since June 1999 (gee, are highways getting emptier?), causing declines in prices.

As you would imagine, this ain’t pretty for petroleum execs or oil producers.  Gulp.  According to the New York Times, Iran and Venezuela need oil to trade at $95 a barrel to balance their budgets, and Russia needs at least $70.  Next week, OPEC is having an emergency meeting to figure out how to stabilize prices.  Things may look bad right now for major oil-producing countries, but with oil prices as volatile as they have been, who knows?

After all, what comes down must go back up.  Consumers need any respite they can in these times, but in the long-term, $4 gas could still be in the cards.

With America’s economy pummeled and its financial system all but socialized, a once-unthinkable reality has dawned on the populace: we may not be the world’s only superpower for much longer.

True. But neither will anybody else.

Over the past year, the U.S. economy softened as that of two erstwhile underdogs emerged: India and China. Good money was on Russia and Brazil seeing increased economic strength, too. And as pundits marveled at the breakneck speed of these emerging economies’ growth, the thinly veiled subtext to their awe was, “how much trouble are we in?”

China and India presented a real threat to America’s status as top economic dogs, and it stood to reason that our power might recede as theirs rose. Then came the fall of 2008.
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Fed chair Ben Bernanke said Wednesday to expect economic activity to “fall short of potential for a time.”

A bit of an understatement on the day that the Dow dropped another 733 points, eh?

Peter Goodman at The Times noted Mr. Bernanke also made this curious observation at his Economic Club of NY appearance:

The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem. And that problem, we’ve just recognized now in the current situation, how severe it is.

Just recognized? That’s right. I forgot the banks just kinda merged themselves.

Or has this all just been a red scare?

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Antitrust regulators at the US Justice Department signed off on Bank of America’s $34.9 billion dollar acquisition of Merrill Lynch & Co. this morning. But there was little to celebrate as Merrill announced a $7.5 billion-dollar loss in the third quarter, the fifth straight loss since the fourth quarter of 2007.

Though Merrill has retains its cache as the world’s largest brokerage, a laundry list of that firm’s losses suggest that Bank of America’s  “golden egg” may, in fact, be a lemon. The big question is whether or not Bank of America will demand that Treasury guarantee its investment in Merrill in order to keep the purchase on track.

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