Billions Lost in Former Nasdaq Chairman's Pyramid Scheme
At the end of last week, former Nasdaq chairman and money manager Bernard L. Madoff was arrested for running a firm that lost billions of dollars through a pyramid scheme. Although such scandal is not new to Wall Street, Madoff might hold the dubious honor of committing the largest fraud in financial history. And the details are emerging rapidly this weekend.
As a New Yorker who knows that the economy of my favorite city is inextricably linked to Wall Street, and therefore to the end of the year, often shockingly large bonuses that do everything from add value to New York City real estate while keeping charities afloat– I do think that bonuses are a valuable part of Wall Street.
Lloyd Blankfein, the CEO of Goldman who went from living in public housing growing up to taking home $68 million in his bonus last year, raised eyebrows (and generated some cheers) a week ago, when he announced that he and six other top execs at Goldman would not take home bonuses this year, as Carl noted in his previous entry.
Although other companies don’t need to consider completely eliminating bonuses for execs, almost all of them will be cutting back significantly back on compensation as firms face daunting write-downs. Compensation is the largest expense on Wall Street, and is often used to keep top performers/talent, with many firms arguing that their employees are their firms’ greatest assets.
When talking about bonuses, it’s important to realize this:
-Year-end pay will be down significantly, but it would be much less if it were not for layoffs (less people to compensate) and the bailout. The latter is particularly controversial- is public money actually boosting the compensation of struggling firms? Well yes, most likely- if government hadn’t helped many firms refinance their debt, many would lack the cash at all to compensate their employees.
-As my other blogging colleagues noted, base pay has always been modest at firms (well, maybe not as modest as waitresses, but modest in comparison to how much in profits firms used to bring in). Any major cuts in compensation will not be offset much by employees’ base salaries.
The bottom line: Taxpayers have definitely lost out by funding expensive bailouts (and bonuses), but most employees in Wall Street will definitely see smaller bonuses this year, if they have even managed to keep their jobs.
Vikram Pandit, Citigroup CEO
Late last night, the government and Citigroup came up with a radical plan to stabilize the huge financial conglomerate. The Citigroup bailout dwarfs some of the federal government’s stabilization plans for other companies, with the government planning to directly invest $20 billion in Citigroup, and agreeing to back $306 billion of their loans and securities. Why Citigroup and not Lehman? Well, Citigroup definitely falls in the category of ‘too big to fail.’
The massive financial company has over 200 million accounts worldwide, employs over 350,000 people (though is planning to lay off 50,000!), and is a major dealer in U.S. Treasury securities. The magnitude of a Citi collapse would shake up Wall Street in ways few of us could even imagine- a market earthquake that could have made October 2008 look completely rosy. So far, Wall Street seems to be responding favorably to this latest bailout, with Citigroup (NYSE: C) up 52 percent for the day. Last week, the market ripped apart Citi, with its stock losing half of its value in four days. In the past four quarters, Citi has consistently posted losses, and its consumer loans seem now as toxic as its mortgage-back securities.
How will the government pay for the losses it’s guaranteeing through public money? Citigroup will absorb ten percent of its losses, and the government has agreed to absorb the other 90 percent. First, the Treasury Department will absorb the first $5 billion in losses, the FDIC will bear the next $10 billion, and the Federal Reserve will guarantee any additional losses.
This morning, president-elect Obama announced his economic positions in his cabinet, attempting to both calm Wall Street and the larger American public.
“Right now, our economy is trapped in a vicious cycle: the turmoil on Wall Street means a new round of belt-tightening for families and businesses on Main Street,” said Obama. ”As folks produce less and consume less, that just deepens the problems in our financial markets. These extraordinary stresses on our financial system require extraordinary policy responses. And my Administration will honor the public commitments made by the current Administration to address this crisis.”
Obama’s speech came at a critical time, with the radical plan for Citigroup just announced, and increasing anxiety about unemployment, foreclosures, and the auto industry. ”The news this past week, including this morning’s news about Citigroup, has made it even more clear that we are facing an economic crisis of historic proportions,” said Obama.
Wall Street’s mood has been nervous or skittish at best during the past month and a half, and whether even the investment of billions of dollars of public money into Citigroup will continue to reassure investors remains to be seen.
Obama's Econ Experts At Press Conference This Morning
The self-help queen of money gains serious popularity as American economy tanks.
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.