By now most Americans have heard about sub-prime mortgages and the havoc they’ve wreaked on financial firms and the economy.
But on Sunday, 60 Minutes had a great story on the next mortgages that will become everyday words to Americans. And they’re called “Alt-A” or “Option Arm” mortgages. Check out the video story after the fold and more. (more…)
Just before the previews started at a showing of Slumdog Millionaire on Saturday night, my ear caught the two 40-something guys behind my wife and I talking about Bernard Madoff’s giant Ponzi scheme.
“That makes like 10 people we know who were caught up in this,” said one of the guys.
As I pretended to listen to what my wife was saying I focused on their conversation – hoping to hear a name I might know.
The American auto industry is like a lame horse: The only way to fix it is to let it die.
GM announced on Friday that the company will close 20 of its North American plants and is considering filing for Chapter 11. Chrysler LLC is slated to close 29 plants and lay off 53,000 workers effective immediately. And, though Ford Motor Company CEO Allan Mullaly told a Congressional committee that his company does not face what he called “near-term liquidity issues” which have slammed GM and Chrysler, he still has his cap in hand for $9 billion of Treasury-sponsored credit, should the industry worsen.
Bailouts work when one or two otherwise viable companies need temporary assistance either to survive a short-term cash shortage or to effect an orderly wind-down. An example of a successful bailout occurred in 1998 when Wall Street and the Feds came together to prevent the immediate bankruptcy of Long Term Capital Management—in that case, Wall Street firms bore the brunt of the monetary pain. LTCM’s bailout, although government initiated, also posed a low risk of moral hazard because the plan was an industry-funded solution and was manageable because it only involved one firm.
The government rescue of an entire industry felled by greed and poor leadership, however, becomes an expensive quagmire, which is what TARP is proving to be.
After LTCM’s rescue, the Cleveland Fed reviewed the Federal Reserve’s action. The number one lesson learned: Context matters. Large losses at a financial firm do not by themselves create a need for Federal Reserve action; the losses must have a systemic component.
While one could argue that the failure of the big three would worsen the unemployment significantly and cause a spate of follow-on bankruptcies, the orderly unwinding of the auto manufacturers still does not pose the same kind of systemic risk that failure of the major U.S. commercial banks would have.
A bailout for the Big Three also would not force the kind of changes that domestic auto manufactures need but which a pre-packaged bankruptcy plan created outside a courtroom might. More importantly, it would prevent the obvious scenario a few months from now when the auto industry comes back for an even bigger handout.
The financial services bailout is exhorbitant, messy and rife with moral hazard. It was also necessary to avoid a meltdown of world financial markets. Unpalatable as a bailout for financial services is for the country, replicating it for the automakers makes no sense.
There seems to be a myth that bankruptcy for the (former) Big Three would spell Armageddon. Not true.
It is getting harder lately for companies to reemerge from Chapter 11, true. For example, this year Circuit City and Linen N’ Things were forced to liquidate when they couldn’t find a white knight. Such a Chapter 11-is-the-new-9-scenario could be especially disastrous if the autos went under, and would drag their suppliers under the bus too. We can and should avoid this.
But giving a company like GM a blank check just because its CEO Rick Wagoner has ditched his jet and gone to Quiznos, well that’s a recipe for disaster as well.
There is another way. The government could sponsor the automaker’s bankruptcy. This way they win more concessions than with a bailout. Andrew Ross Sorkin lays out the plan.
“Taxpayers shouldn’t fork over a cent until shareholders are wiped out, management is tossed out and the industry is completely reorganized,” he wrote.
What say you all?
The problem with Capitalism is that when it doesn’t work, everybody expects a quick fix.
My original thought in September was that the U.S. government should never bail out financial institutions, especially using taxpayer money.
But the Treasury can’t undo what’s been done, they can only consider what TARP is actually doing to relieve a one-year-old recession and a tumorous financial crisis.
If you ask me — and I’m sure if asked Adam Smith — Corporate America needs to lean from its mistakes and accept that a free-market economy has its pros and cons. The more we soften the collapse of embattled corporations, the less likely those business will ever make genuine changes in how they run their operations or how they cut corners to make a bigger profit.
And the more our government tries to clean up the mess, the more likely future generations of American consumers, businesses, banks and investors will make the same mistakes.
The intervention between JP Morgan and Bear Sterns was tolerable. It was less a bailout in my view than an aggressive push. But it also flipped open a Pandora’s Box.
TARP is becoming a well-recognized mistake and any similar initiatives given to the auto industry would show equally lame results. Yet the Big Three have their open palms out now.
Goldman is sinking. Citi is imploding. And U.S. taxpayers are out $700 billion. Why would Ford, GM and Chrysler prove any different?
Here’s a solution: Take all that bailout money, put it towards education and start teaching finance and economics to kids in elementary school. Make it part of the core curricculum in all public and private schools all the way up to high school.
I’d love for Gotham to continue to take its slice of outsize Wall Street bonuses and throw it at health care, education and police as we did in the good years. Too bad the zeitgeist is elsewhere.
As Greg wrote, the Mayor gets 9% of his revenue from Wall Street, and the Governor relies on financials for 20%. Not to mention, bonuses have helped sustain New York City’s housing market and the not-for-profit community.
But these days America is hungry for a bit-o-vengeance, and Rep. Henry Waxman and Rep. Barney Frank are happy to comply.
Goldman Sachs and UBS have curtailed executive bonuses for the year, and other financial firms are sure to follow.
In fact, the very concept of a bonus has come under attack.
Researchers at the Center for Financial Studies (CFS) at Frankfurt’s Goethe-University released a study accusing bonuses of playing a significant role in leading us off the cliff of the financial crisis.
And Dan Ariely, a professor of behavioral economics at Duke, recently outlined his anti-bonus research on the op-ed page of the Times. Ariely’s subjects, one group from India and one from MIT, were given monetary incentives to complete cognitive tasks. Those offered the biggest bonuses in both groups fared worse than those given medium or small bonuses.
Ariely concluded that money “motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.”
The professor presented his results to a group of banking executives but they weren’t interested in examining themselves.
So, Lloyd Blankfein has decided that Goldman Sachs’ top management will forgo their yearly bonuses this year, bringing the “will they or won’t they” argument to a close. Now the others are expected to follow suit.
Smooth move, Lloyd: Please Washington by taking a hit at the top; let the “little people” take home their bonuses; and Wall Street and Main Street are finally reconciled.
Goldman’s “goodwill” move has prompted executives at UK-based, Barclays, PLC, Germany’s Deutschbank AG and Switzerland’s UBS AG to abandon bonuses for senior managers. But executives at Morgan Stanley, Citigroup and AIG aren’t lining up to fall on their swords. In fact, John Mack and Brady Dougan are conspicuously silent on the matter while Vikram Pandit has decided to eliminate the bonus question altogether by slashing jobs.
This subject is quite personal for me, since my wife, Stacey, has worked at Morgan Stanley since 2000. She is not an investment banker, nor an executive, so I’m not sure how these plans to cut bonus pay would affect her. She works as a researcher/analyst on asset managers, e.g. mutual funds. Morgan uses her work and that of her colleagues to recommend asset managers to Morgan clients.
Her research division had nothing to do with the high leverage that Morgan took on or its investments in mortgage-backed securities. Her division has continued to make solid, consistent profits for Morgan Stanley.
So if Rep. Barney Frank and Sen. Bernie Sanders are talking about cutting the bonuses of EVERY employee at every financial institution that has received part of the the bailout money I couldn’t be more opposed to the idea. Is it fair to penalize thousands of people for actions they had nothing to do with? And it is more than likely that these employees will be penalized in some way (either by losing their job or receiving less compensation) by their employer without the hand of government getting involved (I get into this later).
Check out this interview Bernie Sanders (I-VT) recently did with CNBC. At the 1:56 mark a host chimes in:
“Senator your proposal looks rather punitive and mean spirited…It’s one thing to say to take bonuses away, when you’re getting federal money, from the big brass, that got us into this mess, but you want bonuses deprived of every Wall Street employee…You want the secretary at Goldman Sachs not to get a $30,000 bonus that she could put back into the economy. And she did nothing wrong.” (more…)
If it were my decision, I wouldn’t give a dime to Wall Street to pay for CEO bonuses. But, as we all know, it’s not up to me.
I saw a segment on “The Early Show” this morning that posed this very controversial question to the experts, which made me decide that I really don’t care if these CEOs get their bonuses or how much the bonuses are–the thing I mostly care about is: Where is the money coming from?