How to Cover Wall Street

Greg, Steve and Damian all make good points. I’ll use my own experience to illustrate my take. When I was a waitress at a diner near the U.N., we had a steady trickle of international customers, most of whom were bad tippers (please excuse the broad national stereotypes for the purposes of instructional parable). The most extreme in their penuriousness, it must be said, were Brits, who would often nurse a $2.99 bowl of soup or $1 cup of tea for ages, and then leave a five or 10 percent gratuity.

The Comfort Diner

The reason wasn’t some unresolved resentment toward the colonies, nor do I think it can be attributed entirely to a lack of familiarity with local custom (Yes, tips are much more modest in your country, I wanted to scream, but you’ve got a guidebook – read it!). (more…)

Treasury Secretary, Henry Paulson, is trying to save the financial system. But the Treasury’s Troubled Asset Relief Program or TARP cannot fund all of the financial institutions that have applied for it.

Regulators for the Treasury have announced that the agency expects at least 1,800 publicly-held financial institutions to line up for their piece of the $700 billion bailout designed to rid banks of toxic assets.

Paulson moved quickly to shore up the financial services sector in the midst of a meltdown. And, to date, Treasury plans to divide $33 billion  among the nine largest US banks and 16 regional banks. But the Treasury Secretary may have opened up a Pandora’s box since, now, almost any financial institution can apply for a piece of the pie.

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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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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.

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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Though the layperson may still not completely get just how the credit crunch could affect them, it could become pretty clear when it starts to affect his or her spending. A common denominator that is a staple in many people’s financial lives is credit cards. The economic crisis has already had adverse effects on the credit-card industry. You may have noticed fewer credit card offers in your mailbox, and fewer still with offers of zero-percent interest rates. This year, banks like HSBC and Citibank have cut their mailings by as much as half.

Also, your credit limits may start to decrease without your knowledge. Or, if you have a credit card that you  keep around for emergencies but has been rendered inactive, it may be canceled so the issuer can cut the cost of maintaining the account. These may seem like small changes, but they can hurt your credit score, so it’s a good idea to keep a close eye on your accounts these days. The Wall Street Journal reports how you can track what’s being done to your credit score.

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John Mack “quickly signed,” the Wall Street Journal said in its coverage of the Treasury meeting with America’s top nine banking chiefs on Monday.

Maybe he did, or maybe he actually signed in alphabetical order — which would put him somewhere in the middle. “Before the meeting, John J. Mack said his bank, Morgan Stanley, did not need capital from the Treasury. It had just sealed a $9 billion deal with a large Japanese bank,” according to the New York Times account of the same event.

The details here might paint different pictures of Morgan Stanley, but the outcome is all the same. Mack and each of his peers definitively signed away on a $125 billion cash injection (executive pay caps included). Both papers clearly made that point in their coverage of the Washington gathering between the nine CEOs, Henry Paulson, Ben Bernanke and other government officials.

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A few weeks ago, California Governor Arnold Schwarzenegger said his state might need a $7 billion loan from the federal government just to keep making payroll and securing basic services. Virginia faces a $3 billion shortfall, our very own New York has a $2 billion hole in its budget and there are many more states facing huge deficits.

This wouldn’t be as much of a problem if state governments didn’t have state laws or constitutional amendments that demand a balanced budget. They just can’t run a deficit and be done with it (what would the federal government do if that was the case in D.C.?). Many states were in a precarious position with the slowdown in the economy and the credit crisis has only exacerbated their woes.

But what is bad for state governments could be good for investors.
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