How to Cover Wall Street

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?

John Meriwether has had an eventful post-Liar’s Poker career.

Actually it’s been spectacular.

Read the rest of this entry »

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.

Enough, already.

At first, I thought the bailouts were necessary. But, I really never want to hear the “word of the year” again. Especially not for the auto industry.

Read the rest of this entry »

Plain and simple, it’s not a good time for anyone in the U.S. economy. And, according to Campbell Brown of CNN, the times are “terrifying.”

Unlike Wall Street executives or the giants of the auto industry, Brown’s show yesterday focused on a group of people we can actually relate to: students.

Read the rest of this entry »

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.

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

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.

Read the rest of this entry »

Wow. You know this economic crisis is really, really bad when the people actually reporting on it can’t even keep their jobs.

The bad business practices that have swept Wall Street isn’t even beneficial to the companies that it’s helping. In covering the financial meltdown, CNBC has garnered stellar ratings. The channels numbers in September were the best ever (in its 19-year history) and represented a huge increase from last year.

“CNBC in September, which Nielsen Media Research dates from Sept. 1-28, averaged 373,000 viewers during its business-day period. That was up 46% from last September’s 255,000 average and represented the financial news network’s best overall month with the daypart since March 2001.”

CNBC executives tout their prowess in the television business world to a sense of anxiety in the viewer saying, “When there’s an aggressive move to one extreme or the other CNBC engagement surges,” said Mark Hoffman, CNBC’s President. “Through much of this crisis fear has beat greed silly.”

But, now, The New York Observer is reporting that GE’s budget cuts are moving to CNBC.  The rumor is that the cut could be as large as 10 percent.

This is one of the first times that CNBC is feeling the cuts of its parent company. Previously, GE kept the cuts to NBC and cable network MSNBC.

“Back in October, NBC Universal chief Jeff Zucker sent an e-mail to employees, informing them that roughly $500 million, or roughly 3 percent of the budget, would be cut across the company, focusing on “reductions in promotion expenses; in discretionary spending, such as travel and entertainment and outside consultants; and in staffing costs.”

Details of the layoffs have not yet been released—so whether or not on-air anchors or reporters are affected is unknown.

One thing I’m guessing? CNBC won’t be reporting these job cuts during tomorrow’s broadcasts.