How to Cover Wall Street

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.

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

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?

(more…)

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…)