The New Welfare Queens

The NYT has an article on salary caps for banks taking taxpayer handouts. You should be amazed by the sense of entitlement:

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”

Well then, it sure is a shame that you ran your business into the ground and required a taxpayer bailout, isn't it? Frankly, $500K is still excessive considering the poor business leadership that has been demonstrated.

Damn welfare queens want to keep driving their cadillacs.

Bonuses are Required? Bah.

The Wall Street Journal is having terrible cognitive dissonance this morning. On the one hand, we are told that:

It won't be easy to upend a compensation system that is woven into the fabric of the U.S. financial system. Many Wall Street employees work under employment contracts that can't be unwound.

On the other hand, bankrupt Lehman is getting swamped with resumes despite low pay:

"We're getting swamped with résumés," says Bryan Marsal, a turnaround expert who is now Lehman's chief executive officer. The inquiries, he says, are from people affiliated with marquee names such as Bank of America, Citigroup Inc., and Morgan Stanley.

"It's just a tough, tough time, and there are a lot of good people out there looking for work."

The wages are not great by past standards.

I'm sure that Erin Burnett, with her keen financial insight and deep understanding of corporate compensation, will have soothing words to help the WSJ editors get off the couch by noon.

Who Pays?

By now it is painfully obvious that the nation's banks have driven their businesses into insolvency. Fundamentally, the banks bet their businesses on a perpetual rise in housing prices. Their bet was wrong, and now they are not merely illiquid, but insolvent.

It appears to me that the discussion over how to fix this problem omitted the first logical step: Who pays for the mistakes?

The realm of possible solutions really has only three possibilities:
1. The Treasury (and permit me to lump Congressionally-mandated solutions here.)
2. The Federal Reserve (Note that the Fed is not part of the government.)
3. The shareholders/bondholders of the banks.

Who are the actual people behind each of those broad groups?

If the banks' problems are solved by the treasury (and the stimulus package, if it passes): This money is nothing more than a loan guaranteed by future income taxes. Put simply, we are committing the money of the next generations for the errors of this generation.

If the banks' problems are solved by the Federal Reserve: The Fed would necessarily create money out of thin air. Who does this hurt? In short, anybody who was thrifty and who saved dollars in the past years. Those who lived beyond their means are rewarded by paying off debt with dollars that are now easier to come by.

The third group is those who ran the banks, and those who lent money to the banks in the form of bonds. At present, there seems to be little to no discussion about putting the burden squarely on the shoulders of these folks.

In summary, we can either make future generations pay, or we can make savers pay, or we can make those who made poor investments pay.

A future post will discuss more about the ramifications of holding shareholders/bondholders responsible.

Avoiding the Issue

Amazingly, the folks in Washington are STILL not able to face the music. The latest plan from Sheila Bair (as outlined by the NYT):

"She, Mr. Bernanke and Treasury officials have begun talking about a new kind of bank, one that would be created and capitalized by the federal government, and whose sole purpose would be to buy up bad assets."

This is insanity. If the banks were able to sell these assets at a price that made them solvent, they would. It isn't like the value of these assets are going to RISE in the future; The assets are worthless for a reason.

So we might as well stop fooling ourselves: The assets are worth less than the banks paid for them, and the banks have bankrupted themselves by exhibiting bad business sense. They hired the wrong people to make decisions, and their boards are full of folks that endorsed this policy. To buy the "bad" assets is simply a face-saving gift to the banks and a giant middle-finger to the taxpayers by pretending that they don't really know what is going on.

It is time to put a stop to this stupidity: Wipe out the shareholders, haircut the bondholders, fire the boards and management, recapitalize and reboot.

Resets updated with Principle Cap

A number of folks were interestined in the Reset Graph post, but several were looking for more info:



From my inbox: a Business Week graph with resets updated to include NegAms hitting their principle caps.

Update of the Mortgage Reset Graph

Long ago, Credit-Suisse compiled the dollar volume of mortgage resets per month. (I believe it was driven by Ivy Zellman. Anyone know for sure?) If you were lucky enough to see that graph, then the subprime-mortgage meltdown went from "insightful prediction" to "completely obvious."

It is a good time to revisit that graph:



The Obama administration has just about one year of a lull before the next wave hits in 2010. The third year of the Obama administration 2011 is going to see similar pain to 2008.

2x ETFs

Lately, I've been fascinated by the double-short ETFs like SRS and SKF. I have yet to see an analysis of these vehicles that made sense.

These ETFs track (and compound) -2x the daily swing in the underlying index. Several folks have already mentioned that volatility acts against the long holders of these securities. I am searching at the moment for a quantification of the volatility reduction, but have found nothing as of yet.

Perhaps I will have some spare cycles over the holiday. In the meantime, any pointers are welcome.