munky.org|v3.0

We got we wanted against the AIG bonus recipients. Now what?

Be careful what you wish for: it may come true. For the last couple of weeks, the public has been in an outrage over the AIG bonuses. Things have calmed down slightly, and now we get to have a good look at what we’ve done.

These bonuses were retention bonuses, signed legally and in ink, continually promised to the employees who stayed. Why else should they stay? They are literally working themselves out of a job, their only job to piece apart and sell AIG, then the last guy out gets to turn off the lights.

Sure, we can scream, “Hey, they got us in this mess!” Well, most of those guys aren’t around anymore, so we are blaming the wrong people. These people have a very important job, one that the taxpayer owners should be grateful for. They turned down more stable positions (because of the retention bonus) to stick around and extract every potential dollar out of AIG.

Now a number of them are leaving. We’ve demonized them, stripped them of their promised bonus, and put them in a precarious situation. When they had opportunities to go elsewhere they didn’t,  but since this has hit the fan, well. We take the chance of shooting ourselves in the foot now.

How? Consider this. Now these people are leaving, taking key skills with them. Sure there are loads of unemployed bankers, but seriously, who wants to go work for next to nothing working 80 weeks (being overtime exempt), no bonus, and if you are lucky, you get to be the one to turn off the lights on the last day. There isn’t a lot of appeal there.

Plus a lot of the work done is very complex and requires extremely specialized skills – I can’t just grab the recently unemployed trader and get him to work on this. There are applications running things that they don’t even teach in college anymore.

So now how do we screw ourselves? Simple. Intelligent, specialize people are needed for the task of taking apart AIG. Without these skills, AIG may be parted out for way less than possible. Just remember we’ve dumped $180 or so billion into this company, and the only way we are going to ever see any of that back is if AIG does an excellent job. Scaring away talented employees and potential employees is just plain stupid.

So you can scream all you want, but when your company takes a nosedive and they offer you enough of a bonus to stay around till the end, you do you job then get villianized for doing you job, you’ll think differently.

When it comes down too it, as I said before, the government is not in the business of running business. It may be just one of the worst things a government can do. Sure, they won out on the populist rhetoric over the bonuses, but in the end, we’re the ones who are going to get hurt.

Citigroup Headquarters in New York

Citi announced today that it was going to run a new mortgage program. If you become unemployed and have your mortgage through CitiMortgage, you could have your payment reduced to $500 a month for 3 months. Not a bad deal, figuring $500 will get you into a rough apartment in most places across the country. And if after 3 months and you are still out of work, then they can consider continuing it or modifying your mortgage, on a case-by-case basis. The best part being when you find a job, you may also qualify for having your mortgage modified as well.

Now as much as I dislike Citi, this is a great idea. My question is, why couldn’t have someone thought of this a long time ago! At least in 2007, when the alarm bells were going off, the foreclosure rate was creeping up, and the economy was preparing us for this 15 month long (as of now) recession. Do you know how many problems we may have averted! It’s not pandora’s box by a long shot, but is definitely a critical piece of the puzzle that has been missing for a long time.

So if I like this plan so much, why am I criticizing Citi? Because I don’t question the plan, I question the motive. They have been bailed out 3 times by the government, and still may not make it. If my math is right, they are up to $70 billion, or Bank of America’s and JPMorgan Chase’s combined bailout. Given the fact that Citi is smaller than both of those two, it leaves you scratching your head.

I believe there are 2 primary reasons why this has been done. A) To save some face with the public, and B) the public now countrols 36% of Citi. Whose in charge now? Not because someone had a dirty concious, not because someone got smart and figured out nailing it to the guy in need is not going to solve the problem.

All in all, it is a step in the right direction. Too little to late to stem the crisis, but it may soften the blow. Hopefully other banks will move in the same direction. I know they currently offer “mortgage insurance” that eliminates payments, yet when I’m already paying a PMI, I feel I should already be covered.

However, thinking back to Citi’s 3rd bailout (and AIG’s), I think we need to assert an unwritten rule of thumb. Let’s limit them to three. In fact, three is too much, but we’ve already done it so we are stuck with that number. If they need more than three, and are too big to fail, then the U.S. needs to nationalize (yes, I said nationalize), long enough to break up the various pieces and sell them off to investors and other banks, to reduce the recoil felt in the industry.

AIG Headquarters

AIG, the largest crook, eh, insurance company around, has accepted another $30 billion from the U.S. Government. If we think Citi and Bank of America are in dire straights, consider this: If you combine the amounts the largest 12 US Banks received in TARP funds, you would still be nearly $6 billion short of the AIG bailout. Thats right, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, PNC Financial, US Bancorp, Bank of New York Mellon, Suntrust Bank, State Street Bank, Capital One, BB&T, and Regions Financial has received a whooping total of $174.3 billion, as compared to AIG’s $180 billion. Plus the US Government will be taking risky securities from them as well. Us taxpayers will also be taking over partial control of a few business units that AIG has been trying to sell but has come up short.

People scream and complain all day, because the thought of Bank of America receiving $45,000,000,000 (yes, that’s 9 zeros) is mind boggling. Maybe we don’t want to sit down and think about how big $180,000,000,000 really is. There are countries that don’t even have a GDP that high. In fact, there are a LOT of countries with a GDP lower than $180 billion. Yet here we go, giving away medium developing countries to an insurance agent, who should be a master of risk management even more so than a bank, who took on ungodly risks and is paying the piper for it. Their company’s credit rating is being considered for downgrade to junk, which is why the government stepped in again. If it gets downgraded, clauses in insurance contracts will allow customers to close their policy.

Maybe we need to let AIG fail. Not quickly and painfully, since it’s span is webbed throughout the world, and could cause serious withdrawels in places like Japan, China, Hong Kong, among other places.  We need to let it fail gracefully, selling off its pieces as we go along.

How can I say this? Even though I support the bailout and government intervention in times of need, I still believe it goes slap against the core of what a government really is supposed to do. That is to provide infrastructure, emergency services, education. Enticing businesses to come and and stirring up economic activity is of intrinsic interest, but not the first priority (though it is needed for the 1st). AIG is a company that is supposedly too big to fail. Yet if it’s credit ratings drop, customers move elsewhere, investors move elsewhere. While AIG would shrink, it’s competitors would grow. At some point the cost has to outweigh the risk, so is the risk worth at least $180 billion? I dunno, but I think at some point we’re going to find out. That is a tremendous investment, seeing as how most companies in the U.S. have never earned that much money.

Honestly, at this point I’m feeling taken by AIG.  Citigroup is getting to me too, with their 36% move, which unless they get up to like, say $30 a share or so (rough estimate), we the taxpayers are getting a really big short end. At least Bank of America has been repaying their interest to the government, so I can tolerate that $45 billion.

Too many things are still uncertain, but I do think that we are going to see some bad things happen or nearly happen to Citi and AIG this year. Just an opinion. Think differently, then put it out there.

FDIC Insures Deposits Up To $250K

I ALMOST FORGOT TO MENTION THIS! Jeeze, I could get on myself for that. Two banks collapsed into the FDIC’s waiting arms this weekend, bringing the total number to 16 for 2009. There were 25 in 2008 total, so you decide. That’s 16 banks in 2 months, and there are another 10 to go (not to mention a number of other problems, such as commercial real estate, that may implode at any moment). It was another couple of small banks, Heritage Community Bank and Security Savings Bank. Heritage Community Bank was a bank out of Glenwood, IL, while Security Savings Bank was from Henderson, NV. MB Financial, NA and Nevada State Bank were the recipients, respectively.

The grand total to the FDIC (::cough:: taxpayers)  for these two? $100.7 million. A small number, if you consider a small number to be more money than most of us will ever see in our lives. Hope that puts that into perspective.

The FDIC said that the current crisis will probably cost the fund $65 billion by 2013. Or in other words, less than AIG’s bailout.

To finish off tonight, the government did announce that it will take control of 36% of Citigroup. That is 14% + 1 share of nationalization the good ol fashioned way. Now we know what government and private equity has in common.

Has the administration done its homework?

The first go around of the bank bailout has had mixed results. Things didn’t get much better, but they didn’t get much worse either for the most part. So it can be considered both a success and a failure, depending on who you ask. Instead of taking a seat and crunching who needed what, they forced the big banks to take a check, then handed out funds to the others who requested them.

Now we are in phase 2. The calamity that surrounded the first bailout has diminished – however relative – and everyone has more time to think and act. This time, the government is going to use a “stress test” on the banks to figure out who needs what and how badly. These tests are supposed to see if the banks can handle not only what the government expects will happen, but will also test to see if they can stand on the “worst case” scenario: 10% unemployment and another 20% drop in home prices.

Some thoughts on this whole bailout mess. I supported the first bailout. I knew it wasn’t perfect at the beginning, but the price for perfection was too high. America’s financial institutions were in dire straights, and needed help quickly. I was furious at the congressmen and women who were quoted as saying things like “I don’t see the need for it” or “how is this going to help main street?” Some pushed back saying that they wouldn’t support it because their constituents wouldn’t get any benefit from it. Since then we’ve learned just how much Wall Street affects main street. I’m glad it passed, I just hated it took so long. I remember just after one senator – I believe Jim Inhofe of Oklahoma (what a character) – made a comment about not seeing the need to rush things, WaMu failed and Wachovia teetered into competing suitors. These was an urgent need.

Now onto the next $350 billion. I like the concept of the stress test. Now that we have some time to breath, let’s size up the team. My only concern is the worst case scenario may be a bit optimistic. Although a number of good signs have come across throughout the markets (more in-depth studying of our recent lows find that they were not as bad as 11/20 and 11/21), there is still more than can hit the fan, and probably will. Our economy is being shaken up, and there are still more feathers to ruffle. I should hope that home prices don’t drop more than another 20%, but unemployment may hit the 10% mark. Lets hope neither happens.

After the tests, the government (and the banks) will be in a better position to judge their capital positions. If more capital is needed to maintain solvency, then that bank has 6 months to raise private capital before the government purchases preferred convertibles to boost it’s financial position. In theory, eventually these preferred convertibles will later be converted to common shares, increasing its health in the stock market and potentially giving the taxpayers a reward (maybe).

Will it work? That we’ll see. As a long term bailout program, it is much better than our original TARP program. Although I think the option to invest directly in the banks was better than asset recovery (which would’ve taken much longer), it was not designed to be an everlasting measure. I am hopeful that this administration used its time and political chips wisely on this one. It could still fail, but with careful planning and a little luck, it might just work.

Hopefully a number of lessons can be learned from this recession.

1. Although we know consumerism is essential to the growth of our economy, it is reckless and foolish to allow it to be driven by high debt loads
2. We need to learn to save more
3. Speculation is a very serious game with very serious risks. We are all paying the price for it right now
4. The government cannot bail us out of everything, regardless of what is promised

Mainstreet, America

The only way our economy drives is by spending. In theory, as we make more, we spend more, which drives others to make more and spend more, coming around into full circle. Ignoring other factors – such as supply and demand – this is one of the reasons for inflation and job growth. In a perfect society, the debt load would be minimal. Debt is useful in extending out a persons wealth, but debt comes at a real cost. America (and other nations) had become a country where income was going to pay off debt, and debt was driving spending.

In the case of investments, if the return is greater than the cost plus inflation, then borrowing may be a good option, if the risks are acceptable. However, far too many people were using this debt to buy high end televisions and cars, etc. They were buying big houses – on exotic mortgages like interest only, quick changing ARMs, no-doc loans – keeping up with the Joneses. Many people gambled, buying up houses on exotic mortgages, with the knowledge that the sky was the limit for homeprices. Far too many people stopped thinking and went on the bandwagon. I bought my house in 2004, while the housing market was still on fire. I looked around at these beautiful homes, and scoffed at the prices. It was rediculous what people were paying for these homes. Instead I bought a decent starter home in a not so hot neighborhood. My home’s value is higher today than it was in 2004. Odd? Not really. Some places in the country never swept up into the hysteria. Our foreclosure rate in this neighborhood has been very low too. I only know of 1 home that was foreclosed on, but it wasn’t due to economic factors. The family split up and nobody wanted the house so they just walked away. That happens regardless of recession. (more…)

(source) Iraq reconstruction history details waste, failures – CNN

We’ve known it for years: Our government may be the worst role model for how to spend money. But this is almost too sickening given everything else. The war itself, and the ensueing “police action,” were expensive enough. But spending $40 million on a jail that will never be used because some dumbfuck in Washington thought it was a smart idea to start infrastructure improvements BEFORE the country was secure. I guess the next war we’ll let them build skyscrapers on the front lines so the Brass can get the birds eye view.

While we squabble away at this whole bailout mindset – the banks, the homeowners, the carmakers, etc. – the government is showing perfectly that it itself can’t manage money with a damn. Ludacris ideas. Spending way too much on stupid shit while not spending enough on the things that make real importance. Just so they can scratch each others backs while it is finished.

We’re a joke and a disgrace. Our housing markets are in the tank, unemployment levels sky high, banks falling, cities crumbling, the middle-class dying. Towards the begining of the war on terror in Afghanistan, Mr. Bin Laden sent out one of those infamous “fireside chats” of chastizing the infidel. As always. But he stated his mission was simple. Do to the U.S. what they had done to the U.S.S.R. Let the war drive them to bankruptcy. He wanted to bury us on our own terms. His plan is working pretty well, sad to say.

We’re looking at trillion dollar deficits. Ouch! A massive loss of wealth in a short amount of time. Billionaires shrink to millionaires. Millions down to the thousands. Thousands to the unemployment line, with hands open and pockets inside out. Please help.

Even my family and I, of that so-called recession proof class. Hah. My wife looses her near 50,000/year job. 2.5 months later she finally gets another job: a whopping $12/hour. Me, I make it through my job cuts. But no overtime. Zip. Hell, they are trying to fight us about working 40 hours a week. I’ma fight though, because that’s what I got to do.

Well make this through it though. That’s one thing that Bin Laden underestimates. He thinks tenacity is a gift from Allah only given to the Bediuens and the jihadists. We survived a massive economy depression just to be thrust into war. We emerged victorious in both counts. We wonder why our parents and grandparents had a different kind of toughness, it’s from living through those times. These times. Adversity builds character. And too take my cheap jab at the Russians, the lack thereof explains the lack of the U.S.S.R. on a map today.

One thing we need to do though is reign in our government. That whole for the people by the people doesn’t mean “For the people to watch us fuck, by the people who let us fuck.” It’s not enough to sit by idly and trust our country is in good hands. While at the same time, a balance must be made so not to overpressure the government to make hasty ideas, which turn into dangerous ideas. Things will fall into place, but it takes a vigilent eye, the collective eye of every United States citizen, to ensure everything is properly maintained.

Well, that’s bout it for the evening. I need to crash. Hard.