Friday, October 31, 2008

CRASH TALK

Daily Mail, UK - Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out. The struggling Wall Street bank has set aside L7billion for salaries and 2008 year-end bonuses. Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than L3million. The size of the pay pool comfortably dwarfs the L6.1billion lifeline which the U.S. government is throwing to Goldman as part of its L430billion bail-out.

The news comes after it was revealed that even bankers working for collapsed Wall Street giant, Lehman Brothers, could receive huge payouts. Its 10,000 U.S. staff are expected to share a L1.5billion bonus pool. The payouts were agreed as part of the rescue takeover of Lehman's American arm by Barclays last month. The blockbuster handouts caused consternation among London employees of the firm, many of whom have now lost their jobs.

William Greider, The Nation - Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread-the-wealth-around philosophy."

Bill Blum
- In July 2003, Rep. Bernie Sanders of Vermont faced the Fed chairman across the table at a congressional hearing and said:

"Mr. Greenspan, I have long been concerned that you are way out of touch with the needs of the middle class and working families of our country, that you see your major function in your position as the need to represent the wealthy and large corporations . . . I think you just don't know what's going on in the real world. . . You talk about an improving economy, while we have lost 3 million private sector jobs in the last two years. Long-term unemployment has more than tripled. . . We have a $4 trillion national debt. 1.4 million Americans have lost their health insurance. Millions of seniors can't afford prescription drugs. Middle class families can't send their kids to college because they don't have the money to do that."

"Congressman," Greenspan replied, "we have the highest standard of living in the world."
"No, we do not," insisted Sanders. "You go to Scandinavia, and you will find that people have a much higher standard of living, in terms of education, health care and decent paying jobs. Wrong, Mister."

Not accustomed to having to defend his profundities, Greenspan could do no better than to counter with: "We have the highest standard of living for a country of our size.". . . The idea that the United States has the highest standard of living in the world is one that is actually believed by numerous grownups in America, and most of them believe that this highest standard applies across the board. They're only minimally conscious of the fact that whereas they've made extremely painful sacrifices to send a child to university, and they often simply can't come up with enough money, and even if they can the child will be very heavily in debt for years afterward, in much of Western Europe university education is either free or eminently affordable; as it is in Cuba and was in Iraq under Saddam Hussein.

The same lack of awareness about superior conditions in other countries extends to health care, working hours, vacation time, maternity leave, child care, unemployment insurance, and a host of other social and economic benefits.

Phil Mattera, Dirt Diggers Digest -With all the twists and turns in Paulson's actions, it is difficult to determine whether he is indeed trying to guide some aspects of U.S. business but is doing so in a way we mere mortals cannot understand.

Especially puzzling is Treasury's approach to deciding which banks should receive capital infusions. It was no surprise that the first $125 billion went to nine of the country's largest financial institutions, since Paulson believes that shoring up the big guys is key to restoring stability to the system. But when he then turned to regional banks for smaller injections, it was unclear why some were on the list and others were not (at least not yet).

As Fortune points out, Paulson seems to have deliberately omitted Cleveland's National City Bank (which is now being sold to PNC) because of its precarious portfolio of bad home loans, but he included similarly situated ones such as Milwaukee's Marshall & Isley. . .

Paulson was so lackadaisical in structuring the bailout that the banks getting the federal investments did not hesitate to signal that they would use the funds not to make loans but rather to finance acquisitions and continue paying out dividends and probably big executive bonuses. Presumably responding to criticism from other quarters, ranging from members of Congress to the United Steelworkers, some banks are promising that they will take steps to ease the credit crunch. Yet it is unlikely these limited gestures will be enough to shore up a financial system that grows weaker by the day.

So, are things going according to Paulson's plan-or is there no real plan but simply an ad hoc set of measures that desperately seek to prevent a collapse? Paulson seems to want it both ways. He is willing to push through an unprecedented partial nationalization of banks but is unwilling to use that investment to pressure banks to put the public interest before their selfish objectives (which now means lending as little as possible in a enervated economy). We end up with a bizarre form of socialism in which firms get government investment but continue doing what they damn well please.

While Paulson would like to be seen as the mastermind of a brilliant rescue plan, he may be, like the individual Dorothy and her friends discover is frantically manipulating a bunch of levers behind a curtain in Oz, just not a very good wizard.

Faiza Saleh Ambah, Washington Post - As big Western financial institutions have teetered one after the other in the crisis of recent weeks, another financial sector is gaining new confidence: Islamic banking. Proponents of the ancient practice, which looks to sharia law for guidance and bans interest and trading in debt, have been promoting Islamic finance as a cure for the global financial meltdown. This week, Kuwait's commerce minister, Ahmad Baqer, was quoted as saying that the global crisis will prompt more countries to use Islamic principles in running their economies. U.S. Deputy Treasury Secretary Robert M. Kimmet, visiting Jiddah, said experts at his agency have been learning the features of Islamic banking. Though the trillion-dollar Islamic banking industry faces challenges with the slump in real estate and stock prices, advocates say the system has built-in protection from the kind of runaway collapse that has afflicted so many institutions.

For one thing, the use of financial instruments such as derivatives, blamed for the downfall of banking, insurance and investment giants, is banned. So is excessive risk-taking. "The beauty of Islamic banking and the reason it can be used as a replacement for the current market is that you only promise what you own. Islamic banks are not protected if the economy goes down -- they suffer -- but you don't lose your shirt," said Majed al-Refaie, who heads Bahrain-based Unicorn Investment Bank.

The theological underpinning of Islamic banking is scripture that declares that collection of interest is a form of usury, which is banned in Islam. In the modern world, that translates into an attitude toward money that is different from that found in the West: Money cannot just sit and generate more money. To grow, it must be invested in productive enterprises. "In Islamic finance you cannot make money out of thin air," said Amr al-Faisal, a board member of Dar al-Mal al-Islami, a holding company that owns several Islamic banks and financial institutions. "Our dealings have to be tied to actual economic activity, like an asset or a service. You cannot make money off of money. You have to have a building that was actually purchased, a service actually rendered, or a good that was actually sold."

Bloomberg -
Five straight quarters of losses and a 70 percent slide in its stock this year haven't stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses. Goldman Sachs Group Inc. and Morgan Stanley, both still on track for profitable years, have set aside about $13 billion for bonuses after three quarters, down 28 percent from a year ago. Even some employees at Lehman Brothers Holdings Inc., which declared the biggest bankruptcy in U.S. history last month, will get the same bonus they received a year ago. The worst financial crisis since the Great Depression, a $700 billion taxpayer bailout, public outcry over excessive pay and the demise of three of the biggest securities firms won't deter Wall Street from offering year-end rewards to employees on top of their salaries, compensation experts say.

Bloomberg - The U.S. Treasury and the Federal Deposit Insurance Corp. are considering a program that may offer about $500 billion in guarantees for troubled mortgages to stem record foreclosures, people familiar with the matter said. The plan, which might put as many as 3 million homeowners into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay. Under one option, the industry would keep lower monthly payments for five years before raising interest rates.

Washington Post, Las Vegas - There are 6 million empty homes in the United States. Or 6.2 million, to be slightly more precise. Empty houses are normal to some extent -- part of the usual friction of building, selling, renting. But ask the people who study the numbers, and who understand the "overhang" in housing inventory, and they'll tell you: This country has about a million homes too many.

Thousands of them are right here. From an airplane, this valley appears to have been flooded in a biblical deluge of subdivisions. Las Vegas, a dusty rail stop a century ago, has been the fastest-growing urban area in the nation for two decades and is now a desert metropolis of 2 million people. The vast majority live in developments that sprawl to the edge of the mountains.

The overabundance of houses in Las Vegas and elsewhere played a major role in creating the nation's financial crisis -- and, via toxic securities, the global financial crisis. The road to recovery also goes through the housing market. What's taking place here is something of a war of attrition, empty house by empty house.

It'll take a couple of years to burn through the excess inventory, estimates Jeremy Aguero, principal analyst with the Las Vegas research firm Applied Analysis. "We're probably looking at an overhang of about 28,000 homes," he said.

Amsterdam News - New York Gov. David Paterson delivered a somber message to New Yorkers that the financial uncertainty on Wall Street and the unstable economy will lapse the state into the largest budget deficit in history. "New York is at the epicenter of an extraordinary financial crisis," Paterson said. "We will have no choice but to take bold and aggressive action to reduce state spending." According to Paterson and other reports, New York State will face a $1.5 billion shortfall for the current fiscal year. Predictions are that the Empire State will experience an overall budget shortfall of about $47 billion through 2013 - the largest budget deficit in history.

Reuters -
Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens. About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.. . . Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages. "This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

1 Comments:

At November 11, 2008 3:52 AM, Blogger Adam said...

Goldman Sachs, the holding company whose status is changing and not the Indian subsidiary which will be under the same regulatory authority. Goldman Sachs has offices in Mumbai and Bangalore handling investment banking, global investment research, operations and technology.
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Adam

Internet Marketing

 

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