Newsflash: Banks to Participate in Revised Bailout Plan

Man I had so many other posts half written and waiting to go today. Jay Cutler, Curt Schilling, the Final Four, major league baseball and the title defense of Your World Champion Philadelphia Phillies, lots of stuff.

But then I saw this story.

If you have any interest, outrage, or just plain rage related to this whole bank bailout mess, and especially how some of these financial firms have been ready and willing to game the system and take advantage even despite receiving mass injections of taxpayer funds to keep them afloat, then I suggest you read that article, a report out of the Financial Times today. It's short and it's just preliminary at this point, but the essential gist of the link for those of you too lazy to read or just very bad at summing things up to main ideas, is that the largest U.S. banks, including Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley among others, are considering participating in the Obama administration's revised bank bailout plan. Not news, right? Well, there's a catch. Those banks, and others according to the report, are considering participating as buyers in addition to as sellers.

Why is that bad, you may ask? Well, for starters, check out this line from the article:

"This week, John Mack, Morgan Stanley's chief executive, told staff the bank was considering how to become "one of the firms that can buy these assets and package them where your clients will have access to them," according to the paper."

Hmmmmmmmmmmmmmmmm. Let's see. An investment bank. Using taxpayer funds to buy troubled assets, packaging them and making them available in little slices to its clients? Now gosh durn it if that doesn't ring a bell from somewhere, doesn't it? Does that remind you all of anything that's maybe happened before? I'm gonna have to skip some space here to give that quote a minute to really sink in -- Morgan Stanley's CEO wants to be "one of the firms that can buy these assets and package them where your clients will have access to them".



















My hat blew clear off my head there when I read that again, so I had to go chase it down, sorry. Ok so, these banks are going to be permitted to take advantage of government lending unavailable anywhere else in the world, as well as the incredible leverage of the government providing almost all of the capital and taking on almost all of the risk involved in buying up these troubled asset pools from the revised TARP plan that they've now renamed so no one remembers this was the TARP plan, and all of this will be taxpayer-financed out of the new TARP. In other words, the very banks that contributed so greatly to the proliferation of risk and speculation that lie at the heart of the current crisis, are now planning to use taxpayer funds to buy each other's distressed assets at cheap prices that should reap significant rewards over time. The possibility of securitizing those crappy assets all over again and selling them to clients is just a bonus I suppose, I guess for the taxpayers who bear the largest burden under our tax system. My favorite quote of the article comes from Spencer Bachus, the top Republican on the House financial services committee, who vowed to fight against such ridonkery. Apparently Bachus told the Financial Times that it would mark "a new level of absurdity" if financial institutions were "colluding to swap assets at inflated prices using taxpayers' dollars". Ay-men to that.

So far, President Obama honestly does seem to feel our pain and our rage towards these meshuginas in the banks, and the bravado with which they continue to try to take advantage of the system and of the taxpayers of this country in the race for the Almighty Dollar, doesn't he? I can't wait to see his reaction to this one. Stay strong man, stay strong.

Oh and before I forget, don't forget the big blonkament on Sunday. No, not that one, I said the big one, the one I am actually going to be playing in. That's right, it's back -- Julius Goat's Bad Bankroll Management Tournament (BBmT). This will be the second run at the quarterly festival dedicated to those who know how to fritter away their bankroll in true bloggeresque fashion on tournaments with a clear negative expectation. The second BBmT goes down this coming Sunday, April 5, at 9pm ET on full tilt. Password is, appropriately, "busto". The buyin is a far-too-steep-for-your-bankroll $50 + $5, and, as the Goat himself puts it, the tournament wil feature both "Superstacks" and "Superdonks", as well as absolutely no BBT points at all. So come and check it out on Sunday evening -- in fact, be like me and go register now so you don't forget. There's some serious coin to be won lost in this thing for sure.

Stockholders vs. Bondholders and Autos vs Banks

So by now hopefully you've heard that somebody in Washington finally grew a pair, as President Obama officially rejected the restructuring plans submitted last month by the nation's #1 and #3 auto companies GM and Chrysler. In doing so, Obama pushed longtime GM CEO Rick Wagoner out of the company over the weekend, and has essentially given Chrysler 30 days to finalize its partnership with Fiat in order to receive another $6 billion in funding, and GM 60 days of restructuring financing while both companies must make the "painful changes" required to leave them as viable, growable businesses going forward. Both companies presumably face some sort of organized bankruptcy unless dramatic action is soon taken to align these companies' cost structures with those of their more profitable competitors, and with GM it may not be possible to avoid that restructuring at this point no matter what they do. There are several hundred thousand jobs of hard-working Americans directly in the balance of this industry, and another several hundred thousand in ancillary industries like auto service, parts and distribution, and other things like satellite radio to name a few, so it's a very fine line the President has to walk to be sure. And yet, it seems like this AIG disaster -- more likely the political fallout from it -- has left the President feeling far less generous than he once was when it comes to doling out federal bailout money.

It's interesting to take a look at the different approaches being taken here by the Obama administration with respect to the automakers as compared to the financial firms at the center of the global credit crisis. In December, Citigroup more or less "failed" in that it required some $50 billion in total of emergency taxpayer funds and another $280 billion in emergency government guarantees on bad assets to prevent its impending collapse, with Bank of America coming very close to the same fate and requiring less on both counts, but still requiring a government injection of liquidity in the tens of billions just to prevent the market from swallowing the firm whole. In agreeing to spend all those billions of dollars for the two struggling banks, did President Obama and his team require the leadership of the banks to step down? Somehow, no. Somehow, Vikram Pandit is still the CEO of Citi, and Ken Lewis is still the CEO at Bank of America, despite both clearly failing as leaders, overspending on things like corporate junkets, jet fleets, office renovations and god knows what else, and overseeing the firm's decisions to take on -- clearly -- far more risks than they could comfortably cover should the economy slow even a little bit.

And yet these guys still lead their companies. It's something the Obama administration has taken heat for already since the end of last year at least, despite numerous public mistakes made by each CEO in the general strategy and direction of their firms over several years, both resulting in the need for more taxpayer cash than the combination of GM, Ford and Chrysler so far over the past several months. And now, in an interesting twist, GM CEO Rick Wagoner is pushed out over the weekend, and there still isn't even a plan to save the company at all. Chrysler was allowed to keep its CEO, who unlike Wagoner at GM was only installed a few years ago as part of a private equity buyout of the firm. But Chrysler, too, still has no plan for long-term survival, and still needs to hash out the final details of a proposed partnership with Italy's Fiat in order to get $6 billion more in emergency funding from the U.S. government, and even then we can all imagine how long the $6 billion is going to last Chrysler if the situation does not improve dramatically from the Fiat deal.

So Obama threw out the longtime CEO at GM this weekend, even though absolute public clowns like Vik Pandit at Citi and Ken Lewis at Bank of America have been allowed to keep their jobs despite needing more money than the automakers have received so far. That's an interesting change in policy, and is emblematic of what I am hoping is a key change to representing a much more hard-line approach to the government intervening to save failing companies going forward.

The most significant aspect of President Obama's new harder line with the automakers reagrding government bailouts, however, is something that has bugged the shit out of me ever since these bank bailouts first started, actually since a week or so before the government took over Fannie Mae and Freddie Mac last symmer, and that is the different treatment of the bondholders vs. the stockholders in these failing institutions by the Obama, Geithner et al. As you probably know, the stockholders in failed financial institutions like Bear Stearns, Fannie Mae, Freddie Mac, AIG, Wachovia, Washington Mutual, Citigroup and Bank of America all saw their stocks drop to at least the $2 level, mostly down 95% or more from their recent highs, and many of the above have seen their shares denominated in cents, not in dollars. The stockholders of the truly failed firms like WaMu, Fannie and Freddie, and of course Lehman Brothers, literally lost almost their entire investment as their shares traded at just a handful pennies before all was said and done. Those who invested in the stocks of these companies took an absolute bath, losing in most cases between 95 and 100% of their entire investment, almost without regard to where they bought in anytime in the recent past.

Such has not been the case with holders of bonds in these firms. Other than Lehman Brothers, whose abrupt weekend bankruptcy last September caused bondholders to lose an estimated $110 billion in bonds due to be paid out over the next several years by the failed investment bank, those who invested in bonds issued by the other companies mentioned above have all continued to be paid in full and on schedule. Bonds are by their nature senior to stocks in that, in the case of a threat to a company's viability, its bondholders get paid out first before any stockholders. As a result of this lesser risk involved with investing in corporate bonds as opposed to stock in the same company, bond investors also get lesser returns, but more consistent, secure ones. As a result, bond investors tend to be large asset managers and other funds with a need for solid, steady, if a bit understated, but consistent, secure growth. A bond fund might return only 3% a year right now, but a comparable stock fund returning an average of 10% per year might lose 40% this year (for reals). In theory, the bond fund should not suffer such losses because its income is backed by bonds of companies and other institutions that offer it a steady and secure stream of income that is senior to what is owed to the stockholders of the companies issuing the bonds.

As a result of this, and of constant propaganda from piglets people like Bill Gross, co-CEO of PIMCO, the world's largest bond fund, the bondholders in all those financial companies above that failed last year if not for massive government intervention amounting to more than a trillion dollars system-wide, have yet to lose a dime. Even though the underlying firms would never have been able to continue making their bond payments without the massive injections of taxpayer aid and government guarantees, that taxpayer money has been used in part to continue to make regular payments to all the bondholders of those firms, on schedule and in full. It's almost as if the powers that be in both the Bush and Obama administrations are afraid that "haircutting" the bondholders even one time with one of these companies it has to prop up could lead to some kind of systemic panic as a result of all the large pension and other funds and asset managers who rely on investments in these companies' bonds to pay their steady, secure income streams forever. We let guys like Bill Gross take ridiculous advantage of the system, too. This guy manages the largest bond fund in the world, remember. As Fannie and Freddie spiraled towards armageddon last summer, Gross took a look at the situation, and on July 28, 2008, it was reported: “We like it,” said Bill Gross, who oversees the $128 billion Total Return Fund, the largest bond fund in the world, for Newport Beach, California-based Pimco. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.” As a result of this feeling that the government would not dare haircut the bondholders in these failing firms, Gross sold most of his treasury and other government bonds, buying up instead agency mortgage bonds from -- you guessed it -- Fannie Mae and Freddie Mac. By the time early September came around, this guy was so sure the government wouldn't let the bondholders in Fannie and Freddie fail that he actually had some $80 billion of his $132 billion bond fund invested in Fannie and Freddie bonds. And as Gross bought up all the Fannie and Freddie bonds he could find, he took to the airwaves, going on CNBC and saying the government had to put up $40 billion to bail out Fannie Mae and Freddie Mac, to protect the companies' bondholders from taking any kind of a haircut at all which he claimed would threaten the entire U.S. and global financial system.

And Bill Gross wasn't done. After making more than $1.7 billion on the Fannie and Freddie bailout where the bondholders' investments weren't touched while the stockholders got essentially wiped out, he then started buying up bonds of the other troubled financial institutions, all those companies I mentioned above, thinking once again that the government would be too afraid of the systemic risk following from any major corporate bond failure like what happened with Lehman Brothers last fall to haircut these other financial firms' bondholders, picking those bonds up at distressed prices fueled by fear, uncertainty and doubt. And once again, the propaganda mill began -- in his monthly newsletter released on February 24, Bill Gross said, "Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite." (emphasis added)

So once again, here is this clown arguing that the bondholders' investments in the bonds of these struggling companies cannot be touched. Essentially, he seeks a guarantee from the government that his fund's income cannot be stripped or lessened, and he invokes the fear from the Lehman Brothers collapse as the end-all be-all reason why haircutting the senior debtholders must never be considered.

Well I got news for ya, Billy. What are you, anyways? You're a bond investor. Say it with me. Bond. Investor. These are investments. They're not guarantees. If they were guaranteed, they would be what we call interest, on FDIC deposits in federally-insured banks under the insurance maximum. Which, by the way, would be paying you what, half a percent a year right now? Less? But no, Bill Gross isn't satisfied with a half a percent a year, guaranteed. He chooses instead to invest in corporate bonds of very weak companies, which may return something more like 3-5% a year, and on occasion will enable him to make billions of dollars in a year like he did in 2008, a several times greater return than he could ever expect from a truly guaranteed investment. Yet he will try to scare the pants off of everybody who will listen about how the government simply has no choice but to protect the bond investors in these firms, and so far the government has listened and obeyed. Why? Because of the fear that, if they don't, then pension funds, income funds relied on by retired people to live on, IRAs, 401(k)s, annuities, insurance companies, banks, credit unions, etc. will all suffer a huge panic due to the realization that their income is not really guaranteed. But this income never was guaranteed! It's an investment. Bonds do have risk, bank savings deposits under the federally insured limit do not. Treating the bondholders like their investments are as untouchable as my savings account in the bank is dangerous, and sets up all the wrong incentives in the world. Why on earth have taxpayers provided $180 billion to keep AIG afloat, its stockholders saw their investment drop as low as 30-some cents earlier this year, and yet those who invested in bonds to be paid over a long period of time regularly by AIG not suffered a penny of loss? How can that be? Why? AIG failed, plain and simple. It's not even arguable. Why did Bill Gross, who bought up $80 billion of Fannie and Freddie debt when he knew the companies were going to fail get to make $1.7 billion when the government forced the total wipeout of those firms' shareholders but protected the bonds 100% of each company? Why?

With GM as well as Chrysler, the Obama administration is now, finally, triumphantly, making it known that holders of bonds -- investors in bonds -- in these companies are likely to suffer along with investors in these companies' stocks. GM alone has over $27 billion of outstanding unsecured debt, with Chrysler adding another significant chunk to that total, so the prospect of a Lehman-esque bankruptcy for GM and Chrysler is likely to result in a very noticeable $50 billion-plus "event" in the credit markets as a whole. Although this is going to be painful for the markets, and for all kinds of investors and in particular those who invest in corporate bonds as a measure of security, I cannot escape the conclusion that it is the right answer nonetheless. Nobody made these funds and asset managers invest in bonds, corporate bonds, or auto sector corporate bonds, right? Especially knowing and seeing what's been going on for the past several months, clearly there has been ample time to exit these positions prior to this week's rejection of the automaker restructuring plans. No, if you have continued to invest in auto company bonds, at this point my position is that you deserve to take a massive haircut in light of their imminent failures. You bought in or held on and greatly diminished prices, taking a gamble -- a risk -- that you could use that beaten-down price to create an opportunity for a big profit if things broke your way. But things didn't break your way, and now you should pay the piper. Investing in bonds is still called investing for a reason, and those investments still carry risk that they will not be repaid in full.

My best hope right now is that a GM and/or Chrysler forced bankruptcy and restructuring will serve as a model for the government to eventually use with all the financial firms it has bailed out over the past few months or will need to continue bailing out in the future. Keeping the bondholders 100% whole, while forcing the stockholders to bear all the brunt of the losses at these flagging financial firms was never fair, and it was never right. It's time we make investors pay for the risks they took in buying all these bonds issued by deeply struggling companies. Remember, they got a greatly decreased price to buy in as a result of the higher risk associated with those struggles; not making them suffer the direct result of that known higher risk puts the entire financial system at unnecessary and unfair strain. It's time that bondholders -- generally large, megabillion-dollar asset managers, hedge funds and the like -- step up to the plate and take on their fair share of risk from their investments in failing financial institutions, especially where the risk of investing in such entities' bonds was fully known at the time of the investment. For a new president publicly espousing this whole "era of responsibility" motif, the move to punish the bondholders of GM, who took a chance on the company's long-term survival right along with the shareholders, is a clear step in the right direction, and one can only hope this move helps him to see the right way to deal with the major banks of this country as well going forward.

The New Geithner Bank Bailout

So Monday saw embattled Treasury Secretary Tim Geithner reveal to the public the details of his public-private investment plan designed to rid the large U.S. banks of the troubled assets on their books, threatening to make the entire system insolvent in their wake, and the market reacted in a majorly positive way, rising 7-8% across the board on the day as Geithner finally won the approval of investors around the world after several attempts. I spent much of the day reviewing the details provided by Geithner, and I think I have come to my conclusion.

I like it. I really, really like it.

I mean, let's take a step back for a minute. I have made no secret here of my lack of fandom for throwing all this money at the banks. There is little doubt that the administrations of our current and last president were staunchly in favor of gifting funds to the banks it deems "too big to fail" for risk of them damaging our entire financial system beyond easy repair. This is something which President Obama has not even tried to deny, stating repeatedly that despite personal and public feelings around the essential fairness of bailout out Wall Street fat cats, it is common knowledge that the economy simply cannot and will not enjoy meaningful growth again unless and until the banks start easing up on credit. So the thinking is that, even though we all kinda hate it, we simply will have to hold our noses and print money for these banks to replace the capital eaten away by losses on all the troubled assets, bad mortgage-backed debts and other crap sitting on banks' balance sheets after the last ten year or so of irresponsible consumption and investments. Personally, I think given how far the market fell, it is likely that allowing the Citi's, the AIG's and some other financial institutions to fail on their own would likely have resulted in no worse declines in the stock market and probably no worse systemic shock to the financial system either, so these moves have probably not been necessary in actuality, nor did they prevent much of anything in the end result. I think it would probably be ok to continue to let the most struggling banks die out even now, and I am willing to suck up the near term pain, including further market losses, more economic deterioration and likely significantly more job losses in the near future, in an attempt to simply stop printing more and more money and rewarding the bad acts of these Wall Street jackasses who can't even stop paying themselves million-dollar bonuses and buying six-figure area rugs for their offices, even when on the dole from the public.

But putting all that aside, once we accept the Obama plan to shore up his own legacy by speeding up that process by actively taking those bad assets off the books of the biggest banks, I have to say that I think the Geithner plan is a good one, at least in theory. And if you read here with any frequency then you know I have not been a big fan of Geithner so far, but in this case I think he's hit the mark with this public-private investment idea. The whole reason the first attempt at such a plan to buy banks' bad assets by former Treasury Secretary Hank Paulson was scrapped in favor of direct equity investments in the banks is that the government could not figure out how to properly value those assets when making the purchases. Value them at their values as currently marked on the banks' books, and we would be grossly overpaying for those bad loans, thereby ensuring that the government, and therefore we taxpayers, take a huge bath on the deal. Value them at their current market values, however, and most of the banks in the country would instantly be insolvent because the losses recognized on those sales to the government would have completely wiped out the already weakened capital position these banks are currently faced with.

Hank Paulson and his team quickly decided that they simply did not feel like dealing with this whole issue of valuation of banks' bad assets, so they decided instead late in 2008 to invest directly in preferred stock of the banks in exchange for billions of dollars of cash from the original tranche of last year's TARP plan. The problem with this, it turns out, was that the banks did not use those extra billions to ease up the credit markets at all. Instead, they used it to finance acquisitions of other healthy banks, to pay dividends, to pay bonuses to their employees, and most of all, to hoard the cash. They hoarded it because they are still sitting there, looking at the many many billions of dollars of crappy loans on their books, and knowing that there is the potential for still many tens of billions, and in some cases hundreds of billions, of dollars in writedowns coming on those asset portfolios. I mean, even $25 - $50 billion in direct investments in companies like Citigroup and Bank of America did very little to offset the potentially $200-$300 billion of bad assets held by the country's largest banks. And that is where we cue Mr. Geithner's new plan.

So the purchase of direct stakes in the banks in exchange for cash was not nearly sufficient to get credit flowing again through these financial institutions, in no small part due to the massive amounts of troubled assets still sitting on the banks' books. Geithner's new plan is a bold, innovative assault launched directly at the root of that problem. Geithner is tackling the valuation issue head-on, proposing that the government partner with private sector entities -- large asset managers, hedge funds, pension funds and other similar private enterprises -- in purchasing pools of loans from banks and prices determined by the market for those private enterprises. So no longer will the government be forced to decide what value to pay to take the bad loans off of the banks' books; now, the most accurate and fair system we know of here in America -- the free market -- will determine that value. The hedge funds and asset managers simply will not participate in any deal that involves overpaying for the assets, because they are in it to make a buck after all, and the government will simply go along with whatever price is established by the free market negotiations between the parties. Geithner shrewdly has included as a key part of his plan that the government itself will provide the financing for the purchases, in addition to participating itself as a co-investor with its own new funds, which also eliminates perhaps the other biggest problem with banks liquidating these assets themselves -- with credit so frozen right now, no one has been willing to finance purchases of risky, unknown loan pools from crumbling financial giants. Now, with the government stepping in to not only provide its own money to invest in these assets, but also loaning the required funds to the private sector to entice them to be involved, the two main barriers to the process of actually purchasing our banks' troubled assets should be eliminated.

I think it is a foregone conclusion that the Geithner plan will create a market for banks' bad assets, something that basically has not existed for almost two years since the credit crisis first took hold after a wave of defaults in the subprime mortgage market. Although there is always the possibility that private equity will not be interested in buying this distressed debt from banks, in reality the availability of funds from the government at reasonable interest rates should combine with the significantly cheap valuations for such debt in the current conditions to create real interest from several interested parties. Involving the private sector is in my view a stroke of genius that can really act to create a market -- and potentially an active one -- for an entire class of assets that have been more or less unsellable for the past couple of years, and getting those assets moving off of our banks' books should eliminate one more big impediment to getting the banks loaning again to help the economy to grow.

There are two issues I see with the revised bank bailout plan, either or both of which could prove to be significant. The first is the simple fact that, even with much of their bad assets removed from their books, banks are still not likely to resume lending at a pace anywhere near what was being done previously. The bottom line is, banks got absolutely burned by loaning to and investing in many, many assets which were too risky for what the banks should have been doing at the time. Mortgages were made to people who could never reasonably expect to afford the payments unless the values of their homes increased linearly literally for ever. Loans were securitized and sold in packages without the seller, or more importantly even the buyer, really knowing what was in them and how likely the component loans were to be repaid. This behavior has been significantly reeled in by the banks over the past year or more, and there is not appetite right now to revert back to that way going forward, which I think is a good thing. But the bottom line is that in the current economy, with housing prices still dropping well into the double-digits in percentage terms annually, and with economic growth prospects dubious at best, the banks are not going to start throwing money around again anytime soon, even if the risk they face from writedowns of troubled assets is significantly diminished by the new Geithner bailout plan.

The other issue I have is potentially more serious, and it's something that I fully expect we will be seeing soon, probably more likely sooner rather than later. The Geithner plan does nothing to guarantee any particular level of pricing for purchases of bank assets, nor should it. It simply guarantees that financing will be available at reasonable interest rates -- a rare commodity right now to be sure -- and works to create a market at whatever price the market will bear for such assets. Whatever the difference is between the price of an actual sale of a pool of loans, and the price that pool of loans is currently held at on the bank's books, will be a loss and will have to be recorded as such and charged against the bank's existing excess capital. The problem we are going to see, and again my guess is very soon, is that it won't be long before one of these big banks comes to Geithner and says "Mr. Secretary, at the price the private investors are willing to pay me for my assets, I can only sell them $40 billion of my $200 billion loan pool before I am wiped out and will need substantial additional equity in order to continue to survive." This I think is likely to happen with most of the large banks in this country today, as a matter of fact. So I think it is highly likely that Secretary Geithner will soon be grappling with whether or not to contribute significantly more capital to the nation's biggest, and most injured, banks' current capital reserves, a move that is likely to be politically difficult to secure and even more unpopular with the public. It is likely that the size of the revised Obama-Geithner bank bailout will swell to well over a trillion dollars before all of these extra capital infusions are going to be fully worked out.

The Bumbling of the Crisis

What a nice man huh? The champion of the little guy. Going on late-night TV in the midst of the AIG crisis and ragging on the Special Olympics, out of nowhere.

Now everyone go back to your little blogs and write the post you would have written if this was George W. Bush and not Barack Obama doing the talking.

We're coming up on two months in office, and in two months President Obama has presided over a continually shrinking economy, the largest spending package in history and the most unbalanced budget of all time (for any country), a stock market that dropped some 25% in his first six weeks in office, and a response to the financial crisis -- at AIG, the major investment banks and around the world -- that has been as bad as anything I saw happen during the previous administration's (lack of) reaction to the massive problems going on all around them. Pretty soon we're going to be at those crucial "first 100 days" of his term, when people are going to start taking an unabashed look at the state of the union today as compared to three months earlier, and there is little doubt that things are worse today than in mid-January.

What concerns me most about Obama, Geithner, Summers and Bernanke is the totally mixed messages they send almost daily with their words and often strangely and counterproductively inconsistent actions in response to the still growing financial turmoil around the globe. The President talks so much about "the age of irresponsibility" that prevailed during the previous administration -- he is very much correct in that assessment btw -- so one would expect and hope for policies that truly encourage Americans to stop spending beyond their means, running up massive debts, taking on obligations they could never reasonably hope to afford, and just generally changing our attitudes about saving vs. spending over the long run. Instead, the President steps in with his $850 billion "financial stimulus" package, in effect becoming the "consumer of last resort" by committing to spend all that money since it is money that the people of this country won't be spending due to the slowdown in the economy, job losses, increased foreclosures, plunging housing prices, and the list goes on and on. Then it's $50 billion or more to bail out people who purchased homes that they can't afford. Now the Obama Fed announces this week that it will buy $300 billion of U.S. treasury bonds over the next six months -- printing money, this is, make no mistake about it, and Bernanke and Obama would not deny that if asked -- printing $300 billion of new money to flood the system with. It is once again an attempt not to wane Americans from the ultra-consumerist high-money-flow habit that led to all of this in the first place during the very "age of irresponsibility" that the President talks about so much in his public speeches, but rather to artificially extend that very practice, at the direct cost of us, our children and our children's children.

And Treasury Secretary and public tax avoider Tim Geithner is right at the heart of all the inconsistency in the new administration as well. All the furor you're hearing about this week regarding former insurance titan AIG, it all goes directly back to Geithner and everyone knows it. AIG paying $165 million of their bailout money in bonuses to AIG's Financial Products division execs that caused all the troubles with the mortgage-backed securities and credit default swaps in the first place? Tim Geithner knew about it, and he specifically approved it, despite his attempts this week to express mild outrage at the news. As head of the New York Fed prior to finally paying the back taxes he's owed since 2000 and becoming Treasury Secretary, Geithner oversaw the decision to let Lehman Brothers fail in mid-September 2008, and was a primary architect of the AIG bailout(s) later that same month and into this year, and he understood fully the bonuses issue and specifically approved them being paid before all the recent anger and disbelief over them started to build.

Geithner was also very much involved with his predecessor and former Goldman Sachs CEO Hank Paulson in the decision to hand over $180 billion of taxpayer cash to AIG over a four-month period to keep the company afloat, knowing full well that over $100 billion of that money was going directly to the largest investment banks in the world today, many of them outside of the U.S. By far the largest beneficiary of this gift cash from the government, using AIG as a conduit? Goldman Sachs, who got more than $12 billion of cash from AIG, directly after the government provided that cash to AIG expressly for the purpose of making whole its counterparties. The combination of Merrill Lynch and Bank of America received 12 billion in government cash from AIG, Citigroup $2.3 billion and Wachovia $1.5 billion. This, my friends, is what I like to call a "stealth bailout", just as the Obama-Geithner plan has become to "stealth nationalize" the largest financial institutions like Citi which is now proposed to be 36% owned by the government. Geither and former Treasury Secretary Hank Paulson worked out a plan to give $10 billion cash to Goldman, Merrill, Citi and many other large banks like them, and then they knowingly used AIG to pump several billion dollars more of bailout cash into those very same coffers, yet by using AIG as a conduit, they could hide their true intentions from the American people. Not to mention the $8 billion of U.S. taxpayer money that went directly through AIG to U.K.-based Barclays, or $6.4 billion to Germany's Deutsche Bank, or over $5 billion to France's BNP Paribas. Did you know we were bailing out out other countries' banks too?! Of course you didn't, that was exactly Geithner and Paulson's point. Way to effing go, guys.

On top of all that, there is a major, and very worrisome in my view, inconsistency with the Obama/Geither/Bernanke approach to the entire financial crisis at this point in time. It is an undisputed fact that right now the financial institutions in this country are weak, at least by historical terms. Some of them have failed (Lehman, Indymac and several others), many have essentially failed but then been bailed out by the government for pennies on the dollar at the last minute (Bear Stearns, Fannie, Freddie, AIG, Merrill, WaMu, Wachovia, Citi, Bank of America and, again, many many others), and others are simply teetering with their stocks at multi-year lows and waiting for some direction (basically everyone else). Many well-known scholars and economic participants have stated openly their belief that the entire financial system in our country is insolvent, and that basically every bank in the country is under water due to exposure to mortgage-backed and other complex financial instruments in illiquid markets. Our banks need excess capital, which Treasury Secretary Geithner himself estimated at over $1 trillion in needs just last month, and we want to help them to get it by using Geithner's no-details revised bank bailout plan to use public and private funds to purchase the bad assets off of the banks' books in exchange for cold, hard cash.

And yet, through all this, Geithner, Bernanke and especially President Obama insist that the banks must increase their lending. The President has repeatedly expressed outrage that the banks are taking government (taxpayer) funds and then hoarding it, using it to pay bonuses that the bankers who created the original TARP plan did not prevent them from doing, instead of lending it out and making funds available to spur economic expansion and innovation. Now part of the new Geithner plan is that they are "stress-testing" all the nation's major banks as part of the new bailout process. Think about what that means for a minute. It's not like stress-testing the banks means we put the company on a treadmill and attach diodes to its head and abdomen and check it out when its heartrate gets moving. Instead, they are reviewing all of the bank's capital and asset ratios, and subjecting them to models predicting further financial deterioration and prolonged economic weakness, and seeing where those ratios go, how safe the banks will be under circumstances of economic duress. These are mathematical ratios, nothing more, generally relating to how much capital or assets the bank has on its books, compared to its liabilities. The issue I have is what message are Obama and Geithner trying to send to the banks, when they push push push on them to lend, and at the same time impose ratio-based stress tests on them as a part of the process to ensure all the banks get access to the capital they need to be effectively shored up? Forcing the banks to undergo stress tests will undoubtedly influence -- and has already influenced -- the banks to hoard their cash, to try to make the numerators of those asset and capital ratios being tested look as strong as possible, because one of the very few details we have gotten out of Geithner on his new bank bailout plan is that he only plans to provide more free taxpayer money to the banks that are strong enough to survive if they get it.

So on the one hand you're telling these banks to lend lend lend, get the economy going, we can't have real economic recovery in this country until the banks loosen up the money supply again (a very true statement by the way). But with all the losses still slated to come down the pike for the banks in terms of writedowns and bad assets, the banks desperately need to hold on to what capital they have and in fact have to increase that capital, and we should not be encouraging anything other than that. What's more, just the specter of the bank stress tests, let alone the reality of them, very clearly incentivizes these banks to hold on to their cash. A big bank like Citi, Wells Fargo, US Bancorp, these guys would be crazy to be lending out money right now, if they're afraid that lack of capital on their books would cause them to fail a totally not-defined stress test being conducted by Treasury over the coming months to see if they are healthy enough to be kept afloat or instead should be shut down. Think about it -- if you're the CEO of one of those banks, what are you doing right now? Loaning money out of your historically-depleted capital reserves to any shlub who comes in the door with a business idea? Financing the short-term operations of a longtime corporate client of yours experiencing major financial distress due to the shrinking global economy? Or hoarding your cash, making those financial ratios look as strong as possible for when Geithner and his tax-avoiding friends come along to review your bank's financial numbers?

Me too. And that's exactly my problem with the whole mess. You want to know why the markets are languishing so much that we have to be content with a 15% rally up to Dow 7500? Because the people who understand this stuff know. They know that the current administration is all backwards with the entire financial bailout concept. They don't have a clue what started it, and they don't have any more a clue how to finish it. So far, the best plan they've come up with -- providing very little details at that -- has been to create incentives for banks to hoard their cash while proclaiming that they should be lending it out, and all the while just printing billions and billions and billions -- hundreds and hundreds and hundreds of billions -- of freshly minted dollars into the economy to artificially make it seem like there is far more economic activity than there would otherwise naturally be. And the thing is...that idea simply won't work from an economic perspective. The banks won't lend (they're not), and the real economy won't pick up (it's not). You can artificially stimulate the economy and stem the bleeding for a while, but that's all you're doing, and it's all artificial. You force the banks not to lend, and you increase taxes on the wealthy, and on small business, and you fail to promote more sensible spending and saving practices in our country when you have the perfect opportunity to do so, and it sounds to me like a recipe for a longer-lasting downturn that might otherwise be necessary.

Disbelief

I was all set to write today about how in the last two BBT tournament series, I have gone out and essentially won my entire buyins for the series in just the very first event of the series. There's a decent post in there, about how I final tabled the Big Game on Sunday night to start off the BBT after not really playing to win in a single blonkament in many many months, what I did to switch up my routine and try to get back into the groove I have historically felt when playing against the blonkeys. [Mostly what I did was suck out and resuck on people, and win my 60-40s like it was my job. That's the secret, and I was all set to deliver an opus on that to start off the new week in style.]

Now instead I am sitting here mesmerized by the stock market, unable to avert my gaze from the screen, and I am just in total and complete disbelief. Forget the Dow testing the 7000 level for support. Nope, that proved to be a bitter hopeless joke. The Dow quickly proceeded to blow right through 7000 like melty butter, and then right on through 6900 as well. What the hell? The Dow is at 6800 and people are not rushing in to buy buy buy? I am simply in disbelief. Not about the magnitude, but about the sheer ease with which the blue-chips are just slicing through the old lows, in what has proven to be basically a total downward spiral since the week immediately before President Obama took office. I keep waiting for the gifted public speaker to come up with some words, some great oration, to inspire some kind of confidence from someone. Somehow. That shit last week clearly did not do it. Perhaps it was the solid month of down-talking and doomsaying the president himself did all through the first few weeks of the new term that did that effort in. But the American people, investors in American markets, need to hear something soon.

A major problem weighing on the markets right now is this stealth nationalization of Citigroup late last week. Assuming Citi can find private investors to match the government's offer, the U.S. government will convert up to $25 billion of preferred stock into common stock, resulting in the government owning as much as 36% of Citi's total outstanding common shares. But Obama's team won't even admit that they are, in fact, "nationalizing" Citi. I mean, face it guys: the government now owns 36% of Citigroup, period. They are by far the largest shareholder. The government controls that company now, plain and simple. If you want to define "nationalization" as 40%, or 45%, or 60% of the outstanding shares, then fine. For me, it's not about a number; it's about what it represents. In this case, our government now controls Citigroup, just like it controls AIG and Fannie Mae and Freddie Mac. But President Obama knows that bank nationalization is not at all popular with the masses, so he sugar coats it and claims this is his administration's direct attempt not to "nationalize" Citi. And then he takes a 36% ownership in the firm. Mmmm hmmm.

Oh, and while we're at it, another thing the market does not like relates to the losses we have already suffered with the whole Citi investment debacle, and what that likely means for our other investments so far and what we can expect from more direct government intervention in the financial sector going forward. We (the taxpayers, the same people who now own 36% of Citigroup) have already provided Citi with $25 billion from the original tranche of the TARP plan, plus another $25 billion in a second bailout a month or two later. The $50 billion or so we have invested in Citigroup preferred (soon to be common) shares is the equivalent of about 7.5 times Citi's current market capitalization. So we have given this company more than 7 times the value of the entire company currently in the market just over the past few months, and as a result we own just 36% of the whole company? This is a company worth $6.7 billion currently, and we have invested $50 billion in a few months and what we have to show for it is 36% of the total value of that current $6.7 billion. I don't need my calculator to know how putrid that is. Add this to the fact that the government invested approximately another 500 billion in our other financial services firms over the past few months, and imagine applying that same 95% loss rate to all of those investments as well, and it should not be hard to see what the market is worried about right now.

Dow 6800. I truly never thought I'd see the day again.

AIG is a POS

With all the talk about "nationalization" of the largest financial institutions in this country, I thought I would point out a piece of news from earlier this week that I just don't think got enough attention in the financial or major news media. Earlier this week, insurance giant AIG pre-announced its plans to report an all-time record loss (for any company, ever) of $60 billion for just the fourth quarter when it announces its quarterly earnings this coming Monday. Yeah, you read that right: 60 billion dollars of losses, just in one quarter. So that is what, a $20 billion loss in every month, or close to a billion dollars lost on every single business day in the month. How sick. And you know what the worst part of all with this news is?

The government already owns 80% of AIG, as of last September's emergency bailout of the world's largest insurance company. So for the entirety of the fourth quarter, our government was already constructively "in charge" at AIG. This is the closest thing to a "nationalized" entity we have in this country right now, combined with mortgage lenders Fannie Mae and Freddie Mac, both of which were taken over by the government in August of 2008. So for those of you who, like me, are concerned about the ability of the government to effectively run a financial services business, we've got a full quarter's evidence now at each of Fannie, Freddie and AIG. And you know what? Fannie reported quarterly losses of $29 billion in November 2008, Freddie lost $25 billion, and now this $60 billion for AIG.

$114 billion in losses for the three truly nationalized public companies out there right now in the financial sector, in just the first quarter that each of them was managed by the government? I think that tells you all you need to know right there about our government's ability to effectively nationalize our leaders in this space.

And I love this especially much -- take a look at today's latest plan coming out of AIG. Basically, AIG has been trying to sell several lines of business as a way to raise the capital to pay back the $150 billion in emergency loans it accepted from the government late last year, and it is finally accepting that it simply cannot get the prices and the terms for those sales that it thinks it deserves. So the new plan from the new AIG CEO installed by the government in November? Instead of AIG paying us back the $150 billion it owes us, the new idea is just to sell those business lines directly to the U.S. government in-kind.

I mean, isn't it bad enough that we would loan out $150 billion in cash to AIG, and receive in return not cash of an equal amount plus interest, but rather ownership of former AIG business lines which AIG has been flat-out unable to find any buyers at for any reasonable price, but which AIG claims it believes are worth $150 billion? But then, looking at its track record, can you imagine the results of our government trying to run these three insurance businesses going forward? If we accept AIG's latest proposal, that will represent an absolute abuse of us by AIG's current and former leadership, borrowing huge sums of money without an actual ability to repay us taxpayers what they borrowed. One can only hope that Barack Obama figures out that the financial crisis is already bad enough already without the government agreeing to run AIG's global insurance businesses in exchange for forgiveness of the 12-figure debt we advanced to AIG to keep them afloat just four months ago.

The Automakers Back at the Trough

Well, back in December the Big Three U.S. automakers -- mostly just GM and Chrysler -- told the Congress that they needed billions of dollars to be able to survive the current economic crisis, and the Congress didn't buy it. After much fierce debate, Republican Senators managed to defeat the bill to provide these struggling companies with billions of emergency aid without any real plan for becoming viable, profitable businesses. But never fear, our then-president George W. Bush stepped in and provided GM and Chrysler upwards of $15 billion in emergency funds out of the government's TARP package approved last fall. Right when it happened I mentioned here that all this really was, was Bush deciding that he did not want his legacy to include the bankruptcy of America's auto industry and whatever fallout that would entail, so he decided to blink in his showdown with Congress and just come up with enough money to hold these companies over until Bush was back home in Texas, until a day he knew with 100% certitude would come soon but when this would no longer be his problem to deal with.

Folks, that day is today.

On Tuesday evening, GM and Chrysler filed their restructuring plans with the Obama administration, as required by the conditions of the emergency loans provided to these companies by President Bush just two months ago. And guess what? All the money we gave GM and Chrysler back in mid-December -- $15.4 billion, mind you -- is now gone, burnt through in just a few months of run rate at two companies that are losing money billion by billion just running their business in this economy.

And guess what else? Apparently, things have worsened in the beleaguered auto industry just since the last round of free billions in December. I know -- shocker, huh? Now, Chrysler says it will need more than another $5 billion to survive, over 40% more than expected based on the December plans, and troubled GM has determined that it requires another $16 billion to make it! That was some use we got out of that $15 billion in December, huh? Things are so bad with GM, the nation's largest automaker, and it is so lost in terms of figuring out a way to be profitable, that CEO Rick Wagoner (somebody please tell me how the funk this guy is still in charge at GM?!) said the company would run out of money by March without $2 billion in new funds, and that it needs another $2.6 billion to fund April's operations. So we're supposed to just keep coming up with more than $3 billion a month for these companies to lose?

Is anybody really surprised by any of this? I mean, what's the end game here, guys? Someone makes a product that is universally adjudged to be inferior to those of its competitors, they lose $3 billion a month running a huge operation to manufacture and distribute these inferior goods, and the government is just supposed to keep paying for it? Why? Until when?

I just don't get it. It must be me.

Burning Down the Markets

The stock market on Tuesday after the announcement of the revised bank bailout plan by the Great Tax Evader was pretty much the worst case of deja vu I can recall in quite some time. Either there is a serious glitch in the Matrix going on, or I have already lived through our leaders botching press announcements and sending the stock market in a historic tailspin enough times in the past six months to last me for sixty years. Tim Geithner's bank bailout announcement was excuted about as badly as is humanly possible. Somebody please tell me, why would Barack Obama spend all last week talking very publicly about the new bank bailout that was going to be announced on Monday morning? Why publicize this thing with your PR machine so hard, for several days, only to have to put the announcement off on a Monday morning even after an entire weekend to work out the details? And then on top of that, why send your new head of Treasury out there on Tuesday, still without any real details?

Ask yourself this, President Obama and Secretary Geithner, how would you expect the market to react to this turn of events? You tell us all week that Monday is the day when we will all get to find out your administration's plan to save the nation's banking system from critical insolvency, that just the minor details are still being worked out. You broadcast it everywhere and make sure we know to look for the new bank bailout news on Monday. Then early on Monday the announcement gets postponed to Tuesday, for a reason that is actually completely unrelated to any bank bailouts and makes no sense to anyone who hears it. Then on Tuesday you come out with basically four general points of strategy for the revised bank bailout -- now called the Financial Stability Plan instead of the now-tarnished TARP moniker -- and essentially no real details of how the strategies would be carried out.

Particularly troubling was the lack of detail surrounding the "bad bank" concept that Secretary Geithner described as a sharing between public and private funds to invest in purchasing the troubled assets off the books of this country's banks. But the plan as Geithner announced on Tuesday provides almost no detail on how the assets would be priced -- the major stumbling block with the whole "bad bank" concept from the beginning, even back in the Henry Paulson days -- offering up only that pricing of the assets would be left to the private sector to determine. Huh? Right now there is no market in the private sector for these kinds of derivatives and mortgage-backed securities. People see these things and run the other way. Pricing the bad assets is and always has been the key challenge with an aggregator bank concept, because pricing them at current market rates would force banks to take hunreds of billions of dollars more in crushing writedowns, while pricing them too high would put over a trillion dollars of taxpayers' funds at risk of never regaining their value.

Plus, in addition to the problem of valuing the banks' crap assets, or perhaps partially as a result of that problem, it is very hard to know how readily private sector buyers will even be able to be found for all these trillions of dollars of shit on the books of America's big banks, even with federal loan backing to support such purchases. Right now, the last thing almost any hedge fund or mutual fund in the world wants to buy is distressed bank assets. I mean, sure you're going to be able to find someone to buy some percentage of the assets, if the price is right, but there is real concern that it may not be nearly as easy as the government seems to perceive to sell all of these troubled and securitized assets into the private sector.

One other particularly frowned-upon provision of the revised bank bailout plan that Geithner mentioned was his plan to put all banks with more than $100 billion in assets through a "stress test" to determine whether they can handle the losses that could come from an extended economic downturn, and are thus worthy of receiving additional cash infusions from the Treasury to be used specifically for lending. As with the "bad bank" concept, there is real potential with this notion of stress testing American's banks to find out which are the long-term players and which cannot surive in the current environment, but as with the former example, Secretary Geithner's Tuesday announcement was almost completely devoid of any details around how the stress tests would work, or why this hasn't been done already by the nation's banking regulators. What exactly would be tested with these banks? No answers. When would these tests occur? No answers. What would happen if a bank fails the test? They are not eligiable for government bailout funds, but will they be closed down or taken over by the government? Who knows. Could they get a retest at some later date? Nothing. What if one or more of the major U.S. banks fails a stress test? What happens then? Your guess is as good as mine. If a bank fails a stress test, aren't people going to want to withdraw their money in a big ol' hurry? One never knows. What if a bank disputes a negative result in a stress test? It is just question after question after question with this thing, and simply none of it appears to have been thought through at all yet by the new president or Treasury Secretary.

I am still trying to figure out where the hell the lesson went awry and got un-learned by our executives that the market hates fear, and the market hates uncertainty more than anything else. Until eight or nine years ago, that was just an understood fact of life, by everyone, certainly everyone at the high end of our government. But our last president and our most recent Treasury Secretary treated us to a number of enjoyable television appearances and official speeches proclaiming that the sky was falling and talking about how this brilliant idea to give $350 billion cash money to the heads of the banks of this country with little to no strings attached or restrictions for how the money be used was going to work, how it was going to save our country from the economic abyss. How totally and completely screwed we all were if we did not get that bailout working right away. I prayed for months for that man's presidency to end so we could get someone else in here who understands the way that the fragile psyche of the investing public needs to be taken care of. How you need to nurture it. How it needs to be caressed, coddled. Now we have a new president in town, and he's doing the exact same stuff, talking daily including on prime time television about the urgent need for his redonkulously costly stimulus plan and the dire irreversible spiral of hell our country will surely slip in to if he does not get what he wants. His Treasury Secretary is coming to the public with more doomsday talk if his plan is not enacted, plus some vague rhetoric and almost no details and really no clue how to re-seed American banks' totally depleted coffers. Am I the only one that this sounds familiar to?

And I ask again: how would you expect the market to react to this turn of events? When it is made obvious right in all of our faces that our government, the new administration Promising A Change, hasn't got even the first clue how to solve the crisis facing the banks of our country right now. That they had to delay a meeting even after a weekend to work through, and then the announcement they finally came up with contained almost no new or novel ideas and next to no details about how the new bailout plan would all work. What message do you think that sends to investors in this country? That you are unprepared, that you needed extra time and are still unprepared, that you spent all week hyping this thing, took extra time and are still unprepared? That you clearly haven't a clue how to fix the problem?

Right now, the U.S. stock market is at a serious crossroads. Right now. As you're reading this. Tuesday's close marks the lowest close for the major indices since November 20 of last year, and sitting just some 4% or so above the recent closing low of around 7500 on the Dow. Either the administration figures out a way to shape things up with this totally botched bank rescue, or we're going to retest the November 27 lows. Many would be in favor of a re-test of those levels (Dow 7500, S&P 750 or so) so we can bounce back up and provide further confirmation that those were indeed the lowest the indices will reach. But if Barack Obama and his leadership team aren't careful, they might learn the bad lesson about stock market re-tests: sometimes, the lows fail to hold.

McDonalds, and Bank Employment

Not quite as many interesting responses to yesterday's question as I had hoped, but at least one resourceful reader did manage to come pretty close just using internet research. The question was how would you go about trying to guess how many eggs McDonalds goes through around the world in an entire year.

Here is my formula, and then I'll give you the answer:

So there are 31,000 McDonalds restuarants worldwide, 13,000 of them in the U.S. (this I already knew as a stockholder in the company). Let's assume that over the entire roughly 5-hour breakfast session in the U.S., the busy McDonalds restaurant near my office at work serves one breakfast, averaging two eggs per order, every minute or so. This includes an average of the real busy periods as well as the outlier times just after opening and just before the lunch switchover when things are less busy. In fact, this is a busy McDonalds in the middle of Manhattan, so let's say the average store is 50% less busy, serving up one two-eggs breakfast every 90 seconds over 5 hours. That is 300 minutes of breakfast, and thus 200 breakfasts served on average. That is 400 eggs per day for your average U.S. store.

Let's assume that outside the U.S., people in general eat breakfast as McDonalds less frequently, and also that the breakfast foods available in those regions include fewer eggs overall, to include for local customs and eating habits. So, for McDonalds' 13,000 U.S. stores, that is 400 eggs a day, and for the 18,000 foreign stores, let's peg the number a little lower, let's say at 300 eggs per day. So that is 13,000 x 400 eggs = 5,200,000 eggs per day from the U.S. stores, and 18,000 x 300 eggs = 5,400,000 eggs per day from outside the U.S. This is a total of 10.6 million eggs per day for McDonalds. Multiply that number times 365 (let's ignore any differences from weekdays vs weekends and assume those are already factored in to my above daily averages) and you get 10,600,000 x 365 = 3,869,000,000 eggs per year.

The real answer is somewhere between two and three billion eggs per year. As Lester pointed out in the comments, this is some sick figure like 2% of the total worldwide production of eggs from fowl, all to McDonalds just for their breakfasts. But as I said yesterday, the real fun is in the way you choose to figure out the answer to a question like this. I've heard that some prominent U.S. companies ask questions like this in interviews -- one blogger IMd me that he was asked by a large technology company how many white cars there are in America -- and I had heard this one and thought it was interesting.

There's my thoughts for a Friday. Other than that, this is the story that most caught my eye so far in the financial news today. A prominent and well-respected banking analyst expects another 30% job cuts at the major investment banks over the coming years, something with which I fully agree. This was the biggest reason why I left Lehman Brothers last summer when I did -- although I certainly thought Lehman was going to have a tough time getting along independently, it's not that I necessarily knew the company would be declaring bankrupcty less than a month after my departure. My issue was that, even if Lehman could make it alone, I simply did not think financial services was the industry to be in for some time, as the banks as a whole will have to go through a painful time of deleveraging and rightsizing and compensation-cutting that I simply did not feel the need to be working there for. Still, that expectation for job cuts of as much as 30%, that is going to be a fugly time for anyone working in the banking industry as well as those companies who depend on selling to or buying from such firms. Maybe this new bank bailout to be announced on Monday can help these bloated firms get a bit better of a handle on their businesses.

Woe is the Automakers

Lordy lordy lordy have GM and Chrysler ever funked up again.

It's hard to believe. But it's true. The latest culprits for the two most beleaguered automakers in the U.S.? Their own fucking finance arms.

That's right. Back in 2007 when buyout firm Cerberus Capital made the ominous decision to buy Chrysler from Germany's Daimler, Cerberus had the brilliant idea to split off Chrysler Financial, which had long been a part of Chrysler proper, to try to turn more profits from Chrysler Financial itself. This, after Chrysler Financial had spent years with its primary objective not to make a profit but rather to help Chrysler to make sales of its autos.

The result? Now the two separate companies have vastly divergent goals, and as a result they are now working against each other and hurting both companies as a direct result. No longer is Chrysler Financial working to help its former parent sell vehicles, but now instead the finance company is looking instead to straighten out its own bottom line, even if it means making things a heck of a lot harder for consumers to purchase Chrysler cars and trucks.

First, in the summer of 2008, Chrysler Financial stopped providing leases on Chrysler cars outright, eliminating a previously very popular method of individuals and companies obtaining Chrysler cars in response to the then growing credit crisis in the U.S. When that proved not to be enough to fend off ever-increasing credit woes, Chrysler Financial then moved from auto leases to auto loans, tightening its belt by significantly cutting back on the number of financings it allowed for purchases to buy Chrysler vehicles. In addition, Chrysler Financial has also been increasing the charges it levies on Chrysler dealers for vehicles that are remaining on the dealers' lots, making things even worse for dealers who are already struggling mightily amidst the worst recession for automakers in more than a generation, possibly many generations. Sickly, the story is the same for GM's longtime captive finance arm GMAC, which Cerberus also bought a controlling stake in back in April 2006, and who now also is making life difficult by severely restricting the number of auto loans it is providing to potential GM customers.

How bad have Chrysler Financial's and GMAC's actions hurt Chrysler's and GM's ability to move their cars and trucks in the U.S.? Check out these numbers: The largest chain of auto dealers in the U.S., AutoNation Inc., in December reported that it was able to secure only 22 auto loans for car buyers from Chrysler Financial, compared to December 2007, when AutoNation secured 823 auto loans from Chrysler Financial. The figures for GM are even worse, with AutoNation got all of 9 auto loans from GMAC in December 2008, compared to 1,527 loans in December 2007. So, one more time, the largest chain of auto dealers in America saw 2350 auto loans from Chrysler Financial and GMAC in December 2007, but just one year later, that number had dropped to a whopping 31. Now, surely some of that huge dropoff is as a result of falling demand for the two companies' cars as opposed to the unavailability of loans, but come on. We're in the midst of the worst recession since the Great Depression in this country, and the automakers in particular are just a hair away from bankruptcy declarations, and recently needed to take more than $13 billion in taxpayer money just to stay afloat through Q1 of 2009, and the finance arms of the two companies, which previously used to make as many loans as possible available to car buyers without regard to their own profitability, are now providing just 1.5% of the number of auto loans that they did just one year ago. What a joke.

Interestingly, Ford once again shows itself on this issue to be ahead of its two rivals, as that company made the strategic decision to keep control of its finance arm, Ford Motor Credit, and that decision has worked out well for Ford even as it too is faced with tightening credit standards across the board. AutoNation secured 1,235 loans from Ford Motor Credit in December 2008, down from 1,624 in December 2007, but not down anywhere near the magnitude seen with Chrysler and GM, both of whom no longer control their former finance companies.

Last December, after the Congress refused to extend the TARP bailout to the automakers, then president George W. Bush blinked in the standoff and personally fought to extend $13.4 billion to struggling GM and Chrysler, in a move widely understood to be just enough of a lifeline to keep the companies afloat for a few months. Many, myself included, criticized the president for essentially deciding simply to buy a few months until the two companies would surely need more public funds, but at a time when it would no longer be Bush's problem but rather incoming U.S. president Barack Obama's. And here we are. Hopefully the new administration will take a holistic view of the problems facing GM and Chrysler, including seeing all the decisions made (or not made) by these companies over the recent past that have now severely hurt their chances of successfully becoming profitable enterprises, rather than simply throwing more billions of dollars at them in the hopes that it will somehow change them overnight into viable long-term entities.

The Banks and Their Bonuses

For a guy who has been so outspoken about the unfairly positive treatment the banks are receiving over the past year, I am really torn about this whole bonus thing. For those of you who don't know, millions of Americans, including prominently newly sworn-in president Barack Obama, were disgusted and outraged to learn on Thursday that Wall Street paid out $18.4 billion in cash bonuses to its New York City-based employees at the end of 2008 / beginning in 2009 for fiscal year 2008. Many of these banks are the very institutions that received between $10 and $50 billion of taxpayer funds from the TARP program to help stabilize their capital bases and keep them in business as we suffer through the most trying financial crisis since the Great Depression. News that these firms that needed billions and billions of dollars of our money to survive the over-risky positions they got themselves into are now paying out billions and billions of dollars in bonuses to their employees cannot be expected to be taken well.

That said, this isn't nearly as cut and dried as many, including the new president, seem to think it is. In the banks' defense, what they call "bonuses" are not really bonuses in the sense that most non-bank employees think of that word. Having come from that industry myself, I can say with total positivity that this isn't like some other jobs I have had, where you get paid whatever your salary is, and then in a good year maybe they kick you 5 or 10% on top as a year-end bonus. Maybe you get it, maybe you don't, but either way you make your salary and that's what your real pay is. At the banks, the compensation model is completely different. The base salaries at many of the banks, even for those investment bankers making $5 and $10 million a year, generally top out well under a million dollars. It is not uncommon for even the highest-paid bankers in the industry to receive a salary close to $250,000, and then receive their millions all in a bonus at the end of the year, making upwards of 80% or more of their total annual compensation in that year-end bonus.

Now, you may not feel bad for the guy making 250k base salary if he doesn't get his $3 million bonus this year. And I'm not necessarily disagreeing with you on that one. But that example was just to give an example of how the bank compensation model works, to show how totally different it is from essentially all other industries where the bonus is merely a nominal amount of extra cash on top of the base salary already received. It's important to understand that these $5 million bankers aren't taking home $4.5 million in salary, and then also expecting a 500k bonus at year's end. The vast, vast majority of the highest-paid bank employees' compensation comes in that year-end bonus.

The issue is more pressing once you step down the ladder a bit from the highest-paid bank employees. It would not be uncommon for a senior vice president-type at a bank, let's say a non-banker and non-trader, to make maybe 6, 700 thousand dollars a year, but again more than half of that money coming in a year-end bonus. I believe I have said here myself that my own compensation at the bank was more than half in a year-end bonus. The fact of the matter is -- and most people, including the president, don't seem to quite grasp this -- is that it's not nearly as simple as just paying no bonus to all the bank employees in 2008. Not only was more than half of my total compensation coming out of my bonus at year's end, but the base salary I was paid was below average for my field in this area. Far below. Now with the bonus, that more than makes up for any shortfall, but the whole compensation model in the banks is set up like this. Mostly everyone gets paid well below average on the base salary, and then gets bonuses that make them whole (and then some, in many cases) at year's end. Think of waiters and waitresses, who are not even required to be paid minimum wage in salary because it is understood that their tips will get them where they need to be. With bank employees, that's the same function that the bonus serves.

So my point in all this is just to show the folly of simply saying that no banks should pay any bonuses this year because of the problems they have had. All of the good employees would leave in a heartbeat (as well they should) if they got no bonuses, because the entire industry would be grossly undercompensated then, compared to market averages, and even compared in many cases simply to the amount those employees would need to meet their expenses for the year. Forcing all of the best talent to leave the banks by deliberately keeping them from being able to support their families would be a foolish strategy that no one could really support with logic. And yet so many people this week seem to be saying just that. Even President Obama seemed to suggest that the banks who have received federal help this year should not be paying out any bonuses. That is a ridiculous assertion and it is something which should not be done in the middle of a year like this. If you want to tell the banks that they can't pay bonuses in future years, then fine, this gives the banks the chance to determine who their best people are and to raise the base salaries of those employees so that, starting next year, their need to receive a bonus just to be able to meet their expenses is alleviated. But saying that the banks shouldn't be allowed to pay any bonuses this year because of their current troubles is something that only someone with no understanding of how not-truly-discretionary those bonuses really are. I know plenty of people at the banks making 70k in salary with 70k or more in bonus, working a job that any non-bank would pay that same person 120k base and little to no bonus for. I don't see how the answer to this year's financial crisis is to make that guy get by for a year with just 70k in salary.

All that being said, the banks might have really just screwed themselves royally here with these bonus payments. As much as everything I've just said above is undoubtedly true, the bottom line is that the $18.4 billion in bonus payments coming out of Wall Street for 2008 is the sixth largest aggregate bonus pool on record for the banking industry. In fact, $18.6 billion in bonuses basically just takes the banks back down to the bonus levels they paid out in 2004, when the market and the economy were chugging along just fine:



Paying out the sixth-largest bonus pool in history in a year that has seen this kind of carnage and that saw many of the banks needing billions of dollars of taxpayer funds to stay afloat certainly does not sound right to me. All these effers had to do was tell their employees what I solemnly guarantee you they were mostly expecting anyways, which is that bonuses, while still coming, would only be roughly 20% of last year's record levels due to the current calamity in the industry. Yes, some people would have left their jobs as a result as I mentioned above, but not nearly in the numbers that would be more or less forced to go if you paid them no bonus at all. While you can't really pay someone 60% of market salary and then give them no bonus and expect them to stay, it is much more palatable to pay them 60% of market salary and then give them only enough of a bonus to be making around the average level of compensation for their positions, or maybe even a bit under average, given the year we have just been through in the financial sector.

If the banks were smarter, they would have paid out 20 or 25% of last year's bonus levels instead of 40-50%, and gotten the aggregate number down below $10 billion. Again, paying no bonuses is simply not reality given the sub-market base salaries all the banks pay their employees, but somewhere in the $9-10 billion range in total bonuses would make all the difference to me. Then the banks would have been able to claim that they are paying bonus levels that were paid out in the mid 1990s, which is right in line with where the stock prices are now for the most part. And this frankly makes sense to me since I know the banks have to pay out some bonuses to enable their employees to get up to at least close to market compensation. Why they had to go and pay out the 6th highest aggregate bonuses in history just boggles the mind, doesn't it? Clearly, Wall Street is out of whack with what is fair and what is right in this environment. And to think that it is their sector which not only is most directly feeling the brunt of the troubles but also is essentially the cause of the whole crisis, that just makes this $18.4 billion figure stink to high heaven all the more.

I say that the banks might really have screwed themselves here, because even though President Obama has been outspoken in his understanding of the necessity to save our banking system as quickly as possible, it's not like this guy is a friend to the rich bankers like many of our recent executives could fairly be called. Obama is not looking to help the super-rich by any means, and regardless of his stated desire to save the banks in general, the guy will still have plenty of discretion when it comes to exactly how that is executed. Obama could do a lot of things to hurt the individuals employed at these banks who paid out such ridiculous bonuses that Obama on Thursday referred to as "outrageous" and "shameful". The solution to the banking crisis could include clawbacks of executive and other compensation paid to employees over the past year or more. It could include requirements that executives involved in these bonus payout decisions step down from their posts, all of them. Given the shameful, outrageously greedy and out-of-touch behavior these banks have just shown the new president, he might be far more willing to endorse a solution to the banking crisis that involves a total wipeout of these banks' existing equity, or one that requires the banks to feel the pain of fully writing down all their troubled assets before his new proposed "bad bank" will buy their assets.

The 2008 Wall Street bonuses were a great chance for the country's largest banks to show the new administration how contrite they are, how much they are tightening their own purse strings, and just generally how clearly they recognize and accept their own role in the financial crisis and the economic tumble that has overtaken the United States and the rest of the world over the past year or so. Instead, those mf'ers showed Obama and his team just how entitled they really are, and just how out of touch they are with the rest of the free world. When you've got the guy who's about to make major decisions regarding your entire company's and entire industry's future calling you "outrageous" and "shameful" at the very same time he is engaged in discussions about saving your industry, you know you fawked up. Big time. And now, let's all hope they have to pay the price when the latest "solution" is finally crafted by the Obama team.

A Week of Change

Well, it's finally here. This is the week that everything begins anew. After what seems like decades, change is finally here. We finally get to move on to the next phase of our lives, to a series of new decisions that will take our story to new and surely uncharted paths.

That's right folks. Lost returns with new episodes this Wednesday evening.

It's been a long time coming, and to mark the occasion ABC will be taking over all of our television programming with three grueling hours of Lost from 8-11pm ET. First is a one-hour recap of what has happened in the first four seasons, for those who are fool enough to never have watched the greatest show of this millennium, and in particular to remind all of us what happened at the end of Season 4, which I believe was originally aired some time in the early 1970s. I got lucky and channel-surfed my way right into a four-hour Lost marathon on SciFi on Monday evening, and they were smart enough to be showing the final four episodes of Season 4, so I got myself all caught up, but I still will be watching that first hour of Lost programming on Wednesday just to catch any new tidbits they are sure to throw our way, based on previous years' recap episodes. Following that are the first two episodes of Season 5, billed as a two-hour season premiere, running from 9 to 11pm ET. Personally, I can't wait. Even though from interviews done by the show's co-producers during the offseason it does seem like Season 5 is likely to bring more questions than answers, and we will have to wait until the final season to really find out what the hike is really going on with the island, I am still looking forward to finding out the answers to some of our less central and more immediate questions. Questions like Why is it so important that everyone go back to the island? and Who are these people from the freighter, Dr. Faraday, Charlotte, Miles, etc.? Of course another season of Lost will mean another few months of weekly frustration and total confusion. But along with it will be without a doubt the most entertaining hour of every week, the most talked-about show at the virtual water cooler, and, of course, a weekly dose of Goat's fabulous Lost recaps. How's that for pressuring the guy to bring back one of my favorite parts of Lost every week?

Moving on to the other, lesser story of this week, Barack Obama takes office midday Tuesday, putting an end to the tenure of George W. Bush as the leader of the United States of America. As with most inauguration days since I have grown up, I find myself looking back today on the man's legacy after eight years at the helm of our country.

First and foremost, no review of the Bush presidency can be started or finished without talking about 9-11. The worst terrorist attack on our nation's soil went down just nine months into Bush's first term in office, and it really ended up defining the first several years of his presidency, until the economic turmoil of the past couple of years found a way to even supplant that. To be honest, the Bush response to 9-11 has got to be the highlight of his time in office in my view. Maybe some of this has to do with being a New Yorker at the time that 9-11 happened (though I doubt that), but I don't know how one can not give Bush tremendous props for managing to help the country recover from those devastating attacks, and for preventing further violence within our borders. Honestly, if you had told me a few weeks after 9-11 that there would not be another terror attack on our soil for the next eight years, I am positive I would have signed up for that right then and there, regardless of whatever else happened. That was far and away the biggest and most pressing goal of the Bush presidency less than a year after it began, and it turns out that our president delivered on that goal with flying colors. Although there have been some alleged threats, they have all been thwarted and the result has been a totally terrorism-free America ever since the day the towers fell. Bush and his team deserve a massive amount of credit for that, and they surely get it from me. As much of an abject failure as the whole Iraq debacle has been, the mere presence of the war in that country has so successfully diverted the attention of Al-Qaeda and those who wish harm on the U.S. that there has been nary a mention of a serious threat to our security here at home. I'll never know if this was the actual planned strategy all along, but Al-Qaeda has spent their time over the past several years planning attacks on U.S. and U.S.-led forces over there, while having no time or inclination to plan more missives on U.S. soil. A tradeoff which has proven to be brilliant in its simplicity and in its results. As the new president looks to shrink our presence in Iraq, we may come back to this thought time and again as the years go by.

Unfortunately, Bush's stunning success in preventing further attacks in the U.S. stands alone in my eyes among his positive achievements over eight years in office. And things ended up getting so bad on the finance and economic front that it's enough to make me second-guess my feeling eight years ago that I would have signed up for no further terror attacks regardless of what else happened during these eight years. Iraq, other than its general effect of diverting the attention and violent efforts of terrorists away from the United States, has of course been a failure. Attacking a country surrounded by our bitter enemies and full of subversive, violent sects which hate us as well, with absolutely no exit plan or no way of even knowing if we've won or lost at all, was a disaster from the moment of its inception. Thousands of Americans and others have died in Iraq for, in my opinion, no good reason at all while we have insisted on remaining there to "keep the peace" and "promote democracy" in a country whose people seem to have little interest in either.

The worst part about the whole Iraq thing to me is not even the execution so much but how we got there to begin with. In what would prove to be just the beginning of a disturbing trend with George W. Bush, the man went before Congress and before the American people on prime time television and lied to us all. Lied through his fucking teeth about weapons of mass destruction being rampant all through Iraq, and how dire of an emergency it therefore was for us to send troops over there to die in the name of saving America from imminent disaster. In doing so, Bush lost much of his effectiveness with the Congress, while winning a feeling of betrayal from mostly every American. It's always hard to me, and I think for millions of my fellow Americans, to have our own president bald-faced lie to us, making things sound worse than they are just to advance his own personal agenda. I think back to that scumbag Bill Clinton looking right in the camera, proclaiming "I did not have sexual relations with that woman" and then having the audacity to explain during his deposition that "it depends on what the meaning of the word "is" is". What a bunch of lowlifes. And these presidents will never seem to realize how damaging it is when they tell bald-faced lies in front of 250 million Americans, 100 million or so of which are young, impressionable children and teenagers. How the F am I supposed to teach my children to tell the truth when our own president blatantly lies to everyone in the world just to get what he wants? How can people raise their sons not to be womanizing scumbags when our own president ten years ago was more concerned with chasing blowjobs than stamping out a rising Osama Bin Laden in the Sudan? From this perspective alone, I find George Bush's actions to be as unforgivable as those of his predecessor, and surely not befitting of someone worthy of leading this great country.

Although I am a big fan of Bush's sticking to his promise (unlike his daddy) not to raise taxes during his time in office, and I especially favor his support in passing a bill to phase out the baseless and (in my view) unfair estate tax -- a phase-out which Mr. Obama is set to reverse as one of his first steps in office -- Bush also spent the next several years of his time as president focusing far too much on Iraq and far too little on issues threatening to wreak havoc right here in the U.S. When Hurricane Katrina devastated New Orleans and the Gulf Coast area, the response by federal emergency management personnel was far too slow and led to significant unnecessary damage, death and destruction, all while Bush refused to do the right thing and personally visit the area. When we took prisoners in our war against terror, America's historic focus on human rights went right out the window, along with the dignity of our leader, as we tortured our prisoners of war just like any other indecent, lowlife country would (and Bush lied about it, of course). When the last of the major oil companies wanted to merge, where was the Bush administration to stop it in the name of protection of U.S. consumers? What about releasing our strategic oil reserves as necessary in times of big crude shortages in the U.S.? Cue the record-high energy, oil and gasoline prices that occurred during Bush's second term, and which are sure to return as soon as the global economy rebounds. What about the fiscal responsibility that used to be such a lynchpin of the American Republican party platform? Even Ronald Reagan would be rolling over in his grave at the way the Bush administration has nearly tripled our national debt to over $ 8 trillion at last count. And when Bill Clinton's grand strategy to de-regulate the entire banking industry combined with the House and Senate finance committees' blind insistence on banks loaning far too much money to people unable to pay those debts to slowly but surely create a massive bubble in the finance and credit sector at large, where was our current president to step in, recognize the problem and start solving it before the whole house of cards came crashing down? Who knows.

And as I mentioned, this business about lying to the Congress and the public to get whatever he wants proved to be the norm, not an aberration, for Mr. Bush. As the economy worsened all through 2007, Bush was repeatedly one of those clowns who publicly stated that the economy was fine, its fundamentals were sound, and that it was just people talking about a recession all the time that actually created a recession. In reality, this is an abominably stupid position for anyone to take, as recessions are 100% real and 100% regular and in fact as American as apple pie, and yet the Bush camp spent the all of 2007 and the better part of early 2008 making just this argument, even as credit markets around the world seized up in the summer of 2007 amid what has now officially been defined as a recession starting more than 14 months ago. And it all came to a head for me when Bush went on tv last September, in the wake of the failure of Lehman Brothers and the near collapse of insurance giant AIG, and told Americans that we needed to pass the TARP bill to bail out the banks of this country immediately, that the bailout would work to solve the banks' problems, and that if we didn't immediately pass this bill, our country would slip into an economic abyss. Well I got news for ya buddy, we did pass TARP, it ain't done shit for any bank, all of which are once again making new multi-year lows as I type this, and even despite TARP's passage and the expenditure of $750 billion of taxpayer funds to "save the economy", we are still totally, utterly and completely in the tank, economically speaking.

George Bush's legacy as president of the United States is I think very clear at this point. Despite his efforts late in his term to redefine his legacy through silly speeches and disingenuous claims, Bush will go down in history not only as an ineffective leader, but as a dishonest, untrustworthy man who allowed his one-track mind to focus too hard to his own personal agendas and could not see the forest for the trees, someone whose blatant and public dishonesty won him the disrespect of not only the American people at large, but of his partners in the legislative branch of government as well, including even his own party who by the end of his term could barely stand to listen to a word he had to say. As Bush leaves office with a record-low 22% approval rating (and who the F are those 22% btw?!), I find myself hoping that if nothing else, Barack Obama will prove to be true to his word as president. The sad truth is, it's been a looooong time since we've had anyone as president who anybody could call honest without a little bit of a chuckle. I know all politicians are scum when it comes right down to it, but let's get someone in here who can be trusted generally to do what he says he will do, and to always be on the lookout for the American people in all facets of our lives, instead of someone whose primary agenda is getting laid, or getting revenge on the people who tried to kill their daddy a generation earlier. It's time America got someone into office who really is governing "for the people" in every sense of the word.