A New Hero

As promised a few weeks ago, US District Court Judge Jed Rakoff rejected the settlement between Bank of America's Merrill Lynch and the Securities Exchange Commission. The initial complaint by the SEC was over the mega-bonuses that Merrill awarded it's employees prior to the end of the year. Remember? Merrill is the one who ran into the arms of Bank of America because it was going belly-up? But the so-called geniuses of Merrill apparently still "deserved" a bonus? Go figure. Anyway, the SEC filed a complaint because of Bank of America's failure to disclose this information to it's shareholders.

Here it is, in the judge's own words, the settlement "does not comport with the most elementary notions of justice or morality."

Gotta' love it. On the same day President Obama remembered that his administration promised to reform Wall Street (oh, yeah, that idea) having lost their window of opportunity, it took a federal judge to begin the process. Hello! Wall Street! Even the SEC was willing, yet again, to go lightly on who it was regulating (in this case Bank of America) and this brave, heroic judge said it wasn't enough.

Stop the Madness

I swear if I hear the line "we need to give this compensation or bonus in order to keep good people," one more time I am going to keel over laughing. Are these the same Lords of Wall Street who drove us into what is now being called The Great Recession? Wow. I really think we need to keep these people in the same jobs, because, who knows, we may dig ourselves into even deeper holes!

And keep them from what? Apparently banks, you know, the places where you deposit money, they lend it, making you some interest and giving themselves a little profit, well banks also invest their own money. These bonuses and fat compensation packages are going to the traders, the folks who are making trades on Wall Street, investing dollars in all sorts of exotic financial instruments. Frankly, if they leave the banks and the Glass-Stengal Act which prohibited banks from trading, is re-instituted, we could solve many many problems.

But we all know that isn't going to happen. The huge compensations are also not going to be trimmed. This Administration and Congress lost their window of opportunity to change and reform America's financial institutions. Now we're getting lame credit card regulation, which gave the credit card companies a year running start to up interest rates, change late fees, and reduce credit limits. A consumer credit agency that will, what, monitor how these credit card companies are doing, and no further regulation on banks or Wall Street.

We had a chance to stop the madness. Now we're just getting business as usual. Except for this one case, where a judge is actually questioning the cozy relationship between Bank of America and the Securities and Exchange Commission. Count to ten and wait for someone to label him the new judge slime word: activist. I'd call him a hero.

Audacity of Speculation

Last night I attended a dinner party where one of the guests was a dot.com CEO. Since leaving one of the behemoths of the software business, he has created two "start-ups," selling one to Google and his current project is being groomed for another large corporation to purchase for, presumably, a bazillion dollars.

I thoroughly enjoy this young, smart, erudite young man. Particularly, I love engaging his mind. So last night's dinner table discussion, as it always does when we're together, became dominated by the two of us. I wondered why it is that companies are no longer developed to be owned or managed by the developers. I talked about Ford, Boeing, Weyerhaeuser, Goodyear, even IBM (where the Watson family still owns a large amount of stock). Now it seems, in the Silicon Valley or dot.com era, companies created to "flip" them to even larger companies. Think MySpace. Tech journalists constantly speculate about the latest start-up's chances of being acquired by Google, Microsoft, Murdoch, or Barry Diller. My friend's comment was that he was not that interested in viewing his work as his life. In other words, work was a means for him to have the money to do what he wants (and he has a lot of money).

And I bemoaned the days of work and identity. The loggers who viewed their world as being out doors, of having significant risk, and feeling challenged. That now days we merely quantify that work, we pay people like loggers and fishermen to leave what they love. It's all about money.

We buy houses, fix them up and flip them (or we used to), we start businesses with the intent of flipping them to? And relationships...well, that's a whole other matter...

We are, I think, a society of speculators. No staying power. And despite the economy, that isn't changing. The geniuses of Wall Street have merely moved on to other "houses" doing the same swaps and derivatives that they did before. The dot.com folks whose balloons popped in the early part of this decade merely went on to other start-ups. It's other people's money, so who cares? Goldman Sachs, Bank of America are back in the saddle, posting profits, while foreclosing on homes and taking federal bail-out money. It's insane.

Perhaps our economy will not heal, will not be on sound footing, until we learn that speculating on the grand scales that we idealize, is not good. More is lost than money. In this most recent boom and bust, people lost homes, families have split up, parents lost jobs. We need to figure out not only how to build businesses that create value and meaning for the people who work there, but also intend to make something of value and meaning to the consumer.

Think of how audacious a Henry Ford would be in the current corporate culture, wanting to manufacture a product that will last and will be affordable? Where he employs people who have an opportunity to make a decent wage? And where the Ford family remains a part of that company long past the founders death? The idea would be laughed at by today's Lords of Wall Street. The cash would not come fast enough for their taste.

Until we change from speculators to owners, our economy will continue to slide.

Honey! I Shrunk the Economy!

The economy continues to shrink.  It's the 100th day of the Obama Administration, a benchmark which is convenient for the media but seems arbitrary and useless for the rest of us, but on this day, President Obama has to worry whether he has implemented enough steps to arrest the economic contractions.

Ironically, today is the shareholder's meeting for Bank of America.  Ken Lewis, the head of Bank of America, has been in his office for over 7 years.  And during those 7 years he has been part of a real estate boom and bust that has rocked and roiled the global economy.  Chances are, despite some shareholder activists, Lewis will remain the head of the company, the Dead Bank Walking, while complaining his salary and bonus is not high enough.

More important, however, is that President Obama has expressed optimism that the economic stimulus packages will create 2 to 3 million jobs.  That's great, except we are now at an unemployment rate far greater than 2 or 3 million.  

We have a long long way to go before we have figured out how to have a sustainable economy, not subject to the "wizards" of the financial industry's ideas to spread risk on lending practices or whatever other scheme they come up with that will cause our economic stability to crash down around us.  The first step is, during the next 100 days, for Congress to insert ear plugs and stop listening to the financial industry lobbyists.  Then pass legislation that mandates regulation of this industry so that they are not risking our money on Ponzi-like schemes where they and only they come out richer.

The first 100 days have been good, hopefully the next 100 get better.  

In the meantime, anyone know where the economy went?

Salaries and Bonuses? What?

Yesterday, the New York Times reported that banks and other financial institutions are returning to salary and bonus levels found in 2007.  Apparently, these institutions feel they are out of the financial mess they created!

Being blunt about this, this news is like hearing people on welfare get to set their own monthly payments.  While some of these financial institutions may be beginning to do well, they are certainly making profits only because of federal assistance whether it is Troubled Asset Relief Program money, the zero percent interest they are paying for borrowing money from the Federal Reserve or the reluctance by Congress to pass legislation which will restrict the usurious interest rates and lending practices established by banks.  Our financial institutions are the 21st Century version of welfare queens.

Apparently tomorrow there are going to be protests at Bank of America branches through out the country, asking for Ken Lewis's resignation.  We need more than that.  Congress has got to step up and enact legislation that regulates this industry and stand strong against their numerous lobbyists trying to quash the cram down revisions to the Bankruptcy laws.  Enough is enough.  

And what, just what are these salaries going for?

Shell Games with Bank Numbers

Finally, the stock market used it's x-ray vision and saw through profit statements from a bank!  It took a few days, but the analysts realized bally-hooing banks might not be such a good idea since there really hasn't been any change in banking assets except deposits of enormous amounts of taxpayer bail-out money.

Indeed the announcement of Bank of America's numbers sent the stock market on a tail spin.  Maybe investors are beginning to wonder who the heck they can believe?

In the meantime, confidence that boomers can retire and live comfortably is at an all time low level.  In other words, we're more than slightly worried that all those nifty investments we were sold are not going to help us live like we thought when we turn 65.  

All of this is beginning to remind me of the lessons we try to teach children.  About decision making for long term gain rather than short term joy.  It seems to me that so many of the CEOs only thought about short term joy.  Money lining their pockets, not the long term health and welfare of their companies, much less their customers.  

It's beginning to feel a bit like a sophisticated robbery scheme, isn't it?

Health Care

This is Steven Rattner.  He is now the car czar.  In his past life, he was a "corporate raider."  You  know, one of those guys who leveraged other people's money, buying up corporate stock, and then crushed unions to give up wages, health insurance, retirement benefits on the threat of cutting up the company into unrecognizable pieces.  You know, your job or your concessions.

Part of the Obama plan for General Motors and probably Chrysler includes demanding  even more concessions from the United Autoworkers employees and retirees.  Apparently, according to Rattner and other's in the Obama economic brain trust, it's those "legacy costs" of the retirees that is killing GM and Chrysler (funny, I thought it was the crappy cars they made for years).  

I love the term "legacy costs."   It sounds like a Pentagon generated term, sort of like "collateral damage," which means some one, a real live human, got killed while really big bomb exploded.  Here, real people who need health insurance, who more than likely have lots of health issues having worked around paint fumes, doing redundantly repetitive manual labor, will be told to hit the pavement and figure out how to pay just like the rest of us.  This, from an Administration that wants to solve the health care crisis.

What I want to know is are the AIG, Bank of American, Citibank, Wells Fargo, Goldman Sachs executives or matter of fact, any retired Member of Congress who gets amazing health care benefits, being told their "legacy costs" are too much?

You already know the answer.

It's All Toxic Now

The Obama Administration's plan to help stabilize American financial institutions was announced just a few moments ago.  It calls for lending money to private investors who will purchase the so-called "toxic assets" from banks.  The idea is having those assets off the bank ledgers will free up cash and prime the bank lending pump.

The stock market, as I write this, is up over 300 points.  Wall Street goes wild, thinking, finally, the cavalry has come to the rescue.

But really, according to this fascinating article in Rolling Stone, it seems all we have done is rescue the very companies that continue to tell us they are too big to fail, that we are too naive to understand their products, and what is good for them is good for us.  All of these lines we have heard before.  I continue to believe that anything that is too big to fail is too big to succeed, and question the value of propping these behemoths up when really their foundations seem rotten.

What we are doing, by lending money to hedge funds and other private investors is continuing the desperate efforts to make money off of money off of leveraged money.  If these same financial institutions warn about the "moral hazard" of helping individual borrowers by lowering interest charged on credit cards or cram down provisions to modify mortgages in bankruptcy, how can they be so arrogant to not see the moral hazard they are asking us to endorse?  

I keep wondering where is the outrage?  Why are we not banging on the doors of this Administration, of Congress, telling them to forget focusing on the easy targets, the bonuses, and rather it's time to re-do the whole corrupt system.  We can not be held hostage, like the Americans in the Iranian embassy, by these corrupt and unethical corporations.  But oh, that's right, we don't have expensive lobbyists paid to make sure our interests are protected.

And Now, Even Microsoft

Today, Microsoft Corporation, the Redmond, Washington computer operating system behemoth, announced it was laying off 5,000 employees and instituting other cost saving measures.  Of those 5,000, 1,400 apparently were laid off today at the Redmond headquarters.    

This news comes when Microsoft reported that it's earnings were less than expected for the 4th quarter, 2008.  However, what is important to note, they still performed quite well.

But if it isn't clear by now it may never be.  Our economy is in deep, deep trouble.  And I am beginning to wonder whether the proposals made by the Obama Administration are sufficient to self arrest the avalanche of news like today's layoffs at Microsoft.

Several days ago I wrote about banking institutions that are "too big to fail."  And I cautioned that anything that is too big to fail, whose collapse would have, according to some, catastrophic impacts on the global economy, should not even be allowed to exist.  Indeed, within the past week, we have seen the outgoing Secretary of Treasury deliver more federal money to two such banks, Bank of America and CitiCorp.  And the word is that both are still, essentially, insolvent.  

It seems that a wiser, more prudent use of our money may be for the federal government to start several smaller, regional banks.  New, healthy banks.  But to continue dumping federal money into cesspools where we haven't a clue where the bottom is, what kinds of assets they have, how much they actually owe other lenders, seems, well, bad banking.  We are making loans, or investing, in exactly what we don't want banks to be doing anymore.  So, while I understand the panic in the Obama Administration, of not wanting Bank of America or CitiCorp to fail in the first few glorious days of this Administration, perhaps a wiser course would be to just stop giving them money and begin creating new, more stable banking institutions who will act like banks rather than money sponges.  Creating new institutions while we watch the old, lumbering, banks fail, could be a very healthy idea.  Short of this, Obama just need to nationalize the banks, kick out the management, and well, maybe hire some of the 5,000 bright young stars from Microsoft to run them.  They need jobs.

The other fundamental problem is a trade issue.  Again, at the risk of becoming the Cassandra of the blogging universe, we can not keep importing and buying their stuff.  We have got to be creating, manufacturing, and exporting our stuff.  The so-called "new economy" has failed.  Let's be real about that.  And what did we really export anyway, credit default swaps?  The Lords of Wall Street who got us into this mess?  Yep, sure, they are advising China, India, Singapore on how to look just like us?  Come on!  

We have so gutted our manufacturing capability that it will take years and years to get that back.  But I think part of the deal this Administration has to make with private industry is if they want bail-out or stimulus money, they have to be American.  No call centers in other countries, no imported steel, concrete, or solar panels.  And if, because of all the trade agreements we have made this requirement is considered a trade barrier, well, tough.  The world feasted on our stupidity for a long time, it's had more than it's share.  Sounds tough, I know.

But Obama has to explain to other countries that if they don't want bread riots in their streets, America has got to get it's own economy on a sustainable basis, and that means reducing our trade deficit, developing well paying jobs here.

Pundits are saying much the same thing.  Obama promised to listen to all of us.  Hopefully he does, and soon.

Meanwhile, I'll keep my accounts in one the of "too big to fail" banks, because I am not sure there are any other solvent alternatives.

Exhibit A

The Wall Street Journal printed an article on January 3, 2009 that is Exhibit A in what I have been discussing about the financial industry.  This house, or shack, was appraised at $132,000 and received a loan, a "no-doc" loan for $103,000.  It was unfit for human occupancy (or any other occupancy for that matter!).  Now, there could be an argument that the land was worth that amount, but the reality is someone had to pay that loan.  You have to read the story to understand that there is no way, no way, the lender should have made the loan.

Indeed, we can blame the borrower.  She was on a fixed income, a mix of disability, food stamps, welfare to work for a total of $3,000 a month.  She probably knew she could not afford an adjustable rate mortgage with an introductory rate of 9.5%.  But come on, isn't the lender, the mortgage broker, responsible for something here?  Turns out she was telemarketed.  Yep, someone called and told her to apply for the loan.  Then they paid for an appraisal.  They assured her she would qualify.  And the mortgage broker didn't just arrange for one loan, he made sure she got two, one his own firm lent her!

Of course, this is an extreme example.  But the bottom line is that we, as a community, will pay for this travesty, along with others that are more nuanced but as egregious.  Frankly, I regret not writing on the outside of the hundreds of direct mail pieces I received from Washington Mutual, Bank of America, Countrywide, and others: stop sending me these offers, it is immoral.  But I didn't.  

Now what?  Well, I think we begin by understanding everyone shoulders the blame.  Not just the greedy mortgage broker or the bottom-of-the-rung woman in this story.  We all went nuts during the past two decades.  We spent money we didn't have.

Second, I think we begin to realize our homes are not investments, but homes.  We live here.  We raise children here.  We sit by the fire and read.  We have holidays dinners at home.  We slam doors when we're angry and pop champagne corks when we celebrate.  We buy a house or condo as our home.  It's great that the house appreciates in value, and fantastic that we add value to it by restoring or remodeling.  But it is a home.  Using it as our credit card is not only unwise, but it changes the meaning of a place that shelters us.   It is not a home but similar to a piece of plastic with a name, number, and expiration date.  This change, from realizing our homes are not investments, is cultural.  It will be a huge shift in how the lending industry has led us to think during the past 8 or so years.  It will be hard, but a wise cultural shift to make.

Third, while this is hard for me to assert, we need some accountability.  I have yet to look at court dockets, but I can imagine there will be a lot of litigation over the predatory loans.  While I think litigation will be good, it more than likely will only name corporations as the defendants.  There are a lot of individuals in the mortgage industry that made a lot of money and who should also be held at least civilly accountable.  I would also think a few criminal prosecutions for fraud might be a good deterrent.

Our community took a hit.  We all let this happen.   Now it's up to us to fix it.  We need a habitat for humanity that fixes our culture.