Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. CEOs of the World ... UNITE!A little ideological confusion at the Wall Street Journal's front page article on Ken Lewis having to forgo $2.5 million in compensation. [Don't cry for him, unemployed America: he'll somehow manage to get by on his $69.3 million payout when he retires in a few months).According to the Journal: The move angered many on Wall Street, which has been anxiously awaiting Mr. Feinberg's rulings on compensation at the seven federal wards, which also include Citigroup Inc. and General Motors Co. Mr. Feinberg had been expected to clamp down on compensation by cutting highly paid employees' salaries. But until now, there has been little indication he would take away an employee's entire pay. Since when is a CEO an employee? --d.f. Labels: Bank of America, ceo pay, Daniel Fireside, Golden Parachutes, Ken Lewis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Foreclosures Up 15% In 2009This is hardly surprising. One out of every five homeowners owe more than their houses are worth. The real unemployment rate is over 16% and climbing. And banks are refusing to refinance sour loans, even with $50 billion from the Obama Administration. You can't unpop a bubble.From the wires: The number of U.S. households on the verge of losing their homes soared by nearly 15 percent in the first half of the year as more people lost their jobs and were unable to pay their monthly mortgage bills. --d.f. Labels: Daniel Fireside, foreclosures, homeownership, real estate market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). CIA Hiring Failed Wall Street AnalystsAccording to the Wall Street Journal, the CIA is recruiting out of work financial analysts from Wall Street.Why would they seek out the financial expertise of the people most directly responsible for the global economic meltdown? The CIA now produces a daily Economic Intelligence Brief for President Barack Obama, chronicling economic, political, and leadership developments that could impact the world economic order. We can only hope that this explanation is only a cover for their real mission: covertly placing Wall Street's failed finest in charge of the financial and economic sectors of our worst enemies. --d.f. Labels: CIA, Daniel Fireside, economic meltdown, unemployment, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank's $180 Billion Credit Card Time BombIf the economy stays on its present dismal course, banks can expect to lose $180 billion, according to analysts quoted in the New York Times. The figure is much higher than the government's so-called "stress test" scenario of $82.4 billion in losses because the Fed presumed no increase from current unemployment rates, and because they didn't count the losses from securitization of credit card debt. Yes, the banks bundled up credit card debt just like it did bad mortgages, selling and reselling it to investors and creating liabilities far in excess of value of the underlying loans.The average US household has over $8,400 in credit card and other revolving debt. With unemployment rising, housing prices unlikely to climb back to bubble elevations, and consumers saving more, and Congress considering curbing the most egregious predatory practices of the industry, the glory days of credit card profits for banks appears to be over. The banks are also slashing the credit available to consumers. According to Meredith Whitney, lenders are cutting back credit lines by $2.7 trillion over the next year, a 57% reduction of available credit from just two years ago. As consumers cut back their spending, the negative feedback loop will only accelerate. --d.f. Labels: bankruptcy, Credit card industry, credit crisis, Daniel Fireside, Meredith Whitney, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GM Bankruptcy Clock Ticking FastGM appears likely to follow fellow carmaker Chrysler into bankruptcy court. The company lost $6 billion in the first quarter of the year, with no signs that sales will improve. The company faces a June 1 deadline imposed by the government to drastically reduce its liabilities and expenses, including persuading the United Auto Workers (UAW) to accept stock to cover the company's $20 billion obligation to fund retirees' health benefits, and bondholders to accept pennies on the dollar, again in stock, for $27 billion in current debt. The company must get both the union and 90% of the bondholders to agree to the terms or the government will withhold future loans, driving the company directly into bankruptcy where a judge can impose terms on all parties.Bankruptcy would also ease the company's plans to slash 2,600 of 6,246 dealerships over the next year. --d.f. Labels: auto industry, auto industry loans, bankruptcy, Chrysler, Daniel Fireside, General Motors, GM Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Real Unemployment at Record HighThe Bureau of Labor Statistics announced that the "official" unemployment rate for April is 8.9%, a stunning jump from 4.8% just a year earlier. It is the highest jobless rate since the glory days of the Reagan Revolution in 1983. The country lost 539,000 jobs last month, which reporters are scrambling to put a happy face on by saying that "analysts had predicted a loss of 600,000," although this difference is more than offset by the 72,000 temporary government jobs associated with the 2010 census.Over 4 million million jobs have been lost in the past six months, and over 5 million during the last 16 straight months of job losses. However, to get back to pre-recession/depression rate (if things magically started recovering like last week) we would need to add 7 million jobs, to account for the growth in the population. The real story, of course, is much grimmer. The official BLS rate (shown in line U3 of the monthly reports) only counts those actively seeking work. Line U6 of that same report, however, gives a more accurate picture of the state of unemployment. This rate stands at 15.8% for April 2009, up from 8.9% a year earlier. (All the info comes from the BLS website). The U6 number includes the following:
--d.f. Labels: Bureau of Labor Statistics, Daniel Fireside, economic meltdown, real unemployment rate, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest Banks Need $75 Billion MoreThe results of the "stress tests" are in.According to the results, the biggest banks need $75 billion in additional capital to ride out a "prolonged downturn" (as opposed to whatever it was we've just been through and all the money we've loaned out). The Washington Post has a handy chart here. The biggest potential losers are Bank of America, Wells Fargo, and GMAC. However, according to former banking regulator and S&L scandal prosecutor William Black, the tests are a "complete sham" that don't go nearly far enough. If they really tested banks properly they would show a collective hole of $2 Trillion (yes, capital "t"), and force banks to massively increase their capitalization rates. Read the article here and the interview here, as well as Black's amazing article for D&S way back from 2007. --d.f. Labels: bank stress testing, banking crisis, banking system, Daniel Fireside, stress tests, William Black, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Bonuses Were $454 MillionTurns out the total bonuses paid to AIG were $454 million last year, or 4 times higher than previously reported. How do we know this? Because Congressman Elija Cummings asked them a direct question. See, nobody asked them this precise question before, so they didn't think anyone really wanted to know.From Politico: The 2008 AIG bonus pool just keeps getting larger and larger. In other news, AIG lost another $5 billion in the first three months of the year. I suppose that's better than losing $10 billion. Another round of bonuses for everyone! --d.f. Labels: AIG, Daniel Fireside, Elija Cummings, Wall Stree bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UAW Plans To Dump Chrysler StockIt appears that the worker takeover of what remains of industrial America will be short lived. The other day the Senate shot down the possibility of bankruptcy judges being able to alter the terms of first mortgages, citing the "sanctity of contracts." Considering that the big worry here is how to finance the commitments to retired workers, it will be interesting how much concern these same Senators for the contracts of auto workers.From the wires: STERLING HEIGHTS, Mich. - The United Auto Workers union has no intention of keeping its 55 percent stake in the new Chrysler and will sell the shares to fund a trust that will take over retiree health care costs next year, the union's president said Monday. --d.f. Labels: auto industry, bankruptcy, Chrysler, Daniel Fireside, VEBA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Senators Block Cram DownsThe US Senate voted down the "cram down" legislation that would have given bankruptcy judges temporary authority to write down the value of mortgages. Responding to the behest of the banking industry (recipient of hundreds of billions in taxpayer dollars) Republican senators and a dozen or so like-minded Democrats shot the bill down, even though a stronger bill had earlier passed through the House.Bankruptcy judges currently have the authority to rewrite the terms of mortgages on second homes and yachts, but not for primary residences. The failed bill would have given judges the authority to rewrite mortgages to reflect current home values, albeit with significant caveats: banks must have refused to make fair offers to renegotiate loans, future profits on the home (if the owner sold in a rising market) would have been split with the banks, and the authority would have expired in 2012. Advocates had argued that this was a critical element of any housing recovery plan in the face of plummeting home prices and unprecedented foreclosures and abandoned properties. They also argued that banks had to accept responsibility for making huge profits on bad loans for overvalued properties. --d.f. Labels: cram down, Daniel Fireside, foreclosures, mortgage meltdown, Mortgage plan Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lose Money Get RaiseThe New York Times has a nice chart showing how CEOs from public companies are making out like bandits with massive pay raises even while their bottom lines plummet.Some tidbits: ArcherDanielsMidland CEO Patricia A. Woertz saw her compensation jump 397% to $15 million from 2007 to 2008 while profits fell 17%. Data giant EMC's CEO Joseph M. Tucci a 148% raise in 2008 to $11.7 million while the company lost money. On a similar note, Paul Krugman laments that compensation for investment bankers is zooming back up to levels from pre-meltdown days. As he notes: there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks. --d.f. Labels: ceo pay, compensation, Corporate Swindles, Daniel Fireside, executive pay, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GM Dumps Pontiac and WorkersIn a last ditch to stave off bankruptcy, GM announced that it will ditch the Pontiac brand by the end of next year (Hummers, Saabs, and Saturns will be done by the end of 2009 but other companies may buy the brand names), cut 23,000 of its 61,000 factory jobs by 2011, and slash the number of dealers by 42% to 3,600, and offering creditors stock for debt. The US Treasury would end up with at least a 50% stake in the company, bondholders up to 10%, the UAW 39%, and existing stockholders 1%.Bondholders, who currently own $27 billion in company debt, are the key to the deal going forward. In a letter to bondholders, the company warned:
The company will close 16 of its 47 US manufacturing plants by 2012, including six this year and seven next year. The automaker has already received over $15 billion in taxpayer funding and must present a restructuring plan by June 1 in order to receive additional funding and avoid bankruptcy. --d.f. Labels: auto industry, bankruptcy, Daniel Fireside, General Motors, GM Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 29 Failed Banks In 2009 -- So FarThe FDIC took over 4 more banks on Friday, bringing the total for 2009 to 29, compared to 25 for all of 2008. The banks were located in Idaho, Michigan, and Georgia, in addition to the now officially down and out First Bank of Beverly Hills.The massive number of bank failures has brought the FDIC insurance fund to its lowest point in nearly a quarter century. As of the end of 2008, it had $18.9 billion, compared to $52.4 billion a year earlier. The FDIC had 252 banks on its troubled bank watch list at the start of the year, up from 171 in September 2008. --d.f. Labels: bank failures, Daniel Fireside, FDIC Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Pensions Plans in PerilIf the auto industry is allowed to dump their pension plans through bankruptcy, it could put the pensions of millions of other retired workers at risk. The Pension Benefit Guarantee Corporation, the government insurer that backs pension plans, would quickly run out of funds and be overwhelmed with claims. It would be forced to slash promised benefits to retirees. It would also open the door to other companies looking to dump their pension obligations through bankruptcy court.The dire state of the Pension Benefit Guarantee Corporation's decision to gamble its money in the stock market certainly hasn't helped things, as we noted here earlier this month. The holes in the pension fund and related dire circumstances of 401(k) programs have been apparent for some time. James Ridgeway reported on corporate America's plans to ditch their obligations to retired workers back in this article from 1999. We can only hope that the current situation will put an end to any more calls to privatize Social Security, which is becoming the default retirement plan for more and more Americans. From the NYT: Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons. --d.f. Labels: auto industry, Daniel Fireside, Pension Benefit Guarantee Corporation, pensions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 14 million homes are vacantFrom USA Today:Census numbers show: Banks are on a tear to evict people rather than renegotiate loans to market rates. As we wrote earlier, this has hit renters as well as homeowners. The Obama plan barely addresses this problem by providing just $2 billion for buying up and renovating abandoned properties -- hardly enough to make the slightest dent in the growing glut of vacant properties. The bank policy of forcing eviction instead of renegotiating the loans to market rates is insane. The glut of foreclosed properties is driving down the value of homes everywhere. Vacant properties quickly attract vandals and criminals, often leaving disaster zones in their wake. The banks are left with a property worth a fraction of what they could have gotten by renegotiating the loans. This is why some Democrats have been pushing to give bankruptcy judges the authority to "cram down" mortgages. The impact has been devastating for communities. Owners who keep up on their mortgages have seen their home values fall even further, vacant properties are a blight on neighborhoods, and homelessness is rising. The banks seem determined to drive themselves into the ground and take the rest of the country with them. --d.f. Labels: Daniel Fireside, eviction, housing bubble, housing market, mortgage meltdown, Mortgage plan Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). California Housing Defaults SkyrocketAfter a brief lull, California's housing market has resumed its downward spiral. According to the Silicon Valley Mercury News, the number of default notices sent by lenders to property owners jumped 80% in the first three months of 2009 versus the last three months of 2008. Default is the first step in the foreclosure process.There were nearly 80,000 foreclosures in the third quarter of 2008 before dropping to 46,183 and 43,620 for the following two quarters, respectively, due to temporary changes in foreclosure policies that have now come to an end. Foreclosed properties now account for 58.1% of all resales in California this year. --d.f. Labels: California, Daniel Fireside, foreclosures, housing bubble, housing market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Big Corps Using Bailout Bucks For LobbyingIt's the best game in town. Get taxpayer bailout billions and spend some of the spare cash on lobbyists to press Congressional Reps and Senators into giving more money and ending onerous conditions like limiting executive compensation.There oughta be a law... --df From the Washington Post: Major recipients of federal bailout money spent more than $10 million to lobby lawmakers in the first three months of 2009, including arguing against pay limits for corporate executives, according to newly filed disclosure records. Labels: bailout, Citigroup, Daniel Fireside, financial crisis bailout, General Motors, JP Morgan Chase, lobbyists, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Cram Down Those Loans!Senate Democrats are negotiating with banking industry lobbyists on legislation that would allow for bankruptcy judges to "cram down" (or rewrite) mortgage loans. Judges currently have the authority to do this for mortgages on second homes, yachts, and luxury automobiles, but not for primary residences.Bank lobbyists (whose salaries are paid by banks receiving billions in taxpayer bailout funds) are hoping that Senate Republicans can either stop the bill outright or force limits on who would be covered by the bill, as well as a time limit (or sunset period). The House passed a version earlier this month. Advocates for troubled homeowners are pushing for legislation that would allow bankruptcy judges the authority to change the terms of interest rates and loan principle to reflect current market rates. This would help stop the flood of houses going into foreclosure, maintain value for the banks, and prevent neighborhoods from being overwhelmed with vacant properties. The bill would not only benefit homeowners who are able to convince judges that they have the means and will to pay a mortgage brought down to reflect the current value of their homes, but also renters -- a group that represents 40% of all people at risk of eviction because of foreclosure. Banks had no qualms about extending loans on overvalued properties in good times (and then leveraging them many times over in credit default swaps and other derivatives). Their current policy is to foreclose, evict everyone, and let the government deal with the resulting mess of abandoned property and growing homelessness. Even those current on their mortgages lose out as their property values continue to plummet amid the glut of bank-owned properties on the market. With profits rising thanks to government handouts, why should banks be allowed to duck their share of responsibility for the mortgage mess? --df Labels: banking crisis, banking system, Daniel Fireside, derivatives, lobbyists, mortgage backed securities, mortgage meltdown, Renters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Mall Operator In BankruptcyYou know it's a really bad sign when sales are so slow that the malls are closing up. Unless you hate malls. The company operates malls in 44 states, including Boston's Faneuil Hall Marketplace. Seems likely that this is only the tip of the iceberg for commercial real estate.From the Washington Post: General Growth Properties, the giant shopping mall company whose holdings stretch from Tysons Corner to the planned community of Columbia and Baltimore's Inner Harbor, announced today that it has sought protection from creditors in bankruptcy court. --df Labels: bankruptcy, Commercial Real Estate, Daniel Fireside, real estate market, shopping malls Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). What Harvard Money Managers MakeAs we reported earlier, Harvard expects to lose $11 billion, or 30% of its endowment (just what they lost is equivalent to what Iceland received in bailout funds). The budget for the entire city of Boston is $2.4 billion.Although a lot of money was lost, the financial geniuses who run the fund (officially the Harvard Management Corporation) have pocketed a pretty penny. Here are the annual compensation packages for the top six managers (fiscal years July 1 to June 30th): 2003 $107.5 million (source) (note: alumni outrage at the compensation from this year prompted the imposition of salary caps, although even then, as seen below, the caps are still quite generous.) 2004 $78.4 million (source) 2005 $56.8 million (source) 2006 $13.3 million (source) (note: total payout is lower because of management turnover and outsourcing of some fund oversight.) 2007 $22.3 million (source) 2008 $26.8 million (source) The total for these six years for the top six money managers (HMC does not report the compensation of the other employees) was $305.1 million. Interestingly, the top managers of Yale's endowment, which has posted similar outsized returns, earn about one tenth of their counterparts at Harvard. Even with the drop to a total value of $20-some billion that is expected to be reported in July, the endowment represents a massive amount of capital controlled by a single non-profit, tax-exempt entity that receives hundreds of millions in taxpayer grant money. --df Labels: Daniel Fireside, executive pay, Harvard University, University endowments Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
