OT - Financial mess 101 ($700 billion bailout)

[FatPitcher]

I am all in favor of a STIMULUS package, but not all of Obama's package is going to stimulate the economy. It was a sly way for him to get some of his other policies snuck in there.

I'm all for putting money into the nation's infrastructure. We are in dire need of it and this will create jobs. Enhancing the energy grid, same thing. Much needed and will create jobs. Any of those kinds of projects I am for.

I think he is overspending for education. I know schools need enhanced, but that is more of a state and local thing. I pay ungodly property taxes and it still isn't enough because the school system my kids go to receives no money at all from the state. Each state needs to reevalute how it funds their schools. If help is needed from the federal government, we'll go from there.

Lastly, I am against sending every American another check for $500 or $1000. I was against it under Bush as well. It is a very short term solution to a long term problem.

Bottom line is that the American people and the Federal Government over the past 10-12 years has lost all sense of fiscal responsibility (not all Americans, but a majority of them). We went through a period where Americans were buying way more house than you needed. American auto companies were making gas guzzling SUVs instead of thinking forward for fuel economic cars before it was too late. American people weren't saving money for an inevitable economic collapse.

Again, printing up more money isn't going to solve anything. These irresponsible corporations deserve to fail and go under. Yes, that means a loss of jobs in the short term, but there are alot of intelligent people out there that will start up a new business and get it running properly, making things better in the long term. The more money we print now, the more inflation we are going to see in the future, and that isn't good for anyone.

The core problem is Americans consuming more than they produce. This recession isn't just a result lack of consumer confidence, it is the result of consumers first running out of money and then running out of credit. It's not just a temporary problem where the government can step in and spend more money for a while and things eventually will be back to the way they were anytime in the last 15 years. Basically, some of that prosperity was a mirage. The only way to actually attain it is for individuals and businesses to become more productive. I don't think that's the plan, though.

[FatPitcher]

The news came out yesterday that the Wall Street banks just paid $18 BILLION in bonuses for 2008.

Today, it's reported that Exxon "reported the largest annual profit ($45.22 BILLION) in U.S. history."

http://money.cnn.com/2009/01/30/news/co ... tm?cnn=yes

At least some people are still making money, I guess. It makes me sick.

Investment bankers typically have a large portion of their income paid in bonuses, with rather small base salaries.

And it makes me happy that people are still making money. I'm sure Bloomberg wishes they were making even more, given that declines in tax revenues have shredded the city budget.

Shell just posted a $2.8 billion loss. That should cheer you up a bit.

[Feanor]

I don't think he meant anyone here personally. He was basically saying, isn't a consensus or a summary of a group's collective opinion's, more valuable that one single person's opinion?

Scientific consensus is the collective judgment of the community of scientists in a particular field of study. Consensus implies general agreement, though not necessarily unanimity. Economics is a social science and like other sciences theories can never be proven only disproven, and so people obviously are going to talk about the economic consensus in this thread from time to time.

[Feanor]

The only way to actually attain it is for individuals and businesses to become more productive. I don't think that's the plan, though.

In the long-run, this is 100% correct. Raising productivity growth is the absolute key. The bailout and the current stimulus plan don't seem to have anything to do with that, except that keeping the economy from sliding further into recession and keeping the credit markets alive and well is essential if we want businesses to keep making the investments that lead to higher future productivity of capital and labor. Government investment in education is also critical to raising productivity.

[GTHobbes]

Shell just posted a $2.8 billion loss. That should cheer you up a bit.

Actually, Shell had a loss in the quarter, but it still sounds like they had a pretty darn good year:

"Excluding the effect of write-downs on inventory prompted by the fall in oil prices, Shell’s annual profit rose 14 percent to $31.5 billion from $27.5 billion."

http://www.chron.com/disp/story.mpl/bus ... 37883.html

[GTHobbes]

Investment bankers typically have a large portion of their income paid in bonuses, with rather small base salaries.

And it makes me happy that people are still making money. I'm sure Bloomberg wishes they were making even more, given that declines in tax revenues have shredded the city budget.

It's not that I have a problem with people making money, per se. But should these people be lining up to accept bail out funds in one hand and HUGE bonuses in the other? How would you feel if it was the auto industry folks who were receiving BILLIONS in bonuses?

And for the record, according to this link, the median base salary of investment bankers five years ago (in 2004) was $147,000. That's the latest data I was able to quickly find. Either way, I'm not sure I'd call that a "rather small base salary."

http://74.125.95.132/search?q=cache:XDZ ... ummary.pdf+ Investment+bankers+typically+have+a+large+portion+of+their+income+paid+in+bonuses,+with+rather+small+base+salaries&hl=en&ct=clnk&cd=8&gl=us

[FatPitcher]

Investment bankers typically have a large portion of their income paid in bonuses, with rather small base salaries.

And it makes me happy that people are still making money. I'm sure Bloomberg wishes they were making even more, given that declines in tax revenues have shredded the city budget.

It's not that I have a problem with people making money, per se. But should these people be lining up to accept bail out funds in one hand and HUGE bonuses in the other? How would you feel if it was the auto industry folks who were receiving BILLIONS in bonuses?

And for the record, according to this link, the median base salary of investment bankers five years ago (in 2004) was $147,000. That's the latest data I was able to quickly find. Either way, I'm not sure I'd call that a "rather small base salary."

http://74.125.95.132/search?q=cache:XDZ ... ummary.pdf+ Investment+bankers+typically+have+a+large+portion+of+their+income+paid+in+bonuses,+with+rather+small+base+salaries&hl=en&ct=clnk&cd=8&gl=us

It's small compared to exaggerated portrait critics are trying to paint. And with the bonuses, why don't they even mention how many people the $18 billion was distributed to? You'd think the average bonus would be a more informative figure, but I suppose that for Obama and others, using the total amount is better for stirring up the rabble. There's also the issue of timing - how many of those bonuses were dished out after things went south in September, and how many of them were from earlier in the year? How many went to people who actually performed well? I guess for some people, there's no need to know any of that; there's a witch to burn!

I'm sure there were undeserved or exorbitant bonuses, and I'm sure that far more than $18 billion is going to be handed out to undeserving people in the stimulus bill.

[wco81]

I heard the $18 billion was one of the highest figures in the history of the industry, which had one of the worst years in its history in 2008.

I'd be curious to see the bonuses before 2008, when they were racking up record profits instead of record losses.

But consider that a lot of Wall Street schemes caused these problems we're having and taxpayer money is propping up many of these institutions, which are being so generous.

As for productivity, American productivity growth has been good in the last 20 years or so. In the early '90s, there were questions whether all the money which had been spent on computers were ever going to pay off in increased productivity. In the later '90s, Greenspan made the argument that technology had indeed boosted US productivity growth over that of other developed nations. In the early part of this decade, after the last recession, job growth wasn't high, partly because higher productivity allowed employers to have smaller number of employees.

We can have a long debate about the best ways to invest to stimulate the economy, while it's going down the tubes. Certainly the Democrats are using this opportunity to force through pet programs which won't have immediate impact.

But the only alternatives I heard were to have more tax cuts or not do the fiscal stimulus at all.

[FatPitcher]

I agree that the general attitude among many investment bank executives has been selfish and contemptible. All in all, everyone on the giving and receiving ends of bailout/stimulus money is acting poorly, I think. You have execs cashing in while they fail miserably are their jobs, Congress using a crisis to funnel money to their supporters when everyone else is tightening their belts, unions demanding to be overpaid by their employers when everyone else is losing their jobs, the President allowing Congress to steamroll him, etc.

But I think it's laughable for one of those actors to point fingers at any of the others.

[GTHobbes]

Bail out recipient, Wells Fargo, seems to be another company that just doesn't get it:

http://www.usatoday.com/money/companies ... argo_N.htm

[greggsand]

Bail out recipient, Wells Fargo, seems to be another company that just doesn't get it:

http://www.usatoday.com/money/companies ... argo_N.htm

Hey, vegas is dirt cheap right!

[F308GTB]

Bail out recipient, Wells Fargo, seems to be another company that just doesn't get it:

http://www.usatoday.com/money/companies ... argo_N.htm

You mean that's not part of the stimulus bill to revitalize Vegas?

I'm willing to bet that if CEO and management salaries were limited this type of stuff wouldn't happen. When you make more than you can spend, everything seems cheap. I will even admit that some things seem dirt cheap to me that others making significantly less would struggle for. It's all a matter of financial perspective, but these fat cats' perspectives are WAY off.

[hellbent]

To preface, let me just say that per CNN Republicans seeking to oppose the stimulus package in its current state published a list of problem items in the stim pkg. (at http://www.cnn.com/2009/POLITICS/02/02/ ... index.html )

Without taking political sides, I can see a few items on the list that *may* help the economy by directly creating jobs or reducing costs, but the powers-that-be need to consider splitting the bill into separate pieces.

I really hope some of the more questionable provisions are cut completely (or at least properly justified) before it is put up for its first vote.

I can get behind quite a bit of the measures to improve our infrastructure, increase security, et al, but much of this stuff needs to be approached in separate bills, IMO, especially after the stink made about earmarks this past election season.

[wco81]

They'd have a bit more credibility on "fiscal discipline" if they were so hawkish about deficits when they were in charge and there was no need for fiscal stimulus.

[Rodster]

They'd have a bit more credibility on "fiscal discipline" if they were so hawkish about deficits when they were in charge and there was no need for fiscal stimulus.

Politics is not about right vs wrong but rather us vs them.

[jondiehl]

Bail out recipient, Wells Fargo, seems to be another company that just doesn't get it:

http://www.usatoday.com/money/companies ... argo_N.htm

Wells Fargo did not want, and did not need the TARP money. They were forced into the TARP plan. Same with U.S. Bank. Both banks are consistently mentioned by media and experts as solid banks that are well run and will be the ones that survive this mess.

[GTHobbes]

Jon, I'm not sure where you got that impression about Wells Fargo, but the USA Today story has been updated with a mention that Wells Fargo is announcing this week that they lost more than $2.3 BILLION in the last 3 months of 2008. They've also now cancelled the Vegas junket (after initially defending it) under mounting pressure from Congress.

[FatPitcher]

Jon, I'm not sure where you got that impression about Wells Fargo, but the USA Today story has been updated with a mention that Wells Fargo is announcing this week that they lost more than $2.3 BILLION in the last 3 months of 2008. They've also now cancelled the Vegas junket (after initially defending it) under mounting pressure from Congress.

I also recall Wells Fargo being arm-twisted into taking bailout money, as I'm one of their customers and was following the issue closely just in case the FDIC was going to be handling my accounts.

It struck some of those in the room as fortunate that Citigroup Inc. and Wells Fargo are so far apart in the alphabet. The two firms just last week were locked in a bitter battle over control of banking giant Wachovia Corp., a fight Wells Fargo eventually won. Citigroup is still seeking billions of dollars from Wells Fargo in damages for swooping in on the Citigroup deal after regulators had already blessed it. With the firms sitting alphabetically, at least the heads of the two rivals, Mr. Kovacevich and Citigroup Chief Executive Vikram Pandit, wouldn’t have to sit next to each other.

Mr. Paulson said the public had lost confidence in the banking system. “The system needs more money, and all of you will be better off if there’s more capital in the system,” Mr. Paulson told the bankers.

After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government’s money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn’t raise money privately, Mr. Paulson promised the government wouldn’t be so generous the second time around.

And a Wells Fargo presser:

http://finance.yahoo.com/news/Wells-Far ... 44484.html

The only reason they are canceling it is because bad PR is bad PR, no matter how unjustified it is.

I guess rewarding top performers isn't sound business anymore.

Just out of curiosity, GTHobbes, what kind of work do you do? I am guessing either non-profit or government.[/quote]

[GTHobbes]

I also recall Wells Fargo being arm-twisted into taking bailout money, as I'm one of their customers and was following the issue closely just in case the FDIC was going to be handling my accounts.

And a Wells Fargo presser:

http://finance.yahoo.com/news/Wells-Far ... 44484.html

The only reason they are canceling it is because bad PR is bad PR, no matter how unjustified it is.

I'm no economics expert, but I'd say that if Wells Fargo is announcing this week that they lost more than 2.3 BILLION over the last 3 months of 2008, then maybe they were being a little less than upfront back when the original TARP funds were being divied out. That, or they had their heads stuck totally in the sand.

I guess rewarding top performers isn't sound business anymore.

In this economy, top performers at most companies are being rewarded by keeping their jobs. Not by going on a lavish 12 day junket to Vegas. And that's with the companies who did NOT get any part of the bail out funds.

Just out of curiosity, GTHobbes, what kind of work do you do? I am guessing either non-profit or government.

Sorry, FP, but you'd be wrong in your guess. I do some pro bono work for non-profit organizations, but being a commercial litigator pays the bills.

[jondiehl]

Wells Fargo reported a $2.6B Q4 loss, but the company still showed over $11B in revenue for Q4. They had tremendous loan and deposit growth, and will be paying their quarterly dividend.

Much of that reported loss was from writing down old loans, a paper loss. I own WFC in my portfolio, as well as USB. And I've added a bunch more recently, based on that fact that both of those companies are still highly profitable and have shown significant growth in deposits and loans in Q4. In banking, there's a huge flight to quality right now and those two are quality (and the numbers show it, USB has held it's same AA rating that it's always had, while it's peers ratings have fallen significantly). I'm buying shares of these banks (for long term) at prices that haven't been seen in decades. The dividend yield is eye popping, and once Mr. Market figures that out and realizes that not all banks are bad banks (neither WFC or USB has significant toxic assets and did not take on risky mortgages during the feeding frenzy of the past few years), then we'll see their share prices double up back to where their should be based on their profits and income.

Also, top SALES performers in this economy are still being rewarded by more than just keeping their jobs, especially in 100% commission situations like many of the mortgage professionals that were to be awarded on this Vegas trip. Many are being sniped by headhunters by companies offering big upfront signing bonuses to jump ship to another company.

I've never had a salary in my life, never had a guaranteed paycheck for showing up to work or punching a clock, and I'd never want it any other way. Sales positions are generally recession proof actually, assuming you're in an industry that generates business through every economic market cycle.

Here's a little snippet I saw this morning in response to the AP story about the Vegas "junket"

Today’s Associated Press story about Wells Fargo’s recognition events
is intentionally misleading. The event is not a “junket” for
executives but a four-day business meeting and recognition event for
hard-working team members who made homeownership achievable and
sustainable for borrowers across the nation. In 2008 alone, the team
members who were invited to this event and their colleagues produced
$230 billion in mortgage loans for U.S. homeowners.


Through all economic cycles, our recognition events have been an
important part of our company’s culture. Late last year, we cancelled
recognition events for 2009 except those where the financial
commitment was so great that no meaningful savings would occur by
cancelling these events. We had scaled back the mortgage event, but
in light of the current environment, we have now decided to cancel
this event as well. We do not plan to have any other recognition
events this year.


The Associated Press story also misleads readers by implying Wells
Fargo used the government’s investment to pay for these events. As
we’ve said before, we’ve used the government’s investment to lend to
creditworthy customers and to help homeowners avoid foreclosure.


Since credit began contracting 18 months ago, Wells Fargo has made
almost half a trillion dollars in new loan commitments and mortgage
originations. Last quarter alone, we made $22 billion in loan
commitments and $50 billion in mortgage originations. That’s more than
$70 billion or almost three times the amount of the U.S. Treasury’s
investment in Wells Fargo—which has begun to benefit from our
performance through the dividend we will pay to the Treasury this
quarter.

[GTHobbes]

Wells Fargo reported a $2.6B Q4 loss, but the company still showed over $11B in revenue for Q4. They had tremendous loan and deposit growth, and will be paying their quarterly dividend.

Much of that reported loss was from writing down old loans, a paper loss. I own WFC in my portfolio, as well as USB. And I've added a bunch more recently, based on that fact that both of those companies are still highly profitable and have shown significant growth in deposits and loans in Q4. In banking, there's a huge flight to quality right now and those two are quality (and the numbers show it, USB has held it's same AA rating that it's always had, while it's peers ratings have fallen significantly). I'm buying shares of these banks (for long term) at prices that haven't been seen in decades. The dividend yield is eye popping, and once Mr. Market figures that out and realizes that not all banks are bad banks (neither WFC or USB has significant toxic assets and did not take on risky mortgages during the feeding frenzy of the past few years), then we'll see their share prices double up back to where their should be based on their profits and income.

Also, top SALES performers in this economy are still being rewarded by more than just keeping their jobs, especially in 100% commission situations like many of the mortgage professionals that were to be awarded on this Vegas trip. Many are being sniped by headhunters by companies offering big upfront signing bonuses to jump ship to another company.

I've never had a salary in my life, never had a guaranteed paycheck for showing up to work or punching a clock, and I'd never want it any other way. Sales positions are generally recession proof actually, assuming you're in an industry that generates business through every economic market cycle.

Here's a little snippet I saw this morning in response to the AP story about the Vegas "junket"

Jon, thanks for the insight. Like I said, I'm not an expert in the field...I can only go by what I read. I do find a couple of things you said to be confusing, though. On the one hand, you say that "Much of that reported [$2.3 BILLION] loss was from writing down old loans, a paper loss." On the other hand, you say that "neither WFC or USB has significant toxic assets and did not take on risky mortgages during the feeding frenzy of the past few years." It would seem to me that the $2.3 BILLION write off was due to "significant toxic assets" and "risky mortgages" on WF's books but, again, I could just be missing something.

Also, the AP snipped you posted talked about a 4 day business conference...but the USA Today article said it was a 12 day deal, and that, in the past, it featured Jimmy Buffett performances, a different gift on the pillow each day, etc. I don't know who to believe but my guess is that there will be some more digging done on this one.

[wco81]

There are a lot of eye-popping dividend yields and they've been saying for over a year that when the financials return, they will return with a vengeance.

But just when you think good companies like GE can't fall further, they continue to.

There's a lot of cash sitting on the sidelines but after a year like last year, there's a great reluctance to dive in unless it seems like a sure thing.

Hell I haven't even allocated my IRA contribution yet.

[jondiehl]

Jon, thanks for the insight. Like I said, I'm not an expert in the field...I can only go by what I read. I do find a couple of things you said to be confusing, though. On the one hand, you say that "Much of that reported [$2.3 BILLION] loss was from writing down old loans, a paper loss." On the other hand, you say that "neither WFC or USB has significant toxic assets and did not take on risky mortgages during the feeding frenzy of the past few years." It would seem to me that the $2.3 BILLION write off was due to "significant toxic assets" and "risky mortgages" on WF's books but, again, I could just be missing something.

Also, the AP snipped you posted talked about a 4 day business conference...but the USA Today article said it was a 12 day deal, and that, in the past, it featured Jimmy Buffett performances, a different gift on the pillow each day, etc. I don't know who to believe but my guess is that there will be some more digging done on this one.

Yeah, the snipped I posted was a rebuttal to the previous article talking about the 12 day deal and past indulgences (I found snippet saying that the source of that info was a disgruntled/fired employee from year's past that wanted to put out some bad press on the company). I guess they had already scaled it back this year, and are going to cancel the entire thing now with the bad PR.

What I had posted did sound confusing... Wells and USB did not take on alot of risky sub-prime mortgages. However, Wells Fargo's Q4 purchase of Wachovia and THEIR toxic assets weighed down the bank's Q4 profits. That's where that loss is coming from. They purchased a bank that was circling the drain because they saw a good value investment, and hope that after everything shakes out they'll be a bigger/stronger bank from it.

The TARP money is for one purpose, to help spur banks to give out more loans. More loans means businesses growing and expanding, people buying more, etc... The TARP money that Wells and USB took did exactly that. Both banks had huge Q4 numbers for the amount of loans that they did.

What frustrating is that people think because a bank was cornered into taking TARP money, then all of a sudden that money is now being spent for corporate events, advertising, awards, etc... The companies that took TARP money are still showed a profit should be allowed to blow their profits however they want. They have shareholders to respond to, not taxpayers because the TARP money was not used for that purpose at all (in fact, USB's TARP money is still sitting there... unused. They took it, which boosted the balance sheet, but it's not like they used it and went out and bought or spent with it).

It would be like a bank giving XYZ widget company a business loan, and then telling the owner how I can use that money to support and grow that business after they've loaned it. It would be odd for the bank to say, no you can't advertise and have a tent at a golf tournament. No you can't reward your top sales people with extra contest incentives, no you can't expand your business by purchasing a competitor that's struggling. As soon as that check clears, that business owner can do whatever he wants with it, so long as those payments are made in time. In that example, the business owner actually asked for the loan, with the TARP money, those banks are even using the damn money yet, but the media wants to put them through the ringer for any spending they do. Hell, USB still showed a profit in Q4, just not as much as Q4 2007, but if they do something similar to reward their commissioned sales people I'm sure the media would have a field day (even though the TARP money hasn't been touched yet... that is per Richard Davis, CEO, on a conf. call from a couple weeks ago).

[jondiehl]

There are a lot of eye-popping dividend yields and they've been saying for over a year that when the financials return, they will return with a vengeance.

But just when you think good companies like GE can't fall further, they continue to.

There's a lot of cash sitting on the sidelines but after a year like last year, there's a great reluctance to dive in unless it seems like a sure thing.

Hell I haven't even allocated my IRA contribution yet.

GE is a fantastic buy. Buffett bought it at $20. I've owned it a long time, back when it was in the $30's, and will be buying more to dollar cost average down. It's impossible to try and time it to grab stocks at the bottom. If you're worried about that though, just buy good dividend stocks (like GE or previously mentioned USB) and write covered calls. If the stock goes down you'll make money on the calls and collect a
dividend while you wait for the prices to recover. If GE's AAA rating goes away, the panicing investors will sell and drive the price down into the single digits. That's when I back up the truck and scoop up a bunch more. GE already said that if they had to choose they would protect the dividend over the AAA rating. In bear markets, dividend stocks are king.

Most investors in for the long haul do not dump their good dividend payers in times like these and know that eventually that market price will creep back up. The ability to pick up stocks that are paying double digit dividend yields right now is unbelievable. For an IRA account, picking up shares of companies like these should be a no brainer (since it's money that won't likely be used until 70yrs of age and even then it's only going to get drawn down by a few percent each year for income). Buy and hold boys!

[JackB1]

Does anyone know why the Republicans are so against passing Obama's Stimulus Bill? Is there really that much "pork spending" in there or is this just partisan crap?