Jenoa and I were out knocking on doors for Obama today!! What a blast. What have you done for the world lately? 5 minutes can make a difference.
I was a bit caught up the past two weeks and did not get a chance to write about everything I wanted to, so bear with me as we go through some week-olds. The first, what the heck is this bailout? What will it do? Why did the first one get voted down? What’s the difference between the first and the second plan? And WHY oh why isn’t it working yet?!!What is this bailout?
The bailout was intended to inject confidence back into the market so that everyone would start trading again. See, much of our market rev up was due to the trading of mortgages, which lost their value and are unable to be sold now. This “bailout” would jumpstart that market again. Or so they hoped. Later, they’d use the $700B to buy up distressed mortgage securities (not the mortgages themselves, but the Mortgage Backed Securities that got us into this mess – remember the ones where they bundle up all of the mortgages and then sell that bundle off like a stock. These are CMOs, CDOs, CDSs, ABSs.).Why this plan? Interestingly enough, many thought the reason the Great Depression was so great was because the government did not act fast enough. In their book A Monetary History of the United States: 1867-1960, Milton Friedman and Anna Jacobson Schwartz argued the Fed could have mitigated the financial crisis of the 30s by cutting rates, buying bonds, and making loans. Instead, the Fed reduced its credit to the banking system, causing about 1,860 banks to fail. Luckily for us, Bernanke is a Great Depression expert (really, he studied the G.D. intensively.. perhaps they had a bit of foresight when they brought him on in early 2006).
What’s the difference between the first and second plan?
The initial draft was 3 pages. Here’s the initial draft proposal. But many thought the first plan gave Paulson too much power and that the government wasn’t going to get enough ownership stake in the companies so that we, the taxpayers, could benefit if the plan worked.That got reworked into about 110 pages for Bailout Plan #1. The first plan gave the Secretary of the Treasury (Paulson) the right to buy up any mortgage related assets. It proposed disbursement of the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted while another $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review. In an attempt to protect taxpayers, the banks selling the assets would issue stock warrants – which gives us an opportunity to take an equity stake and therefore make profits.
But it was voted down on September 29 in the House, 228 to 205. The majority of nay sayers were the House Republicans, but it received nays from both sides.
Back to the drawing board. The Senate then reworked the plan and had a new draft ready October 1. On October 3, the House approved the plan, 263 to 171. What was the difference? The second plan, a 450 pager,saw a few changes – it requires the Treasury to set up an insurance-based alternative. That is, instead of buying up the mortgage securities (MBSs), the Treasury will act as an insurer to the banks holding MBSs and the bank will, in return, pay the Treasury a premium. It also temporarily raises the FDIC insurance limit from $100,000 to $250,000. It also allows for the purchase of MBS’s through a reverse auction, where the banks will compete to sell their assets to the Treasury. The Treasury sets a price (usually a higher one to ensure good participation) and then allows the institutions to offer lower prices. It also allows the Fed to pay interest on the money that banks must leave in the Central Bank – this will hopefully provide some more liquidity into the financial system and to our ailing banks.
It’s also stuffed with what people like to call PORK. $150 BILLION worth of tax provisions for some rather random parties. Here’s the list of recipients:
- Wind Power
- Solar Power
- Disaster Victims
- College Students
- Teachers
- NASCAR Racetrack Owners - $128 million
- Small- to Medium-budget Film and Television Productions - $10 million
- Bicycle Commuters
- Makers of Virgin Islands Rum & Puerto Rican Rum $192 million.
- Owner of Plug-In Electrical Vehicles
- Corporations Operating in American Samoa - $33 million
- Mine Rescuers
- Worsted Wool Fabric Producers
- Alaskan Fisherman whose livelihoods suffered as a result of the 1989 Exxon Valdez oil spill - $223 million
- Makers of Wooden Arrows for Use by Children - $6 million
So with all that The Emergency Economic Stabilization Act aka the Wall Street Bailout Plan was passed by the House 263 to 171 and was signed October 3. Huzzah!
Huzzah? But it’s not even working!
No, it’s not working. At least the confidence part, since the actual implementation of the plan hasn’t begun yet. Despite all the attempts at assuaging our fears, fear levels among investors are high, fear levels among the banks are high, since they’re not lending each other money as they usually do, and fear levels among the rest of us are high. And it’s showing in the market.
A golden parachute is a clause in an executive’s employment contract that specifies he will receive benefits in the event the company is taken over and the executive is let go. A golden parachute can come in the form of severance pay in cash, stock options, bonuses, etc. The term more loosely refers to an executive’s severance package - regardless of takeover. Golden parachutes are designed to protect the executive from job loss and to hinder unwanted takeovers.
The origin of the “golden parachute” comes from TWA and Howard Hughes. Shareholders wanted to decrease Hughes’ control of TWA and so appointed Charles Tillinghurst as chariman of TWA. They guaranteed Tillinghurst financial protection (a severance package) if Hughes were to retain control and fire him.
Below is a list of various egregious compensation packages and golden parachutes awarded to Wall Street’s best. They’re listed in chronological order of bank failure. (Numbers may be disputed based upon which CEO pay calculator you use. Some include cash, pension, benefits, accelerated stock and options and other compensation, while some do not. Either way - you get the point.)
Countrywide - Angelo Mozilo was supposed to receive a $37.5 million severance package when Countrywide was acquired by BofA in January, though he declined it. He did, however, cash in on his stock options to make about $122 million.
Bear Stearns - James Cayne sold his stake of Bear shares for $61 million just before the company completely collapsed and was sold off to JPMorgan.
Indymac – Michael Perry, Indy’s CEO & Chairman, was dealt something more like a golden anvil. He’s under investigation for misleading the investing public about IndyMac Bank’s risk profile and financial condition from April 26, 07 until May 12, 2008.
Fannie Mae - Daniel Mudd earned $11.6 million last year and was expected to receive $8 million in a severance package after Fannie was rescued. The Federal Housing Finance Agency (FHFA) denied him that golden parachute.
Freddie Mac - Richard Syron earned $18.3 million last year and was expected to receive $16 million when Freddie went down. Again, the FHFA, which Congress gave the power to limit severance packages of departing executives, said no.
Merrill Lynch - Stanley O’Neal received a $161 million retirement package when we was let go last year after the bank saw huge losses. When Thain came on board, he said he wouldn’t accept any cash severance. Instead, he took restricted stock, giving him a nice $9 million parachute to fly away from the sale of Merrill to BofA.
Lehman Brothers - Richard Fuld, Lehman’s CEO, received about $22 million in exit packages and earned $354 million in his last 4 years as CEO. He also sold about $490 million worth of LEH stock before it collapsed. Not a bad retirement plan.
AIG - Robert Willumstad was supposed to receive a $22 million exit package when AIG was rescued by the Treasury, but he voluntarily declined. His predecessor, however, was not as humble. Martin Sullivan, who was forced out of AIG in June 2008 received $15 million in severance package.
Washington Mutual - Kerry Killinger, WaMu’s former CEO received $44 million upon his departure on September 8. He was succeeded by Alan Fishman, who was on the job for 17 days before WaMu went down, but received $20 million.
Goldman Sachs - Lloyd Blankfein, Goldman’s CEO, made $70 million last year.
Morgan Stanley – Mack the Knife received over $1.6 million in stock last year.
Wachovia - Ken Thompson received package worth $5 million when he was ousted in June (after making a nice salary of $20 million in 2007). Bob Steel, his predecessor brought on in July, was set to receive $1 million salary plus a $12 million bonus, but we’ll see what he really gets after the dust settles in Wachovia’s sale to Citigroup.
Citigroup - Chuck Prince left Citi last year with a $22 million severance package. Mind you that was after Citi announced far greater than expected losses.
JP Morgan Chase – CEO James Dimon earned about $28 million in 2007.
Do you ever get whiffs of smells that remind you of something so faint in your childhood you can’t even pinpoint it, but the memory is there?
OR you could nationalize some mortgage related debt (aka “impaired assets”) that banks, credit unions, and pension funds hold. Using our tax dollars, of course.
- Give every person in the US $2,300 or give every household $6,200.
- Pay the income taxes of every American who makes $500,000 or less a year.
- Fully fund the Defense, Treasury, Education, State Veterans Affairs and Interior departments next year, as well as NASA.
- Buy gasoline for every car in the US for 16 months.
- Buy every NFL, NBA, and MLB team and build each one a new stadium - and pay your players $191 million a piece for a year
- Create the 17th largest economy in the world - roughly equal to that of the Netherlands.
- Or you could pay off just 7% of the $9.8 trillion national debt. (via Time)
Imagine that you are a traveler who finds yourself in a strange new land. You have heard wonderful things about the natural scenery in this part of the world, and decide to take a long walk in order to see the sights.
While strolling through a forest, you hear a faraway sound. You strain your ears to hear. It sounds like a person calling out – but the sound is muffled and faint. You go in the direction of the voice.
Eventually you come across a remarkable sight. There is a deep hole before you – almost like a well – and at the bottom of the hole is a man. He’s calling out for help.
“Hey down there!” you say to him. “Are you OK?”
“Can someone help me?” says the man. “Anybody? I can’t believe how deep this hole is. I’m really stuck. Is there anyone there? Hello? I could really use some help!”
“Yes!” you shout. “I can help you.”
“Hello?” says the man. “I could use some help! Will somebody help me please?” The man doesn’t seem to hear you. He continues to call out for help.
You look around and find some vines hanging on a nearby tree. You cut them down and study the hole that the man has fallen into. It won’t be easy to free him, but you see a way to use the vines and the various features on the sides of the hole to get him out. You call out to him:
“Hey there! I can use these vines to help you. But you’ll have to –”
“Is anyone there?” he says. “I could really use some help!”
“Yes,” you yell. “I’m here. I can help you out. But you’ll have to first reach –”
“Can anyone help?” he says. “Please, can someone help me!”
You step back and consider the situation. The man doesn’t seem to hear you at all. But there’s something else – you notice that he doesn’t stop talking. Not ever. He simply doesn’t pause at all. He can’t hear you over the sound of his own voice.
“Hey!” you say. “Hey! Hey, stop for a second! Hey!”
“I could really use some help!”
“Hey! Just listen for a second!”
“Is anyone there? I could really use some help!”
Things go on like this for quite some time. Eventually you sit down in exasperation. You need the man’s cooperation, but he won’t pause long enough to listen to you.
While you’re sitting, you hear another voice in the distance. You move toward the sound of it, and find something shocking. There’s another hole in the ground – this one with a woman in it.
“Hello,” she says, “Hello, is anyone there? I could use some help. Can anyone help me?”
What type of place is this? you think to yourself. People in holes who won’t stop talking?
“Hey!” you say to her. “Hey! Hey there! Stop talking for a second!”
The woman pauses. “Hello? Was that someone up there?”
“Yes!” you say. “I can help you!”
“Hello? Can someone help me? I can’t get out of this hole. I could really use some help.” She returns to her stream of words.
You try talking to her for a few minutes, and occasionally catch her attention. But you can’t seem to hold a conversation with her – much less give her instructions about how to use the vines to get out of the hole.
After a while, you leave her and walk around the area. To your surprise, you find more people at the bottom of holes. You try talking with them, but none will pause long enough to carry on a conversation. None, that is, until you find a deep hole with a very old man. He seems to be remarkably weary. And he is quiet.
“Hey,” you say. “Can you hear me?”
“Hello?” he says. “Hello? Yes. I can hear you. Can you help me?”
“Yes,” you say. “But I need you to listen to me. Can you do that? Can you stay focused on listening to me?
“Yes,” he says. “I think I can.”
And you proceed to give him instructions about how to use the vines and how to find footholds, and together you work to bring him out of the hole. When he’s free, he thanks you for your help.
“I’ve been in that hole for a long time,” he says. “I would call out for help night and day. But no one came. Today I finally became exhausted and stopped calling out. And a few minutes after that I heard your voice. What a strange experience.”
The he pauses and adds, “Who knows – perhaps there were always people like you trying to help me out. I never stopped calling out long enough to find out.”
I share this story because I am seeing this behavior in myself alot, somewhat like these people. As I got through my life, caught in various pitfalls and challenges. I keep calling out for help – perhaps I am not listening.
My daughter is so sad and scared it hurts to not be able to stop your kids from feeling pain. UGH!
life on a rope
