Sense on Cents

A fascinating look behind the scenes as to what really happened. Ken Lewis, CEO of Bank of America, went from serving the best interests of his country to being pressured by Ben Bernanke and Hank Paulson to complete the deal. Here’s an excerpt:

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank’s earlier cooperation — but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.

This deal is reflective of the fact that the world of global finance is in uncharted waters.

In Merrill Deal, U.S. Played Hardball
by Dan Fitzpatrick, Susanne Craig and Deborah Solomon
The Wall Street Journal; February 5, 2009 

In the midst of the current economic turmoil, nobody in our country has gone unscathed. With rising unemployment and falling 401-K valuations, everybody is looking for scapegoats. Prior to my passing judgment on any situation, I prefer to investigate fully the details and circumstances rather than shooting from the hip. President Obama’s gunslinger approach may resonate with his constituency, but for those who care to understand the details, let’s probe further. Without a full review of compensation practices, a blanket condemnation, in my opinion, is the height of pandering and akin to a fan heckling an umpire without reviewing the videotape. Over and above that, widespread government intervention into compensation practices is a VERY dangerous precedent; be careful what you wish for!!

Let’s go into the world of Wall Street compensation. Any executive on Wall Street will readily admit that their assets walk out the door every night and back in the door every morning. Managing those assets is the crux to managing a business. In my opinion, the same could be said of any business. While there are a handful of smaller brokerage houses on Wall Street, the bulk of the business is executed with the larger shops. The compensation at all of these shops (Goldman Sachs, JP Morgan, Morgan Stanley, Bank America, Credit Suisse, UBS, Citigroup) is structured as salary plus bonus. The bonus can run upwards of 90% of the total compensation for revenue producers. Over and above the simple salary plus bonus structure, anywhere from 25-75% of the bonus will typically come in the form of company stock which is paid out over the course of three to five years. That stock component and delayed payout are known as the “golden handcuffs” because it restricts the ability of an employee to leave a firm. How and why? If an employee leaves a firm, he or she walks out without that portion of his compensation. Additionally, Wall Street firms further restrict a wide swath of senior executives by imposing non-compete agreements. How do these work? At many shops, if a senior executive decides that he wants to leave the firm, he can only receive his “delayed payout” if he chooses to work for a not-for-profit or in the field of education. If an individual is let go, he will receive his “delayed payout” on its’ schedule.

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This piece is strictly a walk down memory lane and reflects on Wall Street interaction with overseas clients. A little something light for a weekend break. Enjoy!!

As a trader, salesman, and then sales manager, the most critically important factor in growing a business, and ultimately a franchise, was the development of deep, meaningful, and longstanding relationships. While I would try to be very customer friendly in all my roles, ultimately human nature dictates you will not get along with everybody. Simple business logic, along with strict rules of compliance, highlight the necessity to “know your customer.”

While the bulk of our mortgage business in the early to mid 1980s was located here in the United States, in the late 1980s Japanese investors became very active in our sector. This development presented some real challenges including:

1. time differential
2. type and level of engagement
3. impact of cultural differences

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Was it only a mere 4 weeks ago when we had a 3% upward move on the first trading day of the year? Do you recall that most equity analysts and money managers were calling for a turn in the economy by midyear and that people should increase their equity exposure?

In fact, for the first four days of the year the atmosphere was somewhat ebullient with markets holding those 3% gains. I wondered what the analysts and money managers were seeing. Not seeing it myself, I wrote the following on January 8th:

I believe a best case scenario for the equity market is that it merely marks time and does not further retract. I have a very difficult time making a case for a rallying equity market. I am more in the camp that we will likely retest the equity lows seen on November 20th. We may penetrate those lows by another 8-10% which would bring the S&P into the 700-725 area from its current level of 915. I do believe the prices in the corporate bond market, including the high yield space, largely reflect the concerns highlighted above. I also believe that despite the Fed and Treasury purchasing government and mortgage debt, these rates will end up higher at the end of this year than they are now simply due to the growing deficit. A move higher in these rates will potentially cause further anguish within the equity markets.

Every coach knows that the films don’t lie and the stat sheet speaks volumes. In that vein, let’s look at the stats for January and see “which players are making the grade.” The tickers under the high yield, mortgage, and municipal bond headings are electronic trading funds (ETFs) that I use as surrogates for those sectors.

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Growing up as one of eight kids, seven boys, dinnertime was always interesting. More often than not, milk was spilled, vegetables were hidden, and you better not be late because the food went quickly. Every week to ten days, get ready for leftovers.

In a similar vein, today’s market activity, economic news, and financial stories felt like one of those “leftover” dinners. There is still plenty of juice in the meat, but we have already seen some of these items. Let me put some ketchup, A-1, black pepper, and worcestershire out here to spice things up.

The stock market on Thursday totally reversed Wednesday’s upward move. Does that mean investors are discounting the concept of Bank Transition that we discussed the other day? Not at all. In fact, I still have “reason for optimism” because an entity like Bank Transition is critically important to rebuilding the financial foundation of our country. If anybody wants to reread that piece, though, don’t overlook the fact that I said we will still experience serious economic pain for an extended period. That said, if we want to come out on the other side of this, sooner rather than later and in better shape, we need Bank Transition. Hopefully, readers can understand the context of my writing. I am not a day trader. I still think we will likely see the lows seen on November 20th. The mere fact that Bank Transition will likely be launched gives me reason for optimism. I hope that clarifies things. If not, please don’t be bashful.

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In the midst of the discussion on nationalizing parts of our banking industry, I am hearing increasing banter of the likelihood that the Obama administration will launch an “Aggregated Bad Bank.” Perhaps I am too literal, but if this initiative is launched and works as hoped, I would recommend a name change. Let’s use “Bank Transition.” Ultimately, the name is less important than the implementation and effectiveness of this entity, but being a positive person and optimist by nature, the term “bad” does nothing for me. How might this entity work? Why is it a good and necessary development? What might it cost? Why wasn’t this move made by Paulson and team? Does this mean we can finally go back to the good old days of the last 5 years? So many questions. Let me try to clarify and offer my opinions.

1. How might this entity work?
As I have referenced previously, I always focus on an entity’s mission and funding. “Bank Transition” would most likely be managed by Sheila Bair of the FDIC. It would be mandated to purchase “toxic assets” (primarily distressed CDO (collateralized debt obligations) assets backed by an array of loans…mortgages, credit cards, auto, manufactured housing, commercial mortgages, corporate loans, and credit default swaps). It would be funded via the issuance of FDIC or FDIC-like bonds. Don’t be surprised to see a separate name used, such as “Transition Bonds,” which would have an explicit government guarantee. These bonds would probably have a few different maturities (1yr, 3yr, 5yr) to provide a degree of financial flexibility for this entity.

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I will admit the term “agape” is not part of my general vocabulary. In the process of looking it up, I see it defined as “in a state of wonder or amazement, often with the mouth wide open.”

After Bernie Madoff and a string of other smaller but no less sordid financial scams, I will admit that I am “agape” after having just reviewed the latest Ponzi scheme that was broken just yesterday.

While Bernie Madoff grew up near Far Rockaway, just a little further out on Long Island is the small town of Hauppauge. The waters surrounding that community possessed a shark by the name of Nicholas Cosmo. This predator ran a shop known as Agape World that largely preyed upon blue-collar workers. The operation was nothing more than a front for a $375 million Ponzi scheme that defrauded thousands of investors.

Let’s take a quick look at the website for Agape World. A few observations:

1. No mention as to any executives. Who runs the show? Red flag!!
2. No mention as to where assets are held. How about a bank, custodian, and trustee? Red flag!!
3. The firm does reference a recommendation by Dun and Bradstreet, a quality credit rating service. OK, let’s check it.  Hmmm, see what I mean?

$ 375 million dollars later….

The tide remains very low and the garbage is really starting to smell.

Madoff, Cosmo, Nadel, Schrenker, and every other con artist should be put away for life, not only for stealing money but for violating the trust and confidence of so many.

LD

Over the course of the last two decades, we have seen a massive increase in global trade in conjunction with a wide array of free trade agreements.

For those who do not track these agreements, two of the United States’ formal trade agreements are:

1. NAFTA: North American Free Trade Agreement
2. CAFTA: Central America Free Trade Agreement

As a country, we have formal trade agreements with certain nations but trade extensively around the world. For those who care to further explore the nature and extent of the U.S. trade agreements, you can do so at http://www.export.gov/fta/index.asp.

Our trade with China presents particular challenges. China has a significant level of quality control and worker safety issues. There are serious questions about Chinese abuse of human rights. On the foreign policy front, China is closely allied with states that sponsor terrorism, including Iran and Sudan. As a nation, we had very limited interaction with China until President Nixon engaged them during his tenure. In the late 1970s, we had a mere $2.5 billion in trade with this most populous country in the world. Fast forward and at the end of 2007, our level of trade topped $300 billion.

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