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Home“Say on Pay” or “Talk is Cheap”
Posted by Larry Doyle on June 11th, 2009 8:04 AM |
There is little doubt that misaligned compensation practices played a very large role in the financial fiasco we have experienced. While the Obama administration is working on a proposal known as “say on pay” legislation crafted through the SEC, a Bloomberg report highlights that it may be more appropriate to define the legislation as “talk is cheap.” Why? Let’s review, Obama Pay Plan Lacks ‘Meat on the Bones’ To Trim CEO Paychecks:
The plan announced yesterday by Treasury Secretary Timothy Geithner would require companies to give shareholders a non- binding vote on pay, without setting limits. Directors who determine the pay and consultants that advise companies would have to be more independent from management, Geithner said.
The administration proposal is aimed at reducing incentives that lead executives to take excessive risks and quell a political uproar over bonuses paid managers at companies including American International Group Inc. that received U.S. aid. Geithner blamed pay standards tied to short-term profits for contributing to the worst financial crisis since the 1930s.
“We’re not telling clients to be prepared for less pay,” said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates. Forms of payment may be adjusted as firms give executives additional cash and put some part of their bonuses in escrow for three to five years, making pay dependent on long-term performance, he said.
I have always maintained that well enforced market based principles are the best means for executive compensation to be controlled. The fact that this legislation provides shareholders a voice is a step in the right direction but it falls woefully short. Why? A non-binding vote that is not allowed to set limits is the ultimate definition of “talk is cheap.”
Swing and a miss!!
Any Green Shoots in the Beige Book?
Posted by Larry Doyle on June 10th, 2009 4:15 PM |
The Federal reserve released its Beige Book a short while ago. Let’s see if we encounter any “green shoots.”
From the Federal Reserve’s report:
Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.
Manufacturing activity declined or remained at a low level across most Districts. However, several Districts also reported that the outlook by manufacturers has improved somewhat. Demand for nonfinancial services contracted across Districts reporting on this segment. Retail spending remained soft as consumers focused on purchasing less expensive necessities and shied away from buying luxury goods. New car purchases remained depressed, with several Districts indicating that tight credit conditions were hampering auto sales. Travel and tourism activity also declined. A number of Districts reported an uptick in home sales, and many said that new home construction appeared to have stabilized at very low levels. Vacancy rates for commercial properties were rising in many parts of the country, while developers are finding financing for new commercial projects increasingly difficult to obtain. Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories. Credit conditions remained stringent or tightened further. Energy activity continued to weaken across most Districts, and demand for natural resources remained depressed. Planting and growing conditions varied across Districts as did agricultural input costs.
Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling. Two Districts also mentioned employers’ plans to scale back employee benefit programs. The Atlanta, Chicago, and St. Louis Districts reported that some state and local governments faced hiring freezes or outright job cuts. While manufacturing employment levels remained low, some Districts saw signs that job losses may be moderating. With few exceptions, Districts reported that prices at all stages of production were generally flat or falling. The notable exception to the downward pressure on prices was the widely-reported increase in oil prices.
For those interested, the report provides more extensive color on developments within specific industry segments. Additionally, the report is broken down by the specific Federal Reserve districts: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco.
For those who find meaningful “green shoots” in the summary report or within the specifics, I will admit your eyesight or binoculars are far stronger than mine.
LD
10yr Treasury Auction and Wall Street Compensation!
Posted by Larry Doyle on June 10th, 2009 12:56 PM |
In 10 minutes time, Wall Street will underwrite $19 billion 10yr notes. In the face of this supply, a major topic on the agenda today is Wall Street compensation.
Secretary Geithner announced earlier today that the SEC would be involved in crafting “say on pay” legislation. This legislation will focus on trying to align risk and compensation, providing greater disclosure on compensation, and creating proper incentives within the financial industry. The devil will be in the details.
Make no mistake, though, the focus on this issue will serve to lessen overall compensation.
Will Wall Street send a message to Washington that they are not happy with this proposal? How might they do that?
Fade their bids on the 10yr auction. That is, lower the price on the auction thus charging Uncle Sam a higher rate of interest.
Check back shortly and I will report on auction results.
As of 12:55pm, the 10yr Treasury note is trading at a 3.95% rate, which is higher by approximately 5 basis points relative to last evening’s closing level.
LD
***UPDATE AS OF 1:05PM
AUCTION RESULTS and MARKET REACTION:
The 10yr auction did “tail” and was underwritten at a 3.99%. The “bid to cover” ratio was a very respectable 2.62 times. That said, the bidders priced in a healthy discount to buy these notes.
The higher Treasury rate will clearly have a knock on effect across all sectors of the bond market but especially the mortgage market. As rates move higher, the affordability of mortgages and housing overall lessens. To this end, mortgage applications fell last month.
Nobody on the street would ever open Pandora’s Box and openly confess to fading a bid on Uncle Sam. That said, I view today’s price action as providing a hint that the Wall Street crowd is not happy with Washington.
Wall Street will have another opportunity to express their displeasure tomorrow as Uncle Sam will be selling $11billion 30yr bonds.
How is the equity market responding to these higher rates? Earlier today the major market equity averages were higher by 1%. We have seen a complete reversal of that upward move and they are now down by 1% on the day.
Lots of hills, valleys, and undulations as we navigate the economic landscape!!
LD
For more on why interest rates continue their move higher, please also read:
“Lehman Sued Over Conflict in Auction-Rate Securities”
Posted by Larry Doyle on June 10th, 2009 8:02 AM |
Why does a $190 million lawsuit receive scant coverage? Why does a $100 billion plus financial fraud pass below the radar screen? With the exception of Bloomberg News, the scandal surrounding Auction Rate Securities receives very limited serious coverage.
Well, with figures the magnitude of those mentioned above, Sense on Cents is highly energized to publicize the scandal and the embedded conflicts in this fraud.
Bloomberg reports, Lehman Sued Over Conflict in Auction-Rate Securities:
June 9 (Bloomberg) — Lehman Brothers Holdings Inc. was sued by two companies seeking more than $190 million over claims the bankrupt investment bank misrepresented the risk of auction- rate securities and had a conflict of interest in their sale.
The complaints against Lehman Brothers, which filed the biggest bankruptcy in U.S. history last September, were filed in federal bankruptcy court in Manhattan. Ceradyne Inc. and Western Digital Corp. claim Lehman had a conflict of interest serving as underwriter and seller of the securities.
Lehman Brothers wrongly asserted that interest rates on the securities were set through a well-established market, and that they were tradable, liquid, short-term investments, according to the complaint.
“The reality, well known to Lehman Brothers Holdings Inc. but undisclosed to Western Digital Corp., was that, in fact, auction rate securities was not supported by a broad, fully- functioning market and therefore could be subject to failed auctions and illiquidity,” according to the complaint.
The $330 billion auction-rate market collapsed in February, 2008, sparking a series of regulatory probes into how brokerages marketed the long-term securities. One year later investors were stuck with as much as $176 billion of the securities even after regulators have forced banks to buy back more than $50 billion of auction-rate debt that was marketed as safe, cash-like instruments.
Justice Department Probe
Last month, the Wall Street Journal, citing unnamed sources, reported that former Lehman executives have been questioned by U.S. Justice Department officials in an investigation of the company’s auction-rate securities sales.
Ceradyne is a Costa Mesa, California-based maker of ceramic body armor for U.S. soldiers, and Western Digital Corp., based in Lake Forest, California, manufactures hard-disk drives.
Lehman spokeswoman Kimberly Macleod didn’t immediately return a call seeking comment after business hours.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The key phrase in this story from my perspective is “conflict of interest.” The claimants are asserting that Lehman should have known and revealed the embedded risks in ARS and that they did not because they were benefitting both as issuer and underwriter.
Having written extensively about the ARS scandal here at Sense on Cents (newer readers can access all posts by writing Auction Rate Securities in the search window in the upper right hand corner of the home page), I would STRONGLY encourage Ceradyne Inc. and Western Digital Corp. to engage Finra in their suit. How so and why?
Would Finra need to be subpoenaed or merely interviewed? I am no lawyer so I will defer on that point. That said, if Lehman were conflicted, I believe every ARS investor would benefit from knowing if Finra also had a conflict of interest in the ARS market.
Recall that Finra’s mission is to protect investors. Finra was an ARS investor itself, and liquidated $647 million in Auction Rate Securities in Spring 2007. Finra did not publicly apprise investors of the ARS meltdown until the market had totally frozen in February 2008. Shortly thereafter, Finra posted a warning on its website. Thanks for very little!!
From my ARS archives, please check out: U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sale; They Should Also Investigate Finra’s.
$190 million lawsuit. $176 billion of ARS. That is “real” money and it spells one enormous conflict!!
LD
Interview on The Rude Awakening, 104.3 FM Tampa Bay
Posted by Larry Doyle on June 9th, 2009 6:15 PM |
I will be interviewed tomorrow morning (Wednesday) on The Rude Awakening, WIFL 104.3 FM, Tampa Bay. Show runs from 8-9am. You can listen to the show live via the internet. Details right here . . .
LD
Where Will TARP Money Go? Let’s Start in Hartford
Posted by Larry Doyle on June 9th, 2009 3:03 PM |
Secretary Geithner and President Obama today hailed the repayment of $68 billion in TARP funds as a clear indication of the success of the overall financial recovery programs implemented by the administration. Well, as those familiar with the “shell game” know, in order to keep the game going it is critically important to display some winners on a regular basis.
How do we know the TARP funds were utilized properly and everybody won on this government investment? We don’t, despite what Barack says. Money is fungible. The system was saved, with no small thanks to the FASB’s relaxation of the mark-to-market. These TARP recipients are designated as the winners. Meanwhile, the system still has upwards of $500 billion – 1.25 trillion in embedded losses, depending on whose projection you would like to use.
In my opinion, I believe Barack and team would have preferred to keep the TARP funds within these financial institutions. That said, there are other factors at work here. What are they?
1. when the TARP legislation was passed last Fall during the Bush administration, it set specific ground rules necessary for repayment. Barack, Tim, and team would have run the risk of flouting that legislation if they did not allow some firms to repay.
2. the administration will still be able to wield significant influence over these firms via a number of other Fed backstops already in place.
3. not being widely publicized but of very real significance, the administration will need these funds in other firms. What firms? Let’s drive on over to Hartford.
As the WSJ recently revealed, Hartford Chief Expects TARP Funds Soon:
It is expected in the next few weeks to get as much as $3.4 billion in funds under the Treasury’s Capital Purchase Program.
Hartford’s stock was down today as it is being downgraded by equity analysts at Citigroup due to management issues.
Recall that Hartford was one of 6 insurance companies that received thrift status by acquiring a controlling stake in a small institution. As such, these firms became eligible for TARP funds. In my opinion, once the TARP dam is broken with one insurance company, the stigma is lessened for others to acquiesce in accepting these funds.
What might be the next stop after Hartford? Perhaps Newark (Prudential Insurance) or Philadelphia (Lincoln Financial). Sense on Cents will monitor where the TARP train moves next.
LD
As California Goes, Part II: Other People’s Money
Posted by Larry Doyle on June 9th, 2009 11:41 AM |
A few weeks back, I wrote As California’s Economy Goes, So Goes the Country to address the financial precipice of the largest state in our country. As California faces financial armageddon, the state finds itself challenged with the prospects of massive budget cuts, significant tax increases, or a combination of the two.
Are we witnessing the prequel for what our entire country faces? I believe we are. Let’s navigate.
“Governator” Schwarzenegger is adamant about not raising taxes. The prospect of significant spending cuts is causing a firestorm with rank and file union members. Democratic pols find themselves between the proverbial rock and a hard place. The Los Angeles Times writes, State’s Budget Crisis Opens Rift Between Unions and Democrats:
The Capitol’s usual political alliances are being tested by the state’s severe financial problems as interest groups scramble to hold onto as much as possible of the state’s shrinking coffers.
The relationship between Democratic leaders and some of their labor benefactors has turned particularly frosty: Many of the programs union members rely on for paychecks — and the unions rely on for dues — have been slated for deep cuts.
In a period of massive fiscal deficits, obviously no stones are left unturned, everybody must contribute, and pain is felt by all parties. Really? If that were the case, then what good is politics and winning elections?
We may want to think that our political process achieves the greatest common good. In my opinion, though, the political game has become a function of “get as much as you can for as long as you can.” In the process, the politicians have become wedded to their constituencies and incestuous relationships have developed deep roots.
To this end, it is no surprise to see the large unions in California enraged at their political cronies for not “taking care of them.” The LA Times provides insights on this angle:
The friction started when the Democrat-dominated Legislature produced a budget in February that raised taxes but also cut programs and included a GOP-driven plan to put the brakes on state spending. A handful of labor groups then spent millions to help defeat the May ballot measures that the budget spawned.
“Many public employee unions, teacher unions [are] thinking that they were thrown under the bus in the last budget,” said Assemblyman Charles Calderon (D-Montebello). “So now they’re asking themselves: If these Democrats are not going to stand up for us, then what good is it to have them there?”
Why are the California unions so enraged? Well, all we really need to do is review what has occurred on the national level. Why is it that the Supreme Court is reviewing the sale of Chrysler to Fiat? Very simply, Obama overran standard bankruptcy procedures in delivering for the UAW. He justified his “means” because he viewed his “ends” as best for the economy. He ran the same play in the GM bankruptcy.
California union members want a bite from the same apple. Why aren’t they getting it? The great equalizer in our country and economy!! What’s that? The fear of failure. That is, Democratic politicians in California know the pulse of the overall electorate as reflected by the energy embedded in the April 15th “Tea Parties.”
The Times again provides interesting color,
But even some of the most liberal Democrats say some union leaders are ignoring the reality of an angry public, a sour economy and a state government approaching insolvency. Moreover, more taxes would require Republican support in the Legislature, and the minority party has made clear that there will be none.
“We have an economy which is in intensive care, and another round of tax increases . . . would put that patient in cardiac arrest,” said Assembly GOP leader Sam Blakeslee of San Luis Obispo.
Barack, Nancy, Harry….are you listening?
Insights from our friends on the “left coast” are always appreciated!!
LD
Uncle Sam Economy: Not Exactly a Level Playing Field
Posted by Larry Doyle on June 9th, 2009 8:08 AM |
As we navigate the landscape of the Uncle Sam Economy, we will soon realize that the “playing field” is anything but level. What does this mean? How can we most appropriately manage? Will there be opportunities? Let’s break out our compass and project what is on the horizon.
As Bloomberg reports, U.S. Said to Plan Approval for 10 Banks to Repay TARP:
The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.
Allow me to provide further color:
1. Why are these institutions keen to repay TARP funds, which are widely held to be a cheap source of funding?
As none other than Pimco’s Bill Gross said of Uncle Sam, “don’t turn your back on him.” I would agree. Uncle Sam is not a good business partner. His agenda runs much farther afield than the bottom line focus of these institutions.
Make no mistake, the greatest motivation for these institutions to repay TARP funds is to be freed from the shackles of compensation controls. The major assets of financial institutions ride down the escalator and go out the door every evening. Operating under compensation caps is a surefire way for an institution to achieve “extreme mediocrity” over the long haul. Why?
The strongest employees will gravitate toward more attractive and financially rewarding opportunities.
2. From an investment perspective, how should we think of TARP recipients versus prospective non-TARP recipients?
In my opinion, the non-TARP institutions will be viewed much more as “growth” opportunities. Why? They will be able to more aggressively allocate capital and take risk unencumbered by Uncle Sam and his minions.
The TARP recipients may very well gravitate more toward a utility-type of business in which they provide basic services while simultaneously fulfilling elements of Uncle Sam’s social agenda.
Geithner, Bernanke, Obama and team will discount this reality but I believe it is a strong likelihood within the financial industry, much as it will be within the automotive industry.
3. From a borrower’s perspective, how should we think of TARP recipients versus non-TARP recipients?
Perhaps initially there will not be much disparity in the relative pricing of different products, but I do believe the disparity will grow over time. All we need to do is review the undercutting of prices within the insurance industry by AIG to see the potential for the same within the financial industry. As borrowers, we will likely have more opportunities to comparison shop going forward. It is not inconceivable that certain non-TARP institutions decide to exit select businesses as pricing becomes non-economical.
4. The greatest question remains, will any of these institutions, both TARP and non-TARP alike, ever be allowed to fail?
The fear of failure at one point was the greatest motivator for innovation and real long term success. Having violated this moral hazard by unprecedented margins, the cost to capitalism will only be known far down the road.
As such, the need to prudently and proactively navigate the economic landscape will remain of paramount importance. The need for Sense on Cents will grow ever stronger.
That’s a good thing!!
LD
Krugman Turns Bullish; Ginsburg Delays Chrysler Sale
Posted by Larry Doyle on June 8th, 2009 4:41 PM |
Nobel prize-winning Princeton economist Paul Krugman commented today that he believes our economy will emerge from recession in the 3rd quarter of 2009. In response to those comments, our equity markets rallied back to unchanged levels on the day after having previously been down by 1%.
Krugman, as with any economist, is entitled to his opinion as well as to changing his opinion. To this point Krugman has been openly critical of many of the Obama administration policies.
I am disappointed that such a substantial, market-moving comment by a high profile economist is not supported with more thorough analysis. I have scanned all of the major news outlets and see nothing of substance. Against that backdrop, I will pose questions myself that I hope Krugman will address:
1. What prompted the change?
2. Are you still openly critical of the programs intended to repair bank balance sheets?
3. Are you still in the camp concerned more by deflation than inflation?
If Krugman believes our economy is emerging from the recession while still battling deflation, he may be all by his lonesome on that front.
While the equity markets did rally back to close unchanged, the bond market continued to sell off led by the front end of the yield curve. The 2yr Treasury is now trading at a 1.43% (+13 basis points on the day) while the 10yr Treasury is now trading at a 3.91% (+8 basis points on the day). Price action of that sort is not indicative of a potentially deflationary environment.
Mr. Krugman, the ball remains in your court. Any Nobel prize-winning economist in good standing will address the full spectrum of questions when leading with such a bold statement as you did earlier today.
LD
Also of note: Supreme Court Justice Ruth Bader Ginsburg has ruled that the sale of Chrysler to Fiat is subject to further review by the court. An Indiana pension fund, which is a Chrysler creditor and holds a very small percentage (approximately .5%) of Chrysler’s outstanding debt, requested a ruling on the Chrysler sale by the court. Any sort of extended delay and review may very well imperil the sale of Chrysler to Fiat. In so doing, Chrysler may be forced into liquidation.
Please recall that many creditors shared the feelings of the Indiana pension fund but were “strongly encouraged, if not intimidated,” by the Obama administration to accede to the administration’s directives.
I tip my hat to Ginsburg for her juris prudence and her respect for attempting to separate the judicial and executive branches of our government.
Tags: Justice Ginsburg stays Chrysler sale, Krugman on recession, Krugman predicts end of recession, Paul Krugman, Paul Krugman comments on economy
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