November 11th, 2009
09:06 AM GMT
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If you thought that lavish bonuses for the financial industry would be a welcome casualty of the current financial crisis, it is time to think again. The New York-based executive search and compensation consultancy, Options Group, put that notion to rest for us in a new report.

Watch CNN's Ali Velshi explain what underlies the return of big bonuses on Wall Street.

Options Group predicts bonuses at financial firms worldwide will increase by an average 40% this year, just months after many of these firms were teetering on the brink of disaster and begging for bailouts.

The report, released this week, says that managing directors in high-yield credit sales will see the biggest bonuses, along with those in commodity sales units. They’ve apparently had a heck of a year. In fact, it is an incredible turnaround in fortunes which came, of course, thanks to a life raft the size of Manhattan!

Still, how could it have happened so fast: A return so promptly to business and bonuses as usual? Interviewed on Monday’s edition of World Business Today, CNN’s Ali Velshi told me, “It’s unusual given the times we are in. It’s less unusual if you’ve been tracking how this market has been doing. When you look at the money these banks are making, they’ve actually made it on trading…. Buying things cheap and selling them high.”

Velshi also points out that many of the big banks making money now have paid back the taxpayer funds they borrowed, and taxpayers have made a profit on those transactions.

However, seven of the big financial firms doling out bonuses are not off the taxpayer’s hook. Their bonuses will reportedly be less handsome.

Velshi says, “Major profits have been taken at companies that have paid that money back… and they want to be free to pay their people. It’s quite a remarkable situation. You wouldn’t have thought six months ago we’d be talking about bonuses that were bigger than last year.”

Some analysts point out that financial firms will offer more in stock and defer more cash payments because of public pressure, and pressure from regulators to pay tie to long-term results rather than rewarding short term risk. That might placate those who believe excessive rewards for short-term risk helped cause the financial meltdown.

Professor Peter Morici, of the University of Maryland’s Robert H. Smith School of Business, says, “These bonuses show Wall Street is arrogant and insensitive. These bonuses were earned by investing cheap taxpayer funds, and the profits really belong to all Americans. This entire episode is an outrage.”

The U.S. Federal Reserve is planning to review the 28 largest banks to ensure compensation is not rewarding risk; however, global leaders have tried and failed more than once in the past year to agree on what constitutes excessive risk or excessive compensation.

“You only know it,” explained Barack Obama’s pay Czar Kenneth Feinberg a few weeks ago, “Once it’s staring you in the face,” and by then, of course, it’s too late.

So what’s the message here? Let’s just get used to it? The punch bowl is full once again on Wall Street. To paraphrase the much-maligned quotation attributed in London’s Sunday Times to Goldman Sachs chief Lloyd Blankfein, God’s work is being done. Phew!

So let’s just grit our teeth and pretend we haven’t learned a thing in the past year. There’s no need to wonder what’s going on now; no need to worry about what might be laying the groundwork for the next financial crisis. After all, we’ll know it, once we see it.

October 5th, 2009
01:40 PM GMT
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LONDON, England – Based on fundamentals, the markets shouldn't be at the levels they've reached. Some hard cold realities have been reminding investors that the long awaited recovery may turn out to be more anemic than anticipated.

 Have markets over-heated?
Have markets over-heated?

Take last week for instance. U.S. stocks fell worst than expected on monthly manufacturing numbers and a horrific employment report.

The number of U.S. workers on payrolls fell by 263,000 in September - much worse than expected - and the unemployment rate rose to 9.8 percent, a 26-year high. To make matters worse, the average workweek fell to a record low of 33 hours, hardly encouraging to those who have been buying stocks on recovery hopes.

Nouriel Roubini, who predicted the financial crisis, is bearish on the market. "Markets have gone up too much, too soon,too fast," he said in an interview over the weekend with Bloomberg.

"I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped, that might be in the fourth quarter or the first quarter of next year," he said.

Roubini is not alone in his thinking. The head of global bank HSBC, Michal Geoghegan, is worried the economic recession could be worst than some anticipate.

"Is this a V recovery or a W?" Mr Geoghegan asked in an interview with the Financial Times. "[I think] it’s the latter. [If I’m right] we have to be very careful we don’t grow the balance sheet so far before the recovery has come only to write it back into the impairment line later on. I’m cautious about growing too fast."

And economist Lena Komileva of Tullet Prebon said the weak data, specifically referring to the manufacturing data out of the U.S. last week, "do challenge the market's optimism that this year's capital markets rally is the bellweather of a V-shaped economic recovery and it forces a negative revision of future quarters growth projections, which challenges current valuations."

In simple talk, the markets are ahead of themselves. The global equity rally has added about $20 trillion to the value of stocks worldwide since this year's low on March 9, according to Bloomberg.

Governments have spent about $2 trillion on stimulus, while central banks have taken extraordinary measures to try and get growth moving again.

All that liquidity and hopes of a global recovery have pushed stocks substantially higher, more than 50 percent for the S&P 500, and nearly 50 percent for Europe's Dow Jones Stoxx 600 index from their March lows.

While markets are off their best levels, they are still too high based on economic reality. I suspect the disappointing economic numbers last week, won't be the last. If Roubini and some others are right, markets have much further to fall.

Do you think the markets are too high?

August 27th, 2009
04:14 PM GMT
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LONDON, England – On a quiet summer day in August, when many in London's financial district are away, or wishing they were away, comes a lightning bolt from the head of the Financial Services Authority.

Adair Turner proposes the idea of a special tax on financial transactions.
Adair Turner proposes the idea of a special tax on financial transactions.

Adair Turner, the man in charge of regulating the City of London, has said that some parts of the financial sector have grown "beyond a socially reasonable size," and some of what it does as "socially useless activity."

In short he thinks financial services account for too much of Britain's output, robbing other sectors of some of the best and brightest.

To underscore his point, he looks at what “percentage of highly intelligent people from our best universities went into financial services." And then goes to say, "Unless you've got a theory that explains why financial intermediation suddenly needs all this extra resource, there is something of a conundrum. Is it really the case that financial intermediation today is a more complex thing that a decade or two back?”

He proposes the idea of a special tax on financial transactions.

His is not a new idea.

Originally, an economist named James Tobin suggested a special tax on foreign currency transactions to curb speculation. Then in 2005, then president of France, Jacques Chirac, placed a "Tobin tax" on financial transactions to deal with what he perceived to be the excesses of "liberal globalization."

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," Turner said.

It's clear that freewheeling capitalism didn't work, that policymakers need to devise ways to curb excessive risk taking. Higher capital requirements should be the first line of defense.

Unsurprisingly, Turner's possible solution and open questioning of whether the financial district is too large, is already provoking sharp debate and response. He even went so far as too suggest that London's competitive advantage as one of the world's premier financial hubs shouldn't be defended at any cost.

The head of the British Bankers Association Angela Knight, did not mince words in response. "I think that if we say we do not want to have an international, competitive industry here, then we will do to financial services what we have done to manufacturing and engineering in the past and that is have it as a minor industry and lose it to others," she said.

I agree with Knight.

Yes, there have been excesses and recklessness in the financial sector that will take decades to unwind, including eye-popping amounts of money bailing out a financial system that could have been put to much more productive use.

But haven't they acknowledged the excesses? Let's not further undermine an economy already on its knees by making it less competitive and attractive. Let's first start with better supervision.

Do you agree there should be global taxes on financial transactions as a way of curbing excesses? Would such taxes be effective?

July 21st, 2009
02:53 PM GMT
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LONDON, England– In the past week, investor sentiment has turned decidedly more positive. On Monday, the Standard and Poor's 500 Index hit an eight-month high. Better than expected earnings from Goldman Sachs in financials, to Intel in tech, to Caterpillar the biggest maker of earth moving equipment, have all helped push the market higher.

Investment banks are raising their year-end projections for the S&P 500. Credit Suisse is advising clients to cut their bond holdings and buy stocks, reversing their advice from June. The bank has raised its year-end guidance for the benchmark index by 14 percent to 1,050, citing better earnings and economic conditions.

Goldman Sachs is also turning more bullish. It has a year-end target of 1,060 for the S&P 500. "Improvement in ex-financial earnings per share, stabilization in profit margins and higher forward EPS guidance all point to a rising market through 2009," its chief U.S. investment strategist, David Kostin wrote this week.

He also raised his 2009 and 2010 earnings estimates for the S&P 500 companies to $52 a share and $75 a share, substantially higher than his previous estimates (a 30 percent increase over his previous 2009 estimate and a 19 percent increase over his previous 2010 estimate.)

However, Kostin is hedging his bets, saying the biggest risk to his forecast is the possibility of a prolonged economic slump.

He also points to budget cutbacks from state and local governments, a higher savings rate, and a weak housing market as keeping consumer and business spending in check.

Goldman is among the most bullish of Wall Street investment banks on equities. Others include JP Morgan which has a target of 1100 year end for the S&P 500. At the other end of the spectrum, HSBC and Morgan Stanley both have a target of 900.

The S&P 500 has risen some 40 percent from its March low, and if the bulls are right, the rally has further to go. So far, some 79 percent of S&P 500 companies have beaten earnings forecasts, the best showing since 1993.

For the rally to continue, companies will have to continue to beat forecasts, and investors will have to remain confident that the economy will continue to improve.

Do you think the rally has come too far too fast?

April 21st, 2009
05:41 PM GMT
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NEW YORK - It was too good to be true and in our hearts we knew it.

A slew of U.S. earnings reveal the extent of the economic gloom.
A slew of U.S. earnings reveal the extent of the economic gloom.

In early March stocks embarked on an explosive six week rally that seemed to signal the global crisis was ending.

Oh, there were plenty who warned that it was just a bear market bounce. But it was much more comforting to think the aggressive action taken by policymakers around the world laid the seeds for a speedy recovery.

This week reality hit.

As hundreds of U.S. companies report earnings, it is clear we are far from being out of the woods.

The American consumer is still in a world of pain.

Monday, Bank of America CEO Ken Lewis warned that credit was bad and getting worse. More and more consumers are falling behind on credit cards and loans.

Tuesday, Delta warned it expects more empty seats in the second quarter as consumers cut back on flying.

And it is not just vacations that are put off. Merck is seeing lower sales on many of its major drugs. Caterpillar, the company that makes the diggers and tractors that build new homes, sees no recovery in profits or sales.

And we aren't even half way through the week!

Trader Yra Harris of Praxis Group in Chicago told me this morning: "I can't listen to this concept anymore of green shoots. It's nonsense.

"You still have to clear out this issue of the solvency or insolvency of financial institutions because that what the real health of the market is dependent upon."

The U.S. government is going to try to do that when it releases the results of its bank stress tests on May 4.

In theory that should clear the air, but I am hearing a huge amount of skepticism already and we don't even know the details of what the tests consist of.

And there is something else I'm worried about. In order to be credible these tests will have to identify losers. What happens when they do, will be unsettling to say the least.

The bears were in hibernation in March, but they are awake now. And they smell a trading opportunity.

April 8th, 2009
09:42 AM GMT
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LONDON, England - Alcoa, the largest U.S. aluminum producer, has kicked off the first quarter earnings season with a loss of nearly $500 million.

Markets haven't taken the news well. Alcoa is a nasty reminder that the sting of the recession continues to bite. There will be plenty of other reminders.

The U.S. earnings decline has now lingered for six straight quarters and it's not over yet. The expectation is that profits for companies in the S&P 500 will decline for three more quarters including the current one, according to Bloomberg data.

Marc Faber, a well-known analyst, predicted this week that the S&P could go back down to 750 - a fall of some 10 percent from its recent high - before rebounding in the summer.

Even though markets are supposed to anticipate recovery, there are still plenty of reasons to be cautious. Nouriel Roubini, who predicted the economic crisis we are now in, remains bearish, and expects the U.S. economy will continue to contract this year.

And Mike Mayo, the banks analyst, is predicting that loan losses at U.S. banks may exceed Great Depression levels.

Mayo, isn't a household name. But anyone who follows Wall Street closely knows his name well. He's the guy who correctly took a bearish stance on banks in 1999, when others remained bullish.

He thinks mortgage-related losses are only about half way to their peak. While credit card and consumer losses are about a third of the way from their worst levels.

George Soros expressed skepticism this week about whether the market rally had legs, pointing to problems in the real economy.

Soros says recently announced changes to fair value accounting rules will keep problem banks in business, and that in turn will only delay any economic recovery.

Confidence of course, plays an important role in any rebound. It was only a matter of time before the reminders of the depth of this downturn hit investors once again.

Alcoa is the first of those fresh reminders - it won't be the last.

Meanwhile, the problems of the banks persist, and as long as that continues, any real recovery will have to wait.

Do you think the recent rally in the market was a bear market trap?

When do you see the economy rebounding?

How much longer do you think it take to work through problems in the banking sector?

March 12th, 2009
08:27 PM GMT
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NEW YORK– Bernard Madoff will likely spend the rest of his life behind bars, but that is little comfort to the thousands of investors who lost their life savings because of his actions.

Madoff arrives at court Thursday.
Madoff arrives at court Thursday.

After he entered his guilty plea, Madoff addressed the court and said he was deeply sorry and ashamed.

Sorry ... Sorry? This was not a one-time mistake, but a multi-billion dollar fraud carried out over decades. He ripped off friends, neighbors, charities and pensioners.

It seems incredible that he asks anyone to believe he has a conscience.

At the end of the hearing Madoff was ordered to go directly to jail while he waits for his official sentencing, scheduled for June 16.

Government prosecutors will no doubt declare victory, but victims are angry there was not a trial.

Richard Friedman, who lost $4 million in savings, told CNN: "It's not enough just to say, 'OK, I'm guilty, put me away.'

"What about all the other people involved? What about his family? I want to know. What about the money? I don't think there's $50 billion out there. I think a lot of it is with the IRS, but whatever money he had, I think that that should come out. Where is that money?"

Legal experts say we may never know where the money went.

Right now investigators have found just under $1 billion, a fraction of the $60 billion that some estimate he swindled.

The other unanswered question that I struggle with is: Why?

When people commit a crime it helps to understand the motive. Why did this respectable and, by all measures, successful man do this?

Why didn't he turn himself in earlier? He said in his opening statement he always knew what he was doing was criminal and that he would be eventually be caught.

How could he have ruined so many lives? One of his victims said simply, "He is evil."

I think it may have more to do with greed. Yes, at the age of 70 he now faces jail time, but for the last 20 years he has lived a life of extreme luxury.

If he is the only one to serve time for this ... has justice really been served?

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Filed under: BusinessWall Street

March 2nd, 2009
08:26 PM GMT
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NEW YORK – It has been called a black hole. The insurance giant American International Group is sucking in billions of dollars in government aid that just seems to vanish.

AIG managed the biggest quarterly loss in corporate history.
AIG managed the biggest quarterly loss in corporate history.

Ask analysts how AIG managed to lose almost $62 billion in just three months and many will just shake their heads and throw up their hands.

In good times, the company's balance sheet could be hard to decipher; in this crisis it has become a gargantuan task.

In an attempt to get to the bottom of it, I went through their press release.

There were billions in unrealized market valuation losses, derivative losses, goodwill impairments, tax benefits not obtained.

I ended up more confused. Especially when I saw the $2.3 billion chalked up to OTHER!!!

Thankfully, my colleague Ali Velshi interviewed AIG CEO Edward Liddy and pushed him to try and explain it in plain language.

This is what he said. "We have a $600 billion investment portfolio, it's invested in equities; equities are declining in value. It's invested in certain forms of real estate; real estate is declining in value. We have to take that decline and put it through our P&L, that's what drives a good portion of that $62 billion loss."

Okay, that makes a little more sense.

Just like my house and my 401K which have plummeted in value and hurt my net worth, AIG's assets are tanking and they are acknowledging those losses.

How did a boring insurance company find itself in this position?

In the 1990's AIG expanded from their traditional role of selling life insurance and retirement products and got heavily involved in the complicated derivatives market.

Analysts liken it to building a hedge fund on top of the regular business base.

In the boom times that quasi-hedge fund made the company billions, but when the U.S. subprime market cracked a lot of those derivative contracts came back to haunt them.

In Liddy's words, they got involved in a business they didn't fully understand. That is an understatement.

Unfortunately we are now paying the price.

The U.S. government has ponied up $180 billion in aid and backstops and some estimate that bill could ultimately run half a trillion dollars.

European banks remained exposed. Retail customers around the world worry that their policies are safe.

Are you one of those customers who hold an AIG policy? Do you agree the government should stand behind the company or does there come a time when enough is enough?

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Filed under: BusinessWall Street

January 30th, 2009
02:21 AM GMT
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NEW YORK — News this week of big bonuses paid out at financial firms on government life support has sparked outrage. AIG is paying $450 million to roughly 400 people at a financial products unit - the same unit that directly contributed to massive losses at the insurer. The company calls them “retention bonuses”.

 A woman holds up a sign near Wall Street on September 22, 2008, in New York City.
A woman holds up a sign near Wall Street on September 22, 2008, in New York City.

They are not alone. The New York state comptroller’s office said cash bonuses paid by Wall Street firms totaled $18 billion in 2008. That is down sharply from the boom times, but still unbelievable considering that these companies would be out of business if not for taxpayer bailouts.

Those headlines stand in stark contrast to another story told to me this week. A medium sized company, hit hard by frozen credit markets and clients that are behind in payments, found itself running low on cash. The bosses made the difficult decision of asking their workers if they would skip a pay period. It was totally voluntary. Ninety percent agreed, with many coming up to the bosses after to express their support and willingness to pull together to make it through this crisis.

Another story crossed our desks about a Michigan pancake restaurant where workers got together and agreed to work a shift with no pay to help the restaurant owner bring down costs. Local patrons, hearing the news, left more generous tips to help make up the difference.

These are not big bosses worth millions of dollars who make a big show of taking a dollar salary as a public relations move. These are real people with real bills who are making big sacrifices to try to save their jobs and the companies they are loyal to.

Maybe we should require CEO’s at companies taking taxpayer money to do a job swap and go spend some time out in the real world. They might find out that you don’t need to pay million dollar bonuses to find employees that are worth holding on to.

December 5th, 2008
07:12 PM GMT
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LONDON, England - This is all getting seriously ugly.  The U.S. labor market shed some 533,000 non-farm jobs in November, and it now turns out that in September - before the collapse of Lehman Brothers and the consequent severe volatility on global stock markets - U.S. unemployment was already starting to surge.

It was just a few days ago that we were told the gurus at the U.S. National Bureau for Economic Research had decided that we could use the word "recession" to describe the economic conditions in the United States. But now, with jobs disappearing fast, confidence in shreds and the "Big Three" carmakers holding out the begging bowls in Washington, the word "depression" is starting to be on everyone's lips.

I admit to being the eternal optimist.  I'm not ashamed to say so - I would actually hate to be thought of as a pessimist - but must also confess that it comes with a big personal price tag: for example, ever hopeful, I hung on in there in the stock market for longer than was wise. Watch Michael O'Sullivan of Credit Suisse discuss Europe's options

So it pains me to write this, but given that this recession has already lasted longer than many of its peers - and is widely forecast to last longer than most of them – perhaps we can no longer rule out a depression, a prolonged and dramatic downturn lasting well into 2010.

It's a scenario nobody wants.  But every government and every central bank in the world is now united in fighting to avoid it

Hours before those U.S. labor market numbers stunned financial markets, Europe was launching a broad-fronted counterattack.  The European Central Bank, the Bank of England and Sweden's Riksbank slashed their key interest rates; in the case of the ECB, the 0.75 percentage point reduction was the biggest cut in its 10-year history.  In Germany, the Bundestag voted through the federal government's $39 billion fiscal stimulus package, just as the French President Nicolas Sarkozy chose the car-making city of Douai to announce a similar package worth $32 billion.

In fact, each day now brings news of European Union leaders and the European Commission working closely together to show they are putting up a united front against the recession.  But what is striking is that nobody says they can stop it in its tracks, whatever they do.  The most they can do, say most economists, is soften the pain of recession and ensure it lasts no longer than it has to.

All this comes at a price.  France's latest effort to boost its economy will probably lift its national debt to 3.9% of GDP, and like all prudent governments, it will have to pay that back out of the taxpayer's pocket once normality has returned.  Virtually every European government will be doing the same: borrowing big-time now, and repaying later.

Central banks also face a dilemma.  They have had no choice but to loosen the monetary floodgates in an effort to induce the commercial banks to start lending again; that is essential if businesses are to invest and employ more people, and if individuals are to restart consumer spending.

But lower interest rates take many months to generate their full impact on the economy, and central bankers worry that growth will snap back, forcing up prices and unleashing inflation.

Imagine trying to drive a car along a highway with steering that only responds, say, 30 seconds after you've turned the wheel.  How long before you dive into the ditch?

So there is an argument which says that governments and central banks might do better to stay on the sidelines and let the recession take its course rather than take expensive and risky measures which are never going to stop it anyway.

What do you think?  Are Europe's governments and central banks doing enough to fight off recession, apart from avoiding policy measures which might make things even worse?  Should they actually bother to do anything?  Are they just making things worse? Watch Michael O'Sullivan from Credit Suisse Asset Management answer your questions

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