Sunday, November 30, 2008

More Good News

"In a closely watched move that may be followed across Wall Street, the top executives at Goldman Sachs Group Inc. [GSG] have decided to forgo their 2008 bonuses. In doing so, they are giving up potentially tens of millions of dollars in payouts in a year that reshaped the securities industry. ... The executives will only be eligible for their base salaries, $600,000 for each. A firm spokesman said the executives felt it was 'the right thing' to do. ... The debate over bonuses and how much should be paid out has been raging for months across Wall Street. Some investment bankers have argued that even if it was an ugly year, only a handful of people are responsible for the losses and not everyone should be punished for that. ... Many of these employees performed well in 2008 despite the market turmoil, these people say, but could get plucked away by rival firms if compensation practices are significantly altered. ... At many financial firms, about half of all revenue is allocated to compensation, and multimillion-dollar bonuses are routinely paid out to ensure the best talent stays put. ... Since the start of 2002, Goldman, Morgan Stanley, Merrill, Lehman and Bear have paid a total of $312 billion in compensation and benefits to its employees", my emphasis, Susanne Craig at the WSJ, 17 November 2008.

"Bring out the hair shirts? The decision by top executives at [GSG] to join peers at Deutsche Bank and UBS in forgoing bonuses for the year is a sensible act of contrition. But it is hardly radical. Against the backdrop of a financial crisis and intense public scrutiny--particularly after gorvernment capital injections--they had little choice. ... But cutting the pay of a handful of top executives is window dressing. What matters is the size of broader bonus pools", my emphasis, Thorold Baker at the WSJ, 18 November 2008.

"Citigroup Inc. Chief Executive Vikram Pandit vowed to keep slimming down the financial giant, announcing about 25,000 new job cuts that will shrink the number of employees by 20% since he took over last December", David Enrich at the WSJ, 18 November 2008.

"Capital is key to Citigroup's future. And on that score, investors are still worried, even after the banking giant announced plans Monday to cut 50,000 employees. ... Tangible assets, which don't include goodwill or intangibles, are 55 times the bank's tangible equity. J.P.Morgan Chase, by contrast, is 31.4 times, with Bank of America is 31.3", David Reilly at the WSJ, 18 November 2008.

"Behind headlines of record losses, a small group of Wall Street traders on commodities, currencies and interest-rate trading desks have made huge profits for the banks that employ them. That is setting up a scramble as traders vie for dwindling pools of bonus money once heaped on such top performers. So far, they look to be on the losing side of the trade. ... UBS, meanwhile, is crafting packages that withhold short-term pay if long-term bets go sour. Shaken by the global financial crisis and increasing government oversight, banks are groping with a new way of doing business: Pay out huge sums and risk public ire and perhaps more government intervention. Pay too little, and tempt defections or insurrection from the few people who are driving this year's profits. ... While Morgan Stanley's chief financial officer cited the commodities-trading group on an analyst call this year as one of the bank's 'two top businesses,' some traders in the unit in the past have argued that the commodities group is undercompensated relative to its contribution. ... The best traders at top-tier commodities and currency trading desks made $10 million to $20 million or more last year, and the next level down, traders who brought in $100 million in revenues, might have made $4 million to $5 million [Michael Karp] says. Generally, traders look for bonuses of up to 10% of profits they made for a firm, with adjustments for the performance of the unit and the overall firm. ... [Gustavo] Dolfino says star foreign-exchange traders who expected to make $25 million this year after earning the firm $250 million may get less if it isn't clear the feat can be repeated without the use of borrowed money. Acess to the firm's capital has been a key element to the returns of Morgan [MS] and Goldman [GSG], who have led a virtual duopoly in this commodities-trading business for more than two decades. ... Goldman, the other dominant Wall Street commodity dealer, could make as much as $3 billion in net revenue, say people familar with the results", my emphasis, Ann Davis (AD) at the WSJ, 19 November 2008.

"'The villagers are at the gates of the castle with burning torches,' says one compensation consultant. The sheer amount that bankers are paid riles people at the best of times. When the economy is ravaged and the source of the trouble is banks themselves, the pitchforks come out. Politicians on both sides of the Atlantic are gleefully grilling bankers on pay. ... Bankers are desperately trying to placate their critics. ... Paying out billions in bonuses will still look awful. Worse, many expect the ratio of compensation to income, which normally hovers just below 50%, to balloon as banks' revenues fall faster than their pay bills. ... Surely things are so bad that banks could still afford to disappoint even their better employees by screwing down on their pay? Banks everywhere are ditching staff, after all. ... Mob justice may have deserving targets but it is always crude and usually goes too far. Attacks on bankers' pay are no different", Economist, 20 November 2008, link:

"Treasury Secretary Henry Paulson, under fire from lawmakers and others for his approach to resolving the financial-sector crisis, defended his actions as 'necessary steps to prevent a financial collapse.' Mr. Paulson said Thursday that Washington should take a hard look at compensation practices in the financial-services industry, as well as the process of securitzing loans and selling them to investors. ... Mr. Paulson said he has dealt with matters as best as he could, and blamed the turmoil on factors including 'government action and mistaken actions, outdated U.S. and global financial regulatory sytems, and ... the excessive risk-taking of financial institutions'," my emphasis, Deborah Solomon at the WSJ, 21 November 2008.

"Wall Street firm [GSG] said Friday that it will issue debt backed by the Federal Deposit Insurance Corp. under the new Temporary Liquidity Guarantee Program, or TLGP", Matthew Cowley at the WSJ, 22 November 2008.

Mike Shedlock's 20 November 2008 post about Citigroup is worth reading:

Yves Smith's (YS) 20 November 2008 post about Citigroup is also worth reading,

YS has another post about Citigroup, 23 November 2008 worth reading, I add, "Where were the CPAs"? CPAs are supposed to evaluate a client's "business risks" among other things while doing an audit. The American Institute of Certified Public Accountants published Assessing and Responding to Audit Risk in a Financial Statement Audit (Assessing), 2006, a 498-page tome about how CPAs should consider risk during audits, 498 pages of junk to me. I read all 498 pages. Silly me. Lots of words, no substance. If Citi has "risk control" problems, whatever that means, what did KPMG get $88 million in 2007 for? Plaintiff's bar, start your engines. I smell a lawsuit. Section 4.21 of Assessing reads, "Usually, management identifies business risks and develops approaches to address them. This process for managing risk is an element of the client's internal control and should be evaluated as part of your procedures to gain an understanding of internal control". Then what? Another gem, "During the audit, you may identify risks of material misstatement in the financial stattements that management failed to identify. In such cases, you should consider why the client's risk assessment process failed to identify those risks and whether their process is appropriate to the client's circumstances". Well KPMG? Does anyone at Citi or KPMG know what cost of capital means? Isn't Robert Rubin (RR), "formerly" of Goldman Sachs and Treasury a Citi director? Why does Citi pay RR, double Ivy Leaguer, Harvard followed by Yale Law School, $17 million a year? Much of auditing is window dressing. Hey Mark Olson, of the PCAOB, did you read this NYT article? What if anything, will you do about it? Hey RR, do you know what cost of capital means?

GSG "top executives"? You're kidding. That these guys are eligible for any bonuses shows Wall Street compensation practices are bizzare. Joe Schmoe gets "punished" to support overpaid incompetants and worse, who want bonuses! What chutzpa; i.e., asking a judge for mercy after murdering your parents saying, "Your honor, I'm an orphan". What are investment banks today? A scam! They pay employees every dime possible, then having pushed themselves to the brink of insolvency, scream for bailouts. And get them! Babe Ruth, the Sultan of Swat, El Bambino, in 1931, during the depression asked for an $80,000 ($3 million today) salary. When told that's more than President Hoover makes, $75,000, responded, "I had a better year than he did". Did you have a better year than Bush, Lloyd Antoinette Blankfein (LAB)? Is your public approval rating better than Bush's 20%? LAB, here's a tip: keep your head down.

I agree, it's window dressing. Treasury should tell GSG and its competitors, not ask, tell, until all Treasury funds are repaid in full, including dividends, your bonus pools will be: zero! You don't like it, leave. "But I'm a $50 million a year trader". Really? Without the Fed's suppressing interest rates and fleecing the public to your benefit, you would be lucky to shine shoes in Grand Central Station. Would the capital markets cease to function if you stopped trading? I doubt it.

When you read the whole article, it appears only about 12,000 "job cuts" will come from layoffs. This is still a good opportunity for GSG. It might get 12,000 CNC guillotine rentals from Citigroup. I wonder how GSG bills for its use? Does GSG charge "day rates" or "per chop" like drilling contractors charge "per foot" in the oil patch?

Citigroup is woefully undercapitalized.

MS and GSG may be as poorly managed from each's shareholders perspective as GE. They have traders getting 10% of "their" profits. How do GSG and MS, among others, measure profits? Do they: use Kidder Peabody accounting, appropriately allocate cost of capital? AD notes, "Access to the firm's capital has been a key element to the returns of Morgan and Goldman". Whose capital is it? The traders, or the shareholders? I think these firms are ripe for shareholder revolts. Imagine thousands of "exploited" traders storming Capitol Hill, their Bastille! Will Barney Frank (BF) say, "Mr. Peckinsniff, trader, you made $25 million last year, right? With millions jobless, what are you complaining about? That it wasn't $50 million?" As outside the Capitol thousands of traders carrying pitchforks shake their fists and rebuild 1932's "Bonus Army Village".

How can traders be "undercompensated"? Why do they stay? Does anyone remember microeconomics? You should have encountered "marginal revenue product" (MRP). A firm will hire more of a factor, until its MRP less its marginal cost (MC) equals zero. If a "top" trader only gets 10% of his MRP, he's being enslaved! Why isn't his pay almost ten times his current pay? I see a 13th Amendment problem here. Traders of the world unite, you have nothing to lose but your chains! In 1847 Abraham Lincoln said, "To secure to each labourer the whole product of his labour, or as nearly as possible, is a most worthy object of good government". Traders, you are on the right side of history! Throw Lincoln's statement in BF's face! March around the Capitol with megaphones blaring about your exploitation at the hands of the greedy capitalists. Hand out hundreds of thousands of leaflets explaining your plight. Organize. Join the teamsters' union! If slaves got only 10% of their MRP's, I suspect the slaves' price in the antebellum South would have been much higher that it was. I look at these compensation practices and think, the bailout was an even bigger "mistake" than I thought before. Do MS and GSG do anything which is profitable? Why didn't these "exploited" traders leave years ago? Suppose one of them can make a $250 million pre-tax profit. At even a four PE multiple, he's "worth" $1 billion! Why is he with GSG or MS? What's going on? This sounds like a job, not for Superman, but Joel Stern. Maybe he can get into these firms and figure it out. If GSG's and MS's profits can walk out the door, what PE multiple should they be accorded? Why are they worth anything? On 19 November GSG was $55.18 a share, for a $21.8 billion market cap. If say 50 traders can walk out the door, the rest of GSG may be worth nothing. It may be worth nothing now.

Disagreeing with the Economist, we should reduce bankers' pay until they leave. It's one way to find their MRP given how bad I suspect the banks "responsibility accounting" is. If the traders, etc., don't like it, tough. They should ask their senior management's to return the bailout money. Until then, traders be grateful you haven't had a "date" with the CNC guillotine. The peasants aren't interested in your problems after having paid over $1 trillion to keep you arrogant ingrates in Rolexes and Rolls Royces. At least the unnamed compensation consultant saw the villagers with torches and pitchforks! There is a way to placate the peasants, seppuku!

When a company blames short sellers for the fall in its stock price, you should start its death watch. Is Citigroup's $800 million man this stupid? Doesn't he know when to shut up? Apparently not.

Hey Paulson, why should Washington look at say, GSG's compensation practices? Weren't you GSG's CEO? What did you do for GSG's shareholders when you were GSG's CEO? Did you discharge your job responsibilities correctly? Did you breach a fiduciary duty to them?

GSG employees want bonuses and need Uncle Sam to guarantee GSG's debt? Peasants, pitchforks at the ready. Storm the Bastille.


Anonymous said...

IA... some mean riff... I endorse...

But I think you forgot one thing in your accounting for C, GSC and others when factoring in trader salaries and P/E... that is the "primary dealer" multiple... some schmo trader can't get free Fed liquidity... schmo trader gotta go through GSC et al for leverage...

Independent Accountant said...

That's my point. These traders aren't making big bucks at all. If GSG, C, MS and the rest properly charged the traders for cost of capital, the trading "profits" would evaporate. The traders would have left years ago if they had the financing of GSG, C, MS and the rest. I wrote a substantial part of this piece "tongue in cheek". I asked whose capital are the traders using? Joel Stern, Chicago MBA, 1964, heads a financial consulting company, Stern-Stewart that among other things does "EVA" studies, i.e., economic value added. I'm sure if Stern took these trading operations apart he would find miniscule or negative EVA. Supposedly GSG has used EVA! I can't believe GSG has and pays traders like kings. Reread my piece.

Anonymous said...

I apologize IA... you did cover the "primary dealer" asset pipeline from the Fed/Res... it's gushing dollaros.

killben said...

leaves me zapped ... that they can join elsewhere where they will be better compensated ...

but for the endless bailouts and bilking of tax-payer, none of the companies will be left standing to hire ...

when you enjoyed a bonus due to the ponzi schemes at other dept, does it not make sense to forego when the ponzi scheme has burst ... dis someone then say that he did not deserve the bonus as he was not part of the ponzi scheme

so this is a different version of privatize profits and socialize losses ...