Wall Street Waits for Fed and Whines About Bonuses
Good Evening: Capital markets participants spent most of today positioning themselves for possible policy changes once the two day FOMC meeting breaks up tomorrow. Some expect Bernanke & Co. will decide to buy Treasurys and/or agency MBS, and equity investors seemed content with nibbling a bit ahead of any such announcement. Garnering almost as much attention during this slow-motion day were AIG and Wall Street bonuses. The amount of rationalizing and whining about these payments will only increase the desire of the American public to tell both AIG and Wall Street to pound sand.
After stocks in Japan and Australia were both up smartly, the bourses in Europe and our stock index futures spent most of this morning meandering around levels not too far from unchanged. The major averages survived the earnings reports and another weak Case-Shiller home price index reading to post gains approaching 1% soon after the bell rang. After consumer confidence hit a new all-time low, however, equities sank back to the unchanged mark (see below). From there the major averages drifted unevenly higher in slow trading to post gains of between 0.72% (Dow) and 1.8% (Dow Transports). Treasury securities saw a decent bid in both the long end and for TIPS, perhaps in the hope the FOMC will decide that tomorrow is the time to announce a plan to buy these securities in the open market (see below). The dollar edged lower, and it would be an understatement to say that commodities didn’t benefit from the greenback’s small decline. Crude oil was down 9%, ag futures declined and even gold dropped 1%. Adding it all up, the CRB index lost almost 4% of its value today.
Whether the Fed decides to start buying securities in the open market tomorrow (or ever) is unknowable, but I certainly hope Mr. Bernanke and team decide to support the mortgage market instead of the Treasury market. Those who would directly benefit from Treasury purchases are mostly of the carry-trading variety (banks and hedge funds), but home buyers would be helped if the Fed decided to sit on mortgage rates. I’m not advocating Fed intervention; I’m just stating the case that to do so in the mortgage market would have a bigger impact on a central problem in the credit crisis — the implosion of home prices. It could even hasten the arrival of the “equilibrium” in the housing market foreseen later this year by Karl Case (creator of the Case-Shiller index — see below). The ultimate low in Treasury yields during the 2003 feeding frenzy in government bonds came in anticipation of Fed purchases that never materialized. What happens to yields in public and private markets alike in the wake of whatever the FOMC announces tomorrow will be interesting.
What is also of interest to me, and what represents a source of growing anger among taxpayers, is the level of bonus compensation at AIG and other financial institutions. Many on Wall Street are unhappy that the decimal point on their 2008 checks seems to have moved to the left a notch (see below). After emptying their pockets to fund the TARP, most Americans have zero sympathy for these complaints. Given the choice, I’m sure many taxpayers would join me in support of requiring any financial institution in receipt of government aid set aside at least half of their employee bonus pool in order to purchase troubled assets from their parent company. Round 2 of the TARP could then make matching purchases of the same assets, thus finally aligning the interests of Wall Street employees and the taxpayers who’ve bailed them out.
As for AIG, the “retention bonuses” promised to the derivatives group that ultimately sunk the firm is a pure and simple outrage. I understand the logic behind the payments — AIG does indeed need to retain key employees if it hopes to someday leave Federal protection — but there had better be some pretty serious strings attached (or, better yet, ropes). First and foremost should be a requirement that none of these payments be made in cash. They should all be set aside in a fund that vests after these “key employees” have stuck around for a few years. Second, and just as important, this fund should invest in the very garbage this group foisted upon AIG. 100% of it. Whether the TARP matches or whether the employees get upset and want to leave is of no concern to me or almost anyone else. I would further stipulate that if a “retention bonus-eligible” employee does indeed decide to leave prior to the 3 year time limit, then he or she receives no payment at all. Zip, nada, zilch. If retention bonuses are indeed necessary to keep this crew from bolting, then they should have no problem waiting for it. And, if the drek their bonus pool invests in turns out to be worthless, then tough luck. As far as most of us are concerned, the AIG derivatives group can get a taste of the damage they’ve helped to cause.
– Jack McHugh
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January 27th, 2009 at 9:02 pm
Couldn’t have said it better. Why is there so much outrage about bonuses being cut from those who helped cause this mess? And why the retention bonuses? With the number of the unemployed and more being added from firms planning on more cuts, where would they go?
January 27th, 2009 at 10:34 pm
I’ve got a bonus for them…they get to keep their job. That would put them ahead of many Americans right now.
January 27th, 2009 at 10:48 pm
Since the regulators and politicians won’t control Wall Street, and obviously Wall Street has about as much self-control as a teenager with dad’s car, credit card, and a fake id, then Main Street has to do it. And there’s only one way to do it: cash out. Take cash out of the banks and funds. Do not trade with them; don’t buy or sell stocks, bonds, or other implements of destruction. Cut up your credit cards. Starve the beast. Do you see another way?
“home buyers would be helped if the Fed decided to sit on mortgage rates….I’m just stating the case that to do so in the mortgage market would have a bigger impact on a central problem in the credit crisis — the implosion of home prices.”
No. Home buyers would be helped by the bubble deflating fully and prices becoming affordable again. The primary beneficiaries of the Fed policy is sellers and current homeowners to the extent that Fed policy supports prices remaining inflated. Recall that the Fed is buying up the Agency MBS by “creating new reserves,” a policy that can’t continue indefinitely without risking massive inflation later. What happens when the policy is changed, and the subsidy of mortgages is reduced? Will prices continue to decline? Unless the Fed policy creates substantial wage inflation, I’d think that likely. (I mean, it was loose credit and low interest rates that got us into this mess in the first place. Trying to refill the punch bowl is not the sane way out.) Which means that today’s buyers risk taking a loss so that the schmucks who helped make this mess get bailed out. It is not surprising to me at all that mortgage bankers are seeing a much, much bigger increase in refi applications than in purchase applications.