Elvis (the Horse) Has Left the Building

Yahoo! today carried an AP news article about President Obama imposing new caps on executive pay for any financial firm yet to receive part of the $700B Troubled Asset Relief Program (TARP), better known as the first of many federal bailout programs. TARP specifically targeted the financial services sector of the economy, and caused much of the Wall Street vs. Main Street hand-wringing when it was proposed and approved last fall.

Since the approval of using federal funds to bail out huge mistakes on bad bets by investment bankers, hedge funds, and virtually any bank dealing in securitized subprime mortgage loans, many commentators rightly pointed out that C-level executives of those same firms were still clearing huge amounts of money in annual bonuses. The AP article pegged the bonus figure at $18B last year alone.

Those of us living on Main Street had every right to be angry at the payment of these huge bonuses, since we're familiar with the model of rewarding good performance with a bonus. If one of us made the bad bets and mistakes the leaders of these financial institutions made, we'd be fired, not enticed to stay with a handsome year-end bonus. Gregg Easterbrook even railed against the 2008 bonuses in several of his most recent Tuesday Morning Quarterback (TMQ) columns on ESPN's Page 2.

So, this action by Obama, stepping into a leadership void left by the collective members of the U.S. Congress, is a good thing, right? Right?!

I think the key paragraph to note is this one:

The pay cap would apply to institutions that negotiate agreements with the Treasury Department for "exceptional assistance" in the future. The restriction would not apply to such firms as American International Group Inc., Bank of America Corp., and Citigroup Inc., that already have received such help.

Sadly, the analogy that applies here is closing the barn door after the horse is already gone. The article does not mention just how much of the taxpayers' $700B remains unclaimed at this point, but I dare say not many banks will line up to take the bailout funding after today.

While this was a nice gesture by Obama, I don't think it will have a great impact on the TARP program (brought to you by the Department of Redundancy Department), on other federally-funded bailouts of the auto industry, on the upcoming "stimulus" package (really just a pork-laden spending bill by Congress; it's now up to $900B in additional spending not offset in any way by cuts elsewhere or higher taxes -- the shame!), or on other federal legislation.

He does get to look like he's providing leadership and make headlines, though. For whatever that's worth.

One thing I had to note, though: the POTUS makes an annual salary of $400,000. Plus such benefits as a $50K expense account, a $100K nontaxable travel account, and $19K just for entertaining or entertainment. Does he pay taxes on all the income other than the travel account?

I also had to laugh at the past salaries of U.S. Presidents table found on Wikipedia, under the Salary section of the page. I can appreciate they want to state what the equivalent "Salary in 2008 Dollars" is for the salaries established so many years ago. But there is an error in the math here. If you're talking about what something costs, adjusted for inflation, then something that cost $400K in 2001 would cost $471K in 2008 terms (using just the numbers on the Wikipedia page).

However, since the salary of the President has remained the same since 2001, the equivalent purchasing power of $400K is actually less than what it was in 2001, not more. The official Bureau of Labor Statistics' (BLS) own inflation calculator seems to provide the same type of analysis as what is found on the Wikipedia page. If the salary of the President were adjusted to account for rises in the Consumer Price Index (CPI) every year, then Obama would be earning $479K in 2009. But he's only making $400K. Put it this way, if you reverse the numbers in the BLS calculator, Obama's $400K salary in 2008 could purchase only the equivalent of $333,482 of 2001 goods.

That's still more than the vast majority of us living on Main Street earn, so I don't feel sorry for his diminished purchasing power. I just wish Obama could bring real change to Washington. It hasn't happened yet.

The Current Financial Crisis

It was last week that I stumbled across this article and analysis from Michael Lewis, the famous author of books such as Liar's Poker, Moneyball, Coach, and The Blind Side. I have read all (or a significant portion; in the case of Coach, it was about a 20-page excerpt from the NY Times Magazine, their Sunday paper insert) of those books, and Lewis has to be one of my favorite writers these days. Lest one think Lewis solely writes about sports, he also authored Next in 2001, The New New Thing in 2000, and Trail Fever (AKA Losers) in 1997.

Lewis' most recent book, Panic, just hit the shelves in late 2008, which means he didn't waste any time turning around a new manuscript after publishing The Real Price of Everything in January of 2008. It makes me wonder just a little how well each book is researched and written, although if his previous works are any indication, I will probably enjoy delving into his more serious economic tomes.

Getting back to the original article, which was published in the December 2008 issue of the magazine Conde Nast Portfolio, I was impressed with how Lewis tied everything related to the collapse of Wall Street in 2008 back to one event. One event that happened way back in the early 1980s. According to Lewis, Wall Street was destined to collapse ever since John Gutfreund sold the trading partnership of Salomon Brothers to the Phibro Corporation, thereby divorcing the element of risk from the persons making the trades.

Now, I clearly understand that Lewis had insider experience working for Gutfreund at Salomon Brothers in the '80s. It was his experience pushing complex options and derivatives on the trading floor that formed the basis of his first book and cemented his status as a writer. Naturally, his experience formed a prism through which he seeks to explain later events. And there could very well be an awful lot of truth in that one simple premise: once risk was transferred to shareholders, Wall Street was freed to take ever-increasing (and ever-more-idiotic) gambles with vast sums of money.

However, I'd like to think it was just a little more complex than that. Historians are well aware that significant events often transpire through unexpected coincidences, producing unforeseen results. Never rule out dumb luck when it comes to making history.

The thing that always amazes me is just how fluid history really is. Events we were so completely sure of when our high school textbook declared, "This is how it happened!" often merit further review and differing opinions. Even without going nutso on the concept of Political Correctness, there are no shortage of revisionists who challenge and deny the most basic factual understandings. For as many people who saw airplanes crash into the World Trade Center twin towers on 9/11/2001, there are an almost equal number of people who believe the U.S. government or Israel was responsible. Perhaps more than equal. Scary thought.

Regarding the current economic and financial crisis we seem to find ourselves in, I have to think that there were other circumstances, other events that contributed to the crisis. The entire mess can't all be tied back just to taking Salomon Brothers public, can it?

Despite all the talk of how hard it is to find and raise capital, my own perspective is that there was too much capital sloshing around the system ever since the mid-'90s. So much money was flowing through the system, the hedge fund managers, the financiers, and the investment bankers all felt compelled to take ever larger risks with their clients' money to find a "suitable" return on the investment. Even here in east-central Illinois, I knew of at least three or four Venture Capital firms, all looking for the next Mosaic (Netscape) Internet technology firm to spring from UIUC.

Speaking of the hedge fund managers, more and more people NOT worth millions of dollars felt compelled to get into these investment clubs, hoping to find a decent rate of return while hedging their bets. Sadly, the mathematical models based on quantitative statistical analysis favored by hedge fund managers all seemed to follow the same patterns, so very little hedging was actually accomplished. Certainly, no one had a broad, general market melt-down built into the statistical models.

I often wondered what would happen if (or when) the Baby Boomers decided they would pull their retirement savings out of stocks and move it into more conservative investments. If the constant inflows of new money helped to drive stock prices up, thereby driving Price to Earnings (P/E) Ratios higher during the '90s and mid-'00s (a simple result of supply being outpaced by demand), then the reverse would be true if outflows exceeded inflows on all those 401(k) and IRA mutual funds, right?

At any rate, I think this financial crisis is probably larger than any one factor, any one explanation. Exploring the byzantine world of financial derivatives, including Collateralized Debt Obligations (CDOs), is enough to make any one's head spin, including Lewis and Gutfreund. If those guys couldn't understand how all that money was being invested, what hope do any of the rest of us have? We might as well be giving our money to the Bernie Madoffs of the world.

And yet, perhaps Lewis is right. Perhaps, in this case, the principle of Occam's Razor applies. All of these other issues could be just compounding factors based upon Lewis' rather simple premise. It's certainly food for thought.

On The Run from AJC

Today's Atlanta Journal-Constitution contains some humorous anecdotes from the Presidential campaign trail here. The bit that caught my eye was that Russia decided to turn down John McCain's request for campaign funding. I know! First McCain wants to kick Russia out of the G8, and then his campaign solicits Russia's Ambassador to the UN, Vitaly Churkin, for funding. Well, if your opponents is busy raising $150 Million in a single month, why not look under every stone?

The bigger question is what Obama plans to do with all that money. Better yet, with such a downturn in the economy and the vaporization of wealth on Wall Street (best characterized as simple paper losses, unless people actually sold their shares after stock values plummeted), why are people funding a single campaign in such record numbers?

Especially when the presidential race seems to be almost a foregone conclusion with just 14 days remaining until the polls close.

It's always nice to receive a personal note from the current Governor of Alaska in my inbox, however:

Dear Supporter,

If you caught my guest appearance on Saturday Night Live this weekend, you may have seen an ad or two (or twenty) from Senator Obama's campaign.

This barrage of advertising is adding up to the most expensive negative ad buy in political history. And these ads are funded with the nearly $200 million the Obama campaign and the DNC raised in September.

With this new money, they'll only step up their media buying efforts to flood every network with ads attacking our shared values. These ads are full of inaccurate information designed to mislead voters in key media markets.

We need your support to stop the Obama-Biden Democrats' media buying binge. Your immediate contribution of $25, $50, $100, $250, $500, $1,000 or more will help fund our team's ads in key media markets across the country.

The current media buying gap is a direct result of Senator Obama's broken pledge to accept public financing. This summer, Senator Obama chose to break his promise to the American people by opting out of the public financing system. But, you can be sure that our entire team will honor all of the promises we make in this campaign because we are men and women of our word.

Our team of reformers has a plan to take America in a new direction. Our economic policies focus on providing economic relief to those who need it most. While the Obama-Biden Democrats say they want to "spread the wealth around," our team won't support economic policies that punish Americans for working hard and pursuing the American Dream.

I'm asking you today to help our team get this message out. The funds you give today will help pay for upcoming ad buys and get-out-the-vote efforts.

If Senator Obama is elected and Speaker Pelosi and Senator Reid are in charge of Congress, there will be nothing stopping them from raising your taxes, immediately pulling out of Iraq and placing your healthcare decisions in the hands of government bureaucrats.

We can't let this happen and that's why your financial support is so critical to our efforts. Every dollar we raise goes directly to help fund media buys and get-out-the-vote efforts in important races across the country. So, please make the most generous contribution you can give - whether its $25 or $250. We're certainly grateful for any help you can give. Thank you.

Sincerely,

Governor Sarah Palin

Too bad the e-mail didn't include pics!

The Nuke-yoo-lar Topic of W's Legacy

I friend of mine recently e-mailed an op-ed piece from Charles Krauthammer at the Washington Post titled "History Will Judge." The link provided should take you right to it, and it's well worth the read. I feel sheepish that I hadn't read it or linked to it before, but there are only so many hours in the day for keeping up on the news.

I was happy to see that what was sent in e-mail actually matched the online column, with no edits one way or another. Sadly, I never trust what gets sent via e-mail any more. I don't even subscribe to the age-old Cold War tenet of "Trust but Verify." Whose motto was that? Better than "In God we trust. All others we monitor," which is a motto many spooks might recognize.

The reason why I feel compelled to discuss Krauthammer's column is because I'd been thinking about W's post-Presidency plans myself recently. Seriously. I've been trying to get my head around what W will do in retirement, since I can't picture him being invited to the public speaker lecture circuit any time soon. Which group would have him? Even the die-hardiest of the die-hard GOP faithful have distanced themselves from anything to do with Bush's administration.

I'm sure Bush will continue to have many friends in high places, certainly. He still has his defenders, and he still should have plenty of influence. On what, though? As Krauthammer points out, history will most likely be kinder to W as peoples' memories fade a bit. If no less than Presidents Nixon, Ford, and Carter can all get image rehabs after leaving office, then certainly Bush can, too.

One question for which we really won't have an answer for years to come will be how this very recent Wall Street implosion will affect W's legacy. Nixon (almost impeached), Ford (stagflation), and Carter (malaise) successfully rehabbed their legacies after leaving office; Hoover (Great Depression) did not. I'm not ready to commit to calling these banking problems and economic hard times anything close to another Great Depression. In 1929, over 300 banks had closed their doors even before the stock market crashed. In 1930, over 1,000 additional banks closed forever and the phrase "bank run" struck fears all across the U.S. We're not there yet, and the structural laws and oversight bodies put in place after 1929 should keep us out of another Great Depression. That's the whole idea, at least.

There's no doubt that Wall Street has had its worst week ever (WSJ article, subscription req'd.). I'd like to think that agricultural policies have changed enough so that we won't hit another Dust Bowl again. Unemployment remains relatively low -- last I checked, I think it was around 6%, although as part of the recent rate cut by the Fed, they said they think it will edge up to 7-7.5% by late 2009. Certainly that is still nowhere near the 25% unemployment hit during the Great Depression. Durable goods orders are down and inventories are up, which spell Recession for the economy, and most economists are predicting we're already in a Recession now (more WSJ).

The reason all of the economics issues is important for Bush is that they will have a far more lasting impact on his Presidential legacy than anything else he's done. This is also the key difference from the Krauthammer column, which was published before the Wall Street meltdown. W could be forgiven for promoting a "shoot first, ask questions later" foreign policy. He could be forgiven for domestic spying if it truly keeps us safe from another terrorist attack on U.S. soil. W could be forgiven for acting unilaterally when he felt compelled to do so, even though I think we all remember then-Secretary of State Colin Powell's briefing to the UN Security Council regarding the threat in Iraq. So what if Saddam's WMDs were a figment of his imagination and little more than a ruse to keep the Iranians from attacking? In 2003, everyone agreed they were a real problem. I even think W can be forgiven for his line about looking into Putin's soul back in 2001, as ridiculous as that seems now.

I think Bush will retire to his ranch in Crawford, TX (and everything is bigger in Texas, haven't you heard?), and perhaps have some measure of peace in the months following his departure from the White House. How long can he cut brush? How much mesquite is there in Texas? Would a following administration really put W on the road for sensitive diplomatic missions, as W's father and Bill Clinton have done together? Could you imagine W in France next year, cheering on THE GREAT COMEBACK by Lance Armstrong? It boggles the mind.

If nothing else, W in January becomes fair game for the SNL animation "The X Presidents" as part of their TV Funhouse lineup. So we at least have that to look forward to.