What Citi Got for Christmas: Its Very Own TARP Program

I’ve never set foot in a Build-A-Bear-Workshop, and I fervently hope I never will. But I'm trying to keep up with the activities at Hank Paulson's Build-A-Bailout Workshop.

Every time we look up, Mr. Paulson has adorned his bailout with a new frill or furbelow. His latest flourish, announced on January 2, is called the “Targeted Investment Program.” In its press release, Treasury explained that this was the program “under which the Citigroup investment that was announced on Nov. 23 was made.” An odd statement, since no such program existed back then.

In fact, as late as last week, the Targeted Investment Program failed to make an appearance in Treasury's December 30 response letter to the Congressional Oversight Panel, which proudly outlined 19 other bailout programs and initiatives.

Before the January 2 press release, as I pointed out in this post, there were only two publicly announced programs that could have covered Citi’s November handout: the Capital Purchase Program (CPP) or the Systemically Significant Failing Institutions Program (SSFI), otherwise known as AIG-Land.

Turns out there was, as Bill Clinton used to say, a Third Way: Mr. Paulson injected more cash into Citigroup, then invented the Targeted Investment Program (TIP) to explain what he'd done. Funny, the Treasury's official description of the TIP looks an awful lot like its official description of the SSFI. But the TIP is broader; it lets Treasury come to the rescue when there’s a “loss of confidence” in an institution and the markets are freaking out, while the SSFI requires the threat of an institution's “disorderly failure.”

Gee, if all it takes to get bailed out is for people to lose confidence in you, Mr. Paulson could be bailing himself out any day now.

Note: I've corrected this post. An earlier version said that Treasury's response letter to the Congressional Oversight Panel listed all the programs in effect under the TARP. Actually, Treasury just said it was listing "many of the actions" it had taken. My mistake aside, the letter's failure to mention either the TIP or the huge Citi bailout is just plain weird.

Image source: PR Newswire

Financial Oxymoron of the Year: The Envelope, Please

OK, it's that time again. (Or maybe it was that time a few days ago, but whatever.) Here comes Proxyland's second annual, and slightly renamed, Financial Oxymoron of the Year Award.

Whatever you might say about 2008 - and you've probably said it - this was a great year for oxymorons. Our 2007 co-winners - risk management and financial engineering - pulled a Brett Favre and returned to competition. As the subprime market unraveled early in the year, mortgage-backed securities looked like the oxymoron to beat. In September, Fannie and Freddie's implied guarantee edged ahead.

As the year wore on, analysts warned of an Oxymoron Bubble. Nearly every two-word phrase on the business page seemed to qualify. To wit:

financial services
financial system
market discipline
government oversight
business judgment
free market

Let's throw in Federal Reserve. And is it too soon to add modern civilization? OMG, I need to get a grip.

No way can I decide, so I'm just going to treat these cute oxymorons like a bunch of Wall Street traders at bonus time. In other words, everyone wins! But if you twist my arm to pick one, I'd probably go with market discipline, which a certain Mr. Greenspan once called "the first line of regulatory defense in protecting the safety and soundness of the banking system."

Oh, and Happy New Year --which is not, as of yet, an oxymoron.


photo credit: photoshoptalent.com

TARP Mysteries Abound, and Citi is One of 'Em

(Update: The mystery has been solved! Read all about it.)

Last week's 38-page report by the Congressional Oversight Panel for Economic Stabilization – or the COP, as they cutely call themselves - asked ten questions about the TARP. Ten very good questions. To save Mr. Paulson and Mr. Kashkari some time, I’ll boil the ten down to two:

1. Hey, is there any rhyme or reason to what you guys are doing with that TARP money, or are you just making it up as you go along?

2. Have all those billions done any good, and how the heck would you know anyway?

Buried in one of the ten questions is a Citigroup-related mystery. Why, asks the COP, has Treasury made Citi – but not the other banks receiving TARP funds - play along with the FDIC’s mortgage modification program?

One possible explanation: Citi’s second bailout may have taken place not under the humdrum CPP (Capital Purchase Program) but the more hands-on PSSFI (Program for Systematically Significant Failing Institutions). If so, Citi is now keeping company with the likes of AIG. I recently heard a smart lawyer say that it was "unclear" which program the second Citi bailout fell under. Why is it unclear? Because, I assume, no one wants to tell us. And if no one wants to tell us, the answer seems obvious.

The first time Citi got TARP money, its 8-K said the money came from the Capital Purchase Program. The second time, however, the 8-K just said the bank was getting dough under the TARP, with no mention of the CPP, which seems a bit suspicious.

I can understand why Treasury wouldn't want to come out and call giant Citi a “failing institution." That sounds way too scary. Perhaps they should follow the lead of the Australian educators who've banned the term “failure” from schools, replacing it with “deferred success.”

Dear Citigroup: Happy holidays, and please accept our sincere wishes for your deferred success.

The Unbearable Weirdness of TARP Contracts

In my last post, I complained that our esteemed Treasury Secretary was handing out cash to banks without making sure they'll use it to help un-freeze the credit freeze.

To be fair to Mr. Paulson (not that we're ever unfair), the standard agreement that banks sign to get cash infusions does contain this lovely language:

"WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and
businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy."

and

"WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market."

But here's the thing: These earnest promises show up only in the "whereas" clauses - part of what lawyers call the "preamble" or the "recitals" to the contract - not in the contract itself.

I don't pretend to be a law professor, or any kind of expert on the enforceability of stuff that gets stuck in the preamble to a contract. However, as a lawyer I can say with conviction that if you really want the guy on the other side of a contract to do something, you put that in the main part of the document, not in the preamble.

In five seconds of careful research, I found this lawyerly blog post on preambles. It says that under New York law - which, as it happens, governs these Treasury agreements - "a term appearing in a recital ... is not part of the contract." So maybe the banks are off the hook. Or maybe not. Bring on the law professors.

Like so many aspects of the bailout, the deal between Treasury and the banks is fuzzy, so fuzzy that even lawyers can't figure out exactly what it is. Meanwhile, our nation is left to ponder more and more mysteries: things like "Katy Perry, why do you exist?" and "banks, are you going to lend out your stupid bailout money or not?"

TARP Money: Lend It If You Like

Hank Paulson was once a tree-hugger. In happier days, he served as Chairman of the Nature Conservancy, though you won’t find that in his official Treasury bio.

Now Hank is a bank-hugger. He gives banks a few million (or a few billion), they hand him some preferred stock, and off they trot. Maybe they lend the cash to credit-starved businesses and consumers, maybe they stick it in the office Secret Santa fund. Whatever.

The lucky recipients like to imply - but not promise - that they’ll use the money for loans. Take this artful sentence in yesterday's press release from Washington Banking, announcing Treasury's approval of $26 million in TARP funding:

“Our ability to meet the needs of our customers and the communities we serve will be further strengthened by these funds.”

Very nice, but does this mean the bank plans to lend out its HankBucks? Dunno.

Perhaps I’ll send a loan application to Center Financial, which announced a $55 million commitment from the TARP last week. Center has big plans for its TARP take:

“While increasing Center Bank’s lending capacity to continue supporting the financial needs of small and middle-market businesses in our communities, the additional capital will enhance the company’s liquidity and further our ability to capitalize on strategic opportunities.”

Sounds good, but does increased “lending capacity” equal more loans? Again, dunno. And how much of the $55 million will they spend on "strategic opportunities"? And what the heck do they mean by that, anyway?

As long as we're asking questions, here’s a musical one. You sing, I’ll play the harmonica:

How many bucks must banks get without strings
Before you call it a scam?

The answer, my friend, is...well, I think you know.

Into the Lifeboat, Citigroup Bonuses!

Around the middle of last week, as traders joked about Citigroup and the Titanic, New York City went into a deep freeze. This was fortunate, since it's harder to fling oneself over the windowsill once you've installed storm windows.

I applaud the folks who wrote the 818-word term sheet for Citi's asset guarantee. This is an amazingly brief document, considering that yesterday I signed a 5-page agreement just to download a free software upgrade. Rounding the Citigroup deal to $300 billion, it works out to $366,748,166 per word.

Still, they made room for this paragraph about compensation for Citigroup executives:

"An executive compensation plan, including bonuses, that rewards longterm performance and profitability, with appropriate limitations, must be submitted to, and approved by, the U.S. Government."

Please excuse the italics on "including bonuses." I couldn't help myself.

But, really, this wasn't surprising. Conservation of Bonuses is one of the natural laws of Proxyland. And just think - those two words cost us only $733,496,332.

Risk Management At AIG: A Few Choice Words

I’ve been busy studying Depression-era slang. Apparently, that historic period gave us “boondoggle” (1935), “baloney” (1928) and “cojones” (1932).

But I took a break to check out the term sheet for Treasury's latest deal with our friends at AIG: last week's $40 billion preferred stock investment, which, per Treasury's press release, is “part of a comprehensive plan to restructure federal assistance to the systemically important company.”

Having sold us taxpayers this nifty preferred stock, AIG has a month to “establish...a risk management committee of... AIG’s Board of Directors that will oversee the major risks involved in AIG’s business operations and review AIG’s actions to mitigate and manage those risks.”

I take it, then, that AIG - whose risky deals have made it a recidivist recipient of behemoth bailouts - still does not, um, have such a risk management committee? And that Mr. Paulson didn't make them set one up when he lent them $85 billion in September?

How is this even possible?

Hank, Hank, Hank. This is the kind of thing that makes folks think this bailout boondoggle is a buncha baloney. Go and get yourself some cojones, before it's too late.

Paulson Wimps Out On Executive Pay

Last week I praised Mr. Paulson for attacking one obvious flaw in the bailout bill's executive compensation limits: the Stan O'Neal Memorial Loophole, in which you fire a guy but pretend he left for some other reason so he can keep his golden parachute.

Does this mean I’m loving the way Treasury is carrying out Congress's orders to crack down on excessive compensation at bailed-out banks?

Heavens, no.

First of all, Mr. Paulson is doing the bare minimum the law requires, although he has broad powers to set "appropriate" compensation standards. I can promise you that if I'm appointed Treasury Secretary, I’ll have a lot more fun with this authority.

And in an act of extreme naivete, or extreme cynicism, the current Secretary is putting his trust in the firms’ own compensation committees, those souls of generosity who helped bring about this enjoyable economic moment.

One of the most useful tools in the bill - potentially - is Congress's directive to get rid of compensation plans that could inspire executives at bailed-out firms to take "unnecessary and excessive risks.” But Mr. Paulson has merely delegated this job to each firm's compensation committee, with a few vague instructions. For example, he tells the committees to meet with senior risk officers - once a year - to contemplate the “relationship” between compensation and risk management. Once a year? I'm choking on my gummi bears here, and it's really hard to choke on those things.

And Mr. Paulson’s compensation rules cover only the CEO, CFO and the next 3 highest paid officers. This crazily leaves out many of the traders who got us into this mess, and the ones who'll probably get us into the next one.

Also, as Carl Icahn pointed out on his blog, the golden parachute ban doesn’t kick in unless a severance package adds up to triple an executive’s annual pay. So a bailed-out CEO who’s been averaging $10 million in salary and bonus for the last five years could still get fired for incompetence and head off to Golfland with $29 million in severance.

I suspect boards won’t take advantage of that particular loophole in the immediate future, as they won't want to risk the slings and arrows of Andrew Cuomo and Henry Waxman. But, jeez, Hank, this is no time to be such a wuss. Get out there and have some fun.

AIG, Cuomo, and a Possibly Haunted Hunting Lodge

Perhaps you heard about the $86,000 trip AIG executives took, post-bailout, to an English hunting lodge named Plumber Manor. Surely AIG could have defended itself by pointing to some of the joint’s poor reviews on TripAdvisor: One visitor termed the service “appalling,” while another complained of “massive cobwebs hanging from the bathroom ceiling.”

But, after getting a nasty letter from New York State Attorney General Andrew Cuomo, AIG head Ed Liddy decided to skip the cobweb defense. Pronouncing the company "very grateful for the guidance of Attorney General Cuomo," Liddy promised not to spend any more on “junkets” and said he'd help get back some of the millions in severance paid to ousted executives like former CEO Martin Sullivan.

In his letter, Cuomo threatened legal action if AIG didn’t cooperate. News reports implied Cuomo had discovered some secret weapon in New York law that allowed him to snatch excess compensation back from overpaid executives. “Where have you been all my life, secret clawback law?” I wondered.

However, Cuomo’s “new toy,” as law professor Dale Oesterle called it on his blog, turned out to be something old: calling AIG's expenditures a “fraudulent conveyance” under New York’s debtor/creditor statute. This is a tool you’d find in the laws of every state. The idea is that a business that’s going bankrupt can't give out cash to its friends and then greet creditors at the door with an empty piggy bank and mournful puppy eyes.

According to the skeptical Professor Oesterle, Cuomo’s trick would work only if he could prove AIG was insolvent when it signed the compensation deals, which was long before the bailout in some cases. (If so, the wording of Cuomo’s letter was kinda sloppy; he talked about money being spent “as the company slipped towards insolvency.”)

But law professor Jonathan Lipson cheered Cuomo on, scorning “accounting and bankruptcy wonks" who say "proving insolvency is a fool’s errand.” In fact, Cuomo is thinking “WAY TOO SMALL,” says Professor Lipson. (His caps, not mine.) He argues that, since all the profits made by some banks and investment banks over the last few years have vanished, maybe “they actually weren’t so healthy financially after all. Which may mean that all those bonuses and crazy severance packages... should, in theory, be as vulnerable as Joe Cassano’s $1 million/month consulting fee at AIG.”

I’m not afraid of cobwebs, so I suggest we all repair to Plumber Manor for Halloween and discuss these legal niceties by the fire.

A Bull Market in Compensation Rules

In a noble and unsung effort to bail out lawyers and compensation consultants, last week the Treasury Department announced 3 separate sets of executive compensation rules under the bailout bill.

The first set of rules, which I posted about yesterday, kicks in when banks get a direct capital infusion (in what Treasury’s now calling the CPP, or Capital Purchase Program).

A second set of rules will hit if (when?) Neel Kashkari (that loyal Robin to Mr Paulson’s Batman) starts buying mortgage-related assets from banks using some kind of auction process. They're calling this program the TAAP, which I hope doesn't piss off the Texas Association of Addiction Professionals.

Then there's a third set of rules for direct purchases of really crappy assets. This is the Direct Purchase Program, or DPP, which also includes the PSSFI, or Program for Systematically Significant Failing Institutions. I've put these aside until I shed the carbohydrate brain fog from the jumbo bag of potato chips I swallowed to get through the first two.

Some banks could end up being covered by more than one of these at a time. And the IRS is spewing out lots of new compensation rules for the bailout as well.

Thoroughly confused? Try this handy chart, courtesy of Cleary Gottlieb, where all the lawyers really are above average. Still confused? Feel like you need an attorney or consultant to explain all these rules? Wonderful! Spending during a recession is so patriotic.

Speaking of Batman and Robin, in the 1997 film of that name, the heroes fought a villain named “Mr. Freeze,” played by Arnold Schwarzenegger. Turns out the guy's first name was Credit.

Note: This post has been corrected. I made a mistake, but I'm not going to tell you what it was.

Paulson Is Mean To Golden Parachutes

There's a chance that Bailoutland could turn out to be a pretty gloomy place for CEOs accustomed to life on the sunny slopes of Proxyland.

Under the bailout bill, banks at which the Treasury throws capital aren’t allowed to make “golden parachute payments” if they boot out top managers - not until we taxpayers and our money are outta there, at least. Mr. Paulson, in guidelines put out last week, is valiantly trying to prevent the banks from fudging their way out of this one. (The IRS, with its related rules, is doing the same.)

The golden parachute ban technically applies only when an executive's departure is “involuntary” - what you and I would call getting fired. But in the magical place that is (or was) Proxyland, lawyers' nimble pens have transformed many a firing into something more pleasant-sounding, and more lucrative. For example, you may remember how Merrill, after announcing stunning losses, said Stan O’Neal had suddenly decided to take his $161 million and “retire.” (If only we’d had Sarah P. around back then to help with the winking.)

But Paulson's guidelines are wise to such alchemy. They explicitly pooh-pooh some of Proxyland's time-honored methods for hiding an involuntary termination, like letting an employment contract expire or having the executive resign for “good reason.” Nice try, say the guidelines, but if the facts show the guy was really fired, there’ll be no golden parachute.

How well this works will depend on whether boards tell the truth and - if they don't - whether the feds have the will (and the resources) to second-guess the pretty stories told to protect the feelings, and severance packages, of fired executives. And the guidelines are full of loopholes that might be fun to blog about. Nevertheless, the air of sour cynicism wafting through these rules feels like a refreshing breeze.


*******************************************************************************************
If you like reading about this executive compensation stuff, you should check out Michael Melbinger's blog, which I've just stuck on my blogroll. We need all the help we can get.

Image source: Daylife.com

Do Paulson and Bernanke Watch "House"?

I doubt Mr. Paulson and Mr. Bernanke have time to enjoy prime-time TV. Too bad, because their economic interventions are starting to resemble an extended episode of House, minus the snappy dialogue.

For those of you who don’t watch the show, Dr. House is this brilliant but misanthropic guy who diagnoses mysterious life-threatening ailments using a reckless trial and error process. In the first third of the show he typically kills the patient, who then gets revived with those jumper cable thingies. Then he pumps the victim full of powerful meds, bringing on internal bleeding, liver failure and/or a brain aneurysm. This somehow helps House to figure out what's wrong and, after more jumper cables, to find a successful treatment that usually involves drilling a hole in the patient’s skull without anesthesia.

You can pretty much count on the fact that, 2/3 of the way through each episode, the patient will be on life support and no one will have any idea which symptoms come from the underlying disease and which come from House’s ministrations.

With the economy in critical condition, Bernanke and Paulson have administered, all at once, a barrage of drastic and experimental treatments. It’s too soon to tell if these moves have been wise, though you have to admit they’ve been gutsy. But as this article in yesterday’s WSJ points out, the cure and the disease are starting to merge.

The authors, Liz Rappaport and Serena Ng, give a bunch of examples of how government intervention is skewing markets. For example, the spread on Fannie bonds has risen because money managers are drawn to bank debt, with its shiny new FDIC guarantee. The commercial paper market is discombobulated because there are different backstops for different products. And looking forward, the cost of the bailout (and Barry Ritholtz points out that it's way beyond $700 billion) will force the government to issue more debt, raising yields on Treasuries. This will probably drive up mortgage rates, which could further slow the pulse rate of the housing market.

Let's hope the Federal Reserve has stocked up on jumper cables.

Image source: fox.com

Iceland's Female Bailout

Today we're giving out the “No, Really, I Double-Swear This Headline Isn’t From The Onion” award. And the winner is this Financial Times story: Iceland Calls in Women Bankers to Clean Up ‘Young Men’s Mess’.

Yes, reports the FT, “Iceland has turned to two women to rebuild its financial system after the banking empire built by its young, male business-schooled elite collapsed.” So Iceland’s two nationalized banks, New Landsbanki and New Glitnir, are now being run by Elin Sifgusdottir and Birna Einarsdottir. (Iceland has these nifty gender-based surnames, so you never have to worry about how to address a business letter to someone with a first name like Terry.)

The story quotes an anonymous government official (gender unidentified) who remarked: “It’s typical, the men make the mess and the women come in to clean it up.”

That's cool, Iceland, but Norway is way ahead of you. Two years ago I noted that the Oslo Stock Exchange had decided company boardrooms should look less like Monday Night Football and more like The View. They began imposing a female quota - a whopping 40% - for boards of directors at companies listed on the exchange. And the vast majority of firms have now managed to get there, kicking out a bunch of men in the process.

I have no empirical proof that all those women in Norway’s boardrooms have something to do with the fact that the country's banks are still healthy. But if you try to talk me out of this idea, I swear I’ll scratch your everloving fjord out.


Image source: Britannica.com

Carl Icahn Starts a Club

A couple of weeks ago I mentioned Carl Icahn’s rant about big fat lazy do-nothing rubber-stamping corporate boards.

Since then, some of us have become distracted by other events, but not Carl. He’s continued blogging heartily about the clueless and lackadaisical behavior of nicely paid outside directors. And, hey, it's hard to argue with that one. Check out his latest post on Lehman. (How mean of Nell Minow to note, during last week's Congressional hearing, that the risk management committee of Lehman’s board met only twice a year during 2006 and 2007, and how mean of Carl to repeat it.)

But while CEOs like Richard Fuld sweat before Congress, and Anderson Cooper broadcasts mug shots of his "10 Most Wanted: Culprits of the Collapse," boards have mostly gone missing from the rogues' gallery.

So when the angry torch-carrying mob passes by, Carl will be there to wave it in the direction of directors. (“Get ‘em, guys! They’re up in the skybox!”) To that end, he's forming a new group, the United Shareholders of America. The idea is to get enough pissed-off shareholders together to counter folks like the Business Roundtable, who have gloriously defended entrenched boards against compensation caps, proxy access and other threats to the American way of life.

If you're so inclined, you can join the group right on Carl's blog.

I know why he's calling it United Shareholders of America. Those wasteful managers who make Carl so mad should watch and learn, because he sure knows how to save money. Every time Joe Sixpack yells “USA” at a political rally, Carl’s group gets free publicity.

Image source: epikwhite

Those Mustard Seeds in the Bailout Bill

I love this section of the bailout legislation because it sounds as if Congress is writing a cookbook:

Paragraph (2) of section 40A(d)...is amended by striking "and mustard seeds"... and inserting "mustard seeds, and camelina."

There's a lot to hate about what happened in Washington last week, and not just the pork. For example, people are skeptical about the legislation’s recipes for making executive compensation less yummy. And sure, it would be more fun to stick CEOs in the stocks (you know, the kind the Puritans put in public squares) and make them watch endless footage of Lou Dobbs and/or Sarah Palin.

But there’s a chance these compensation and governance provisions could end up biting some executives. Like the rest of the bill, these sections give the Treasury Secretary mucho mucho discretion. Mr. Paulson, given his Goldman roots, isn’t likely to get creative on compensation matters. But soon we'll have a new President, and almost certainly a new Secretary.

The legislation says that if a financial institution sticks Treasury with assets so crappy that “no bidding process or market prices are available” and the feds take a “meaningful” share of the firm's debt or equity, Treasury “shall require” (nothing optional here) that the institution “meet appropriate standards for executive compensation and corporate governance.”

With a little imagination, this mandate could force real change, at least at firms that are desperate to unload stinky securities. The bill lists some serious compensation and governance standards, and I don’t see anything that stops Treasury from adding others. How about by-laws mandating proxy access? Or perk policies giving executives the same cars the Shriners get?

The legislation tells the Secretary to trash compensation plans that motivate folks "to take unnecessary and excessive risks that threaten the value of the financial institution." (Again, this applies only when Treasury buys securities from the institution in a no-bid process.) Hmm...how do you make corporate dice-rolling less attractive? Well, you could allow only 1950s-style fixed compensation. You know, like salary?

This would be considered extreme and radical in Proxyland, but watch out, financial industry CEOs. The next Treasury Secretary could be Charlie Munger, Ben Stein or Ralph Nader. Like mustard seeds, these guys pack a nasty punch.

Image source: yakimite21

Reader's Digest Covers Its Ears

I, like the Dow Jones average, stupidly assumed the House would pass that bailout. Now I’m mad. I can overlook the fact that my kids’ college savings are melting faster than this town in Alaska, but knowing I wasted several hours reading a 110-page bill and drafting a blog post about it has jacked my Outrage Index up to Lou Dobbs levels.

This, BTW, is not that blog post.

If the House of Representatives can afford to take a day off from fretting about financial Armageddon, surely Proxyland can too. So this seems like a good time to post about a random SEC filing.

Apparently, talk of increased regulation is bad news for Reader’s Digest Association. According to its 10-K, filed yesterday, the mere utterance of the R-word threatens the firm's financial health:

"Our results could... be adversely affected because of public statements or actions by market participants, government officials and others who may be advocates of increased regulation, regulatory scrutiny or litigation. "

Given the number of lips now flapping on these particular subjects, poor Reader’s Digest could be in for some rough months. Fortunately private investors acquired the company last year, so the rest of us can’t further screw up our equity portfolios by investing in it.

OK, here comes a confession of ignorance. The sentence quoted above comes from a paragraph in the MD&A that seems somehow to relate to the performance of Standard & Poor’s. Despite applying my finely honed seat-of-the-pants research techniques, I still can’t figure out what on earth S & P, a McGraw-Hill subsidiary, is doing in this Reader's Digest 10-K.

The world is so confusing lately, and not just to Sarah Palin.

Image source: nbc.com

Bailout Bill Dumps Proxy Access

I wasn't sure we really needed the bailout until I heard that Mr. Paulson got down on his knees and begged. I guess they'll have to put moveable joints in his action figure now.

After hearing that shocker - and a few harrowing tales from folks who work on the street formerly known as Wall - I slinked over to my bank and took out extra cash. I'm worried that if the global financial system crashes, everyone will point the finger at me and my $300 ATM withdrawal, although I plan to blame that bald guy behind me in line.

I see, per the draft bill, that the Democrats have dropped their attempt to stick in proxy access, something that floated by in a draft of the legislation earlier this week. I can't blame them for trying; after all, opponents of proxy access have argued that it would destroy the foundations of capitalism, but that seems rather a moot point.

The august body that is to monitor Treasury's shopping spree will, it appears, be called the Financial Stability Oversight Board. OK, everyone on the House Acronym Committee should be voted out in November. I don't know whether to cry or curse.

p.s: Just saw this 60 Minutes piece in which Paulson and Pelosi claim the kneeling was all in fun, just a way to lighten a tense moment. Guys? Next time use a whoopie cushion.

Image Source: Corbis

Attention MBS Shoppers!

Gosh, I sure hope the bailout happens, because Warren Buffett says it'll be lots of fun. “I would love to have 700-billion at Treasury rates to be able to buy fixed-income securities now that they're in distress," he said. "There's a lot of money to be made.”

Yes, he actually used the word “love,” and then gushed enviously: "If I could borrow 700 billion on the government's terms and buy these assets I'd be doing it myself. But unfortunately I'm tapped out.”

Aw, Warren, don't feel bad. When I get my new CDOs, I'll be happy to trade them to you for some Berkshire Hathaway stock.

Having fought off the cynical thought that Mr. Buffett is playing Tom Sawyer and you and I will soon be whitewashing a fence somewhere in Omaha, I'm eager to start shopping at MBS-Mart! But that still leaves the pesky issue of how much Mr. Paulson should pay at the checkout counter.

Mr. Buffett weighed in on that one, too: ”I basically like a market, or something very close to a market-related price. And there are ways to determine that and I don't think that Uncle Sam should be in the business of paying somebody a whole lot more than it's worth in the market today.”

But what will happen to market prices when the market notices a 700 billion-pound gorilla lurching around with cash hanging out of its pockets, mumbling something about hold-to-maturity values? Perhaps, with this bailout plan, we have met the market and it is us.

*****

Some not-so-bad news: According to my friends at the witty-yet-eggheady Liscio Report, we can sort of afford this bailout.

Some not-so-good news: I just remembered this post I did for footnoted a couple of months ago about Wall Street valuations.

Image source: Unfocused Content

Buffett and Icahn Scold Directors

I don’t get the sense that Carl Icahn and Warren Buffett hang out together. But as they watch Hank Paulson's new game show, "So You Want To Be A Risky Mortgage-Related Products Investor," both are suggesting that outside directors get paid too much.

The two have different styles: While Carl rants, Warren usually stays calm and lets his BFF Charlie Munger say the really mean stuff. So Carl trashed overpaid directors in a peevish blog post, and Warren chided them gently in an interview.

Take it, Carl:

"Total director remuneration at the largest American corporations is running over $1,000 per hour, according to the study by Steven Hall & Partners. With many U.S. corporations struggling, why are we paying board members all this money? Lehman's board members, for example, were paid just short of a half million dollars each last year...I would appreciate it if someone would advise me of what those board members did to deserve that compensation? Can any board member of these collapsed financial institutions claim to have truly monitored the risks their companies were taking?...If the boards did their jobs, many of the problems today would probably not exist."

Warren?

"I think they should punish, in many cases, the people -- I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years...."

I'll take Carl’s word for it that Lehman paid its directors nearly $500K a year. Definitely on the high side. I checked AIG's last proxy, and its directors all made north of $250K. Not astronomical, but Robert Willumstad (who was non-management Chairman at the time) raked in $435K.

AIG was also kind enough to donate over $500K last year to the Asia Society, an organization chaired by another outside director, Richard Holbrooke. (He resigned from AIG's board this past July.) The proxy proclaimed that this donation wouldn't impair Mr. Holbrooke’s independence in the least, plus it would “enhance AIG’s reputation and standing in Asia.” Dunno, the Asia Society is a lovely institution, and located right around the corner from my dentist, but I wonder how that reputation thing is working out.


Image source: Turbo Squid

Pay It Backward, Paulson

Dropping by the Senate Banking Committee this morning, Hank Paulson pointed his bony Ghost of Christmas Future finger at both "bad lending practices by banks" and "borrowers taking out mortgages they couldn’t afford."

Fascinating, how the current woes of Wall Street megatitans are linked to low-income borrowers at the opposite end of the socioeconomic spectrum. It's like a hokey movie where, through some improbable plot device, two people who can't stand each other get handcuffed back-to-back and must work together to escape.

Here’s a suggestion, Congress. Don't try to put limits on Wall Street compensation; there's no time to structure them properly, and lawyers and consultants will just loophole their way out. Instead, claw back some of the millions Wall Street CEOs earned over the past few years and use them to backstop mortgage payments for those who face foreclosure.

Under my French Revolution Plan, everyone wins. Folks will keep their homes, and with mortgage payments assured, the market for mortgage-related junk should become more liquid. The credit markets will thaw, the stock market will rise. The election will go back to being a silly spat about - what was it, bitter lipstick? Even my hair will cooperate. What a lovely dream.

Sure, I'm advocating a pure redistribution of wealth. Sure, it’s socialism. But so is Prime Minister Paulson’s plan. The time has come for extreme and dangerous action, whether it's a size XXXL government bailout that might or might not work, or women sporting jumpsuits in public.