Sunday, November 30, 2008

Black Friday Sales Up 3% In Nominal Terms from Last Year, That is Negative in Real Terms

Black Friday sales were up 3% over last year. But, let's not get excited about this. This is a nominal growth rate. If you subtract the inflation rate to get a real growth rate it is probably closer to -2.5%. Text in bold is my emphasis. From Market Watch:

Strong discounts brought U.S. consumers to the stores on "Black Friday" -- the traditional first day of the holiday shopping season -- with estimated sales rising 3% from last year, according to industry analyst ShopperTrak RCT Corp.

ShopperTrak said in a report Saturday that preliminary sales for Black Friday totaled $10.6 billion. This year's rise in sales, while lower than the 8% increase seen for the day last year, comes despite plummeting consumer sentiment data and other economic turmoil.

"Retailers should be cautiously optimistic as deep discounts drove consumers en masse to various retail locations to spend, despite myriad economic pressures seen over the last two months," ShopperTrak said.

Black Friday refers to the day after Thanksgiving, so called because many retailers begin to turn a profit on that day, moving from "red ink" to "black ink." Sales for the day are seen as a key harbinger for the overall holiday season.

Regionally, the South led the gains with a 3.4% rise over 2007, closely followed by the Midwest, up 3.0%; the West, up 2.7%; and the Northeast, gaining 2.6%.

ShopperTrak cited retailers' early openings and "numerous door buster specials" and other promotions.

"While this is an encouraging start for retailers, there's no guarantee these deep discounts will continue after Black Friday weekend, which could slow spending," said Bill Martin, co-founder of privately-held ShopperTrak.

"Additionally, consumers have just 27 days to shop this year as opposed to 32 in 2007, which may catch some procrastinating consumers off guard, leading to lower sales levels," he said.

The ShopperTrak National Retail Sales Estimate covers retailers of general merchandise, apparel, furniture, sporting goods, electronics, hobby, books and other related store sales.

Friday, November 28, 2008

A Widespread Defaltion is on its Way

Once again the following deals with the UK, but the same is true for the US. There is currently a widespread de-leveraging taking place in the US. This will result in a deflation in the value of hard assets and a flight to gold and silver as a store of value. Text in bold is my emphasis. From the UK Telegraph:

Deflation is sometimes likened to Dante's Inferno. "Abandon all hope" once you step into that Hellfire.

We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. "The world changed in September," said the Governor.

The Bank's fan charts point to zero inflation at current interest rates of 3pc, but the startling new feature is that price falls could gather pace. This is a clear signal that the Monetary Policy Committee will cut rates again in December – perhaps by a full point to the historic low of 2pc, last seen in the Great Depression.

Mr King let slip yesterday that there is "obviously" a risk of deflation, although he remains sure it can be averted by a pre-emptive monetary blitz. Let us hope he is right.

The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.

We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.

"It is going to be absolute murder in Britain if inflation turns negative," said Professor Peter Spencer from York University. "The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule."
Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop.
(The real risk of deflation - people stop buying because prices will be lower tomorrow.)

It also redistributes wealth – the wrong way. Savings appreciate, which is nice for the "rentiers" with capital. The effect is a large transfer of income from working people with mortgages to bondholders. (These may be pension funds, of course).

The modern warning to us all is the "Lost Decade" in Japan, a loose term for the on-again, off-again slump that ultimately led to zero interest rates and – when that failed – to the printing of money. After 18 years, the Nikkei stock index is now trading at 8,700 – down from a peak of nearly 40,000. House prices have fallen by half. Yet after all the stimulus, the country is once again tipping back into deflation.

Governor King said Britain was likely to avoid this fate. "We've taken action much earlier than was the case in Japan," he said.

Not everybody agrees, even after the shock and awe cut of 1.5 percentage points by the MPC. Albert Edwards, global strategist at Société Générale, has long warned that central banks in the Anglo-Saxon countries have stored up trouble by stoking credit booms, and may find it harder than they think to engineer a soft-landing.

"This could easily go the way of Japan. It is true that Bank of England has moved faster, but Japan was a local bubble. This time it is the 'great unwind' on a global scale with leverage spaghetti everywhere," he said.

"The monetary authorities don't have foggiest idea themselves whether this is going to work. They're crossing their fingers and hoping," he said.

Nor is it clear whether rate cuts are gaining much traction. The average rate of tracker mortgages has risen 72 basis points since last month, and credit card rates have been rocketing. The Bank's transmission mechanism is not working properly. This a variant of the 1930s struggle when the central banks found themselves "pushing on a string", in the words of John Maynard Keynes. He called for public works to lift the economy out of its liquidity trap. This is more or less what the US, Japan, China, and parts of Europe are now doing – with more in store after the G20 this weekend. Britain has pitifully limited scope on this front. We had a budget deficit of 3pc of GDP at the top of the cycle – when we should have been in surplus – and we are heading for over 8pc. This is already nearing the danger level. If the Government now lets rip on fiscal policy, we could face a 'gilts strike' as foreign investors retreat from UK debt.

The Bank of England has not run out of ammo yet. It can cut rates to zero if necessary and then escalate to direct infusions of money by purchasing bonds – or indeed by buying a vast range of securities, assets and even houses if necessary. Ultimately it can print money to cover the budget deficit.

As the late Milton Friedman put it, governments can drop bundles of banknotes from helicopters. If they really want to defeat to deflation, they can. Mr Friedman may have overlooked the fact that gunmen can shoot down the helicopter – the Bank of France in October 1931, when it ditched the dollar; perhaps Asian bond investors today? – but that is to quibble.

Professor Spencer says the Bank of England has learned the hard lessons. Without the constraints of the ERM, Gold Standard, or any other fixed exchange system, it retains great freedom of action.

"They are very aware of the deflation risk. They are cutting rates very fast, and if necessary they too will turn to helicopters. But in the end they will keep the wolf from the door," he said.

And the Winner is Gold???

I found the article below from Ambrose Evans-Pritchard to be very interesting. It is similar to what I am beginning to think will happen in the near term - a dramatic increase in the price of gold. Although the dismal scenario (below) is a possibility we, basically, are not there yet. I think a more plausible scenario is that the US (and other western nations) will suffer from lowering currencies values due to tremendous levels of debt needed for the bail-out. This will lead to inflation and an increase in the price of gold. Text in bold is my emphasis. From the UK Telegraph:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.

"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.

"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."

"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Tuesday, November 25, 2008

What is Next for the Economy?

The following from the WSJ is an interesting view on where the economy is headed. In my mind that is the most important question - where is the economy going. Let's face it the credit crisis has already started; the stock market has already fallen 45% and will more than likely fall more; the housing market will take years to come back; the consumer is not spending; the US will have to bail-out the banks, insureance companies, and other financial institutions; the US is headed for a severe recession, the only questions remaining are severity and duration; etc. With all that said where is the economy headed. One big question to be answered will be value of the dollar at some furture date. Right now the dollar appears strong, but that is due to the the liquidation of stock portfolios (have to put the money some place) and the perceived risk of other currencies. But this will eventually end. Then how will the dollar be valued, when coming from a much economically weaker and debt-burdened US?

Text in bold is my emphasis.

With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.

Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."

The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.

In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.

True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.

Monetarist Bernanke and others blame Japan's postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.

There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.

The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.

Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.

Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.

What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.

Monday, November 24, 2008

And the Winner is - - - - China!

The following from the WSJ is an interesting prognostication of what the future holds. Maybe Jim Rpgers was correct in saying that all our children should learn Chinese.

The incoming Obama administration will face formidable challenges, but global economic collapse is no longer imminent. That may be small short-term comfort to the markets and Main Street. But having stared down the abyss, governments around the world appear determined to address root issues. The G-20 gathering of the world's major powers in Washington on Nov. 15 was only the beginning of a long and constructive process of revising the global system.

In the new system the United States will still be the largest economy but no longer the sole determinant of global economic health. The new winners will be cash and China.

Those without cash are in a precarious position. Tens of millions of homeowners and property owners in the U.S., Europe, the Gulf region and Asia have seen the value of their assets decrease sharply. They either have negative equity or insufficient income to make payments. Pension plans and 401(k) accounts have been devastated by a 50% plunge in global equities. Millions of workers have lost or are about to lose their jobs. The U.S. government balance sheet will become even more debt-laden.

But every crisis creates opportunities -- or at least so goes the old Chinese saying. This time is no exception, and China will emerge victorious. As its recently announced $600 billion stimulus package makes clear, those who have cash can spend their way through this global crisis, and China has lots.

The global economy for the past five years has been driven by credit, with cash as currency pushed to the sidelines. With cheap credit, deals got pricier and valuations higher, to the point where some transactions were about as carefully assessed as a Monopoly trade. Now credit is cheap but not readily available. New government regulations and internal risk-mandates will mean that credit won't flow as promiscuously.

There is more cash sloshing around the world than most people think. The problem for the U.S. and to some extent Europe is that this cash is now in unfamiliar places, some of which -- as John McCain reminded us on the campaign trail -- can be found in countries that "don't like us very much."

The McKinsey Global Institute assessment of global financial assets (which includes bank deposits, stocks, bonds and private equity) released earlier this year showed about $167 trillion world-wide at the end of 2006. That figure is now considerably less but still probably three times global GDP, and represents a massive supply of fuel for economic activity. (It would be interesting to see these numbers for the US.)

Tens of trillions in noninvested money (not in stocks or bonds) sit largely unused. Those who have it are hoarding it, unclear about the short term. As the dust settles, however, that cash will be king.

Some cash will be used for purely private gain, for example by vulture real-estate investors in southern Florida, buying up those unused, unwanted and unsold condos at fire-sale prices. Such cash will do little to enhance the public good. But other uses of cash will.

Corporations in the U.S. alone may have up to $1 trillion reserved, and they will begin to pick at deals amid the market wreckage. They are also likely to weigh future cash flow more cautiously. That doesn't mean that all deals will turn out well, but the reliance on cash will temper excessive greed and speculation.

Sovereign wealth funds have cash. After being burned in some of their deals at the end of last year, they have become more stringent. But they still have trillions, and they have every intention of investing that money with an eye on future returns, as demonstrated by Abu Dhabi's recent investment in Barclays, and Saudi Prince Alaweed's raising his percentage to 5% of deeply depressed Citigroup shares.

Private equity and hedge funds also have pools of cash. We hear about the blowups, but not as much about the ones weathering the storm.

In the next few years, these custodians of private capital are likely to assume the role of venture capitalists, merchant bankers and deal makers all in one. They will take on less leverage (by choice or necessity) and put more of their own skin in the game, which is always a good reason for thinking twice and checking your assumptions.

Then there is China. Yes, the balance of power at the G-20 summit shifted toward Russia, Brazil and its hundreds of billions in reserves, Saudi Arabia, and a rich though still economically stagnant Japan. But China remains in a league of its own.

With $2 trillion in central-bank reserves alone, China is cash-rich and almost debt-free. That is true not just for the government but for many individuals. Because there is no mature bond market and the currency remains unconvertible, individuals in China have a savings rate approaching 50%.

To be sure, there have been real-estate bubbles in many Chinese cities, and these have been popping. But China's overall cash position is extremely high, and its dependency on exports is less than most suppose.

The immense stimulus package just announced by China should erase fears of a major Chinese slowdown. Yes, some factories will close because labor is cheaper inland than in the more expensive coastal regions. But the shortfall created by sagging exports will be made up by state spending. Beijing has the money, and the willingness to spend it.

China's actions could also have direct -- and positive -- effects on the U.S. economy. An investment arm of the Chinese government is now deep in talks to buy up parts of AIG. China is already the primary source of growth for many U.S. companies, including ones like Caterpillar that make things in the U.S. and export them to China. As the developed world sags, China is becoming even more important to the global system.

China also needs a vibrant U.S. (and Europe). Beijing will likely take action to prevent a collapse by continuing to purchase U.S. Treasuries. We may not like the fact that China is our creditor, but having no creditor would be a good deal worse.

The U.S. government can spend for a time, provided the dollar remains the currency of last resort and buyers like China keep lending. But as the New Deal showed, and as Barack Obama understands, government alone cannot fuel the economy. Government must jump-start the system when it stalls, but after that, cash and China will drive the recovery.

The Government Bail-Out of Citibank

The article below gives a summary of the US Government bail-out of Citibank. This is important because it could be a model of how bail-outs of large financial institutions may occur. The key is the cash injection and the loss guarantee combined with some loss sharing provision. I am not saying there will be other large bank bail-outs, but we as a country have not even started the process of examining the insurance industry or other large financial institutions that manage investments such an annuties, retirement plans, etc. Text in bold is my emphasis. From Market

The government intends to invest $20 billion in and to guarantee as much as $306 billion of the company's troubled assets in a deal reached late Sunday evening. The agreement also gives the government control of executive bonuses, and it places limits on dividend payments.

The deal would likely make the government the largest Citi shareholder. The U.S. will end up with a 7.8% stake in Citigroup, Chief Financial Officer Gary Crittenden said on CNBC television Monday.

That would surpass the roughly 4.9% stake that the government of Abu Dhabi took in the company last year, and it also tops the 5% stake unveiled last week by Saudi Prince Alwaleed bin Talal.

"The U.S. government's creative ring fencing of Citi's $306 billion in troubled assets is a strong positive for the system and for Citi shareholders," Betsey Graseck, a Morgan Stanley analyst, wrote in an early morning research note.

The deal marks the latest of several government moves to support the financial sector and buoy investor confidence in it.

The Treasury's initial plan to buy up the industry's troubled assets gave way to direct investment in banks to bolster their balance sheets, and Citi has already received a previous $25 billion federal investment.

But, as Citi's shares fell more than 60% in the last week alone, the government decided to try yet another approach to avoid a collapse in Citi and a further loss of faith in the entire U.S. banking system.

It's unclear if the move will be successful, but "the U.S. government is lowering risk while not significantly diluting shareholders, keeping them engaged in the sector," Graseck told clients.

The rescue plan came together after a weekend of intensive negotiations involving the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp., according to published reports.

Federal officials and company management desperately were seeking to avoid a replay of the disastrous failure, and subsequent bankruptcy, of Lehman Bros. earlier this year as stabilization efforts fizzled. Many observers have identified that event as the tipping point between dangerous market and economic conditions into a market crash with potential for a depression.

Citi "reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity," Chief Executive Vikram S. Pandit said in a statement. Citi's board approved the terms.

The lifeline being thrown to the bank represents the first time the government has absorbed bad assets rather than inject money directly into financials. Switzerland's government recently crafted a similar agreement with UBS.

"At some point the handouts have to stop and institutions have to start to take some accountability for what happened. Nobody wants to see Citi go into Chapter 11, but some type of sale or merger would likely have been the scenario preferred by the market," Aite Group analyst Christine Barry said.

The key provisions of the Citi bailout include:

The Treasury will inject $20 billion of capital, on top of a $25 billion federal infusion that was already dispatched.

The government will guarantee a roughly $306 billion pool of Citi's troubled assets, including mortgage-backed securities. Citigroup must absorb the first $29 billion in losses and 10% of anything beyond that.

Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses.

Any losses on bad assets beyond that level would be taken by the Fed. The guarantees will be for 10 years for residential assets and five years for nonresidential assets.

Citi said it would issue $7 billion of preferred stock with an 8% dividend as payment for the guarantee.

Citi said it would issue warrants to the Treasury and the FDIC for some 254 million common shares at a strike price of $10.61.

The government must approve all executive compensation, including bonuses.

Effective with the payment of the next dividend on common stock, Citi agreed not to pay out more than 1 cent a share for three years.

Citigroup previously agreed to issue the government preferred shares in return for the $25 billion the bank received as one of the first nine companies to get capital infusions.

After the deal, Citi's Tier 1 capital ratio at Sept. 30, on a pro-forma basis assuming the October capital injection and the new capital announced on Sunday, is expected to be 14.8%, the banking giant said. Its tangible common equity would be about 9.3% of risk-weighted managed assets, Citi said.

In addition to $2 trillion in assets it has on its balance sheet, Citi has another $1.23 trillion in entities that aren't reflected there, according to reports. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books, The Wall Street Journal reported.

Up until last week, the financial markets had shown signs of recovering some confidence and stability as the shock of Lehman's September bankruptcy began to ease.

On Sept. 15, Lehman filed for Chapter 11 bankruptcy protection, ending the 158-year-old Wall Street firm's run and rattling the foundation of the global financial system.

Lehman's tentacles ran deep across global markets, and investors panicked as debt defaults sparked misery around the world, forcing selling by institutions and hedge funds and triggering the catastrophic "breaking of the buck" at one of the nation's most important money-market funds.

While Citi's difficulties are different from Lehman's, analysts said any disorderly breakdown at Citi would surely have sparked further chaos.

Citi's crisis came in spurts, as the bank has reported about $20 billion of losses over the last year amid huge writedowns for soured investments.

At this time a year ago, the stock market valued the company at about $180 billion. As of Friday morning, its market capitalization stood at $20 billion -- and its once-proud share price had shriveled to $3.75, a 16-year low.

Last week, short sellers focused on the perfect storm surrounding Citigroup. Its shares were sold in unprecedented volume as the concern about the scale of recently unveiled job cuts added to fresh fears about a quickly deteriorating commercial real estate market, as well as a surprise decision by the Treasury earlier this month to forgo purchasing troubled assets from firms like Citigroup.

That latter move by the Treasury likely prompted Citi's decision to bring about $17 billion of bad assets from a subsidiary onto its own balance sheet, sparking a probable charge of up to about $1 billion.

No one knows for sure how many assets like that Citi may have to haul onboard its balance sheet, and what kind of losses it could spark.

Should the company absorb many bad assets and take write-downs, that would eat into profits and, if it goes on long enough, eat away at core capital.

Even before the mortgage-fueled credit crunch, Citi and other banks faced calls to reorganize the company and even split it up.

Citi was created, under the guidance of Sandy Weill, by an acquisition binge in the 1990s that culminated in the merger between insurer Travelers and Citicorp. But the vision of a financial supermarket eventually came apart and Travelers was sold to MetLife

Saturday, November 22, 2008

This Weekend's Contemplation - The President Elect and China are Stepping Up

At least we are not hearing that crap about the "US is fundamentally sound" from the new President Elect. He wants everyone to understand that it is going to take awhile to get out of the mess we are in. Also China is beginning to take its position in the world as a new economic power. I am not so sure it is replacing the US as much as it is rising to the occasion given its new found wealth. Where is Russia in all of this? Maybe it is busy beating up on little countries like Georgia.

"The Times They Are A-Changin" - old (1963) Bob Dylan song.

By the way for those of you that are too young to know who Bob Dylan is try the following from YouTube.

Text in bold is my emphasis. From Yahoo:

U.S. President-elect Barack Obama said on Saturday he was crafting a two-year plan to fight an economic crisis of "historic proportions" and Chinese leader Hu Jintao said his country was ready to play a big role in the global effort.

Hu, U.S. President George W. Bush and other leaders at the Asia-Pacific Economic Cooperation forum called for a global free trade deal to offset the economic crisis.

U.S. automaker General Motors Corp was considering "all options," including bankruptcy, because of its liquidity problems, according to The Wall Street Journal.

Citigroup Inc was in talks with the U.S. government amid doubts about its ability to survive.

Obama, who takes over from Bush on January 20, said, "There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better."

He was speaking in a radio address on Saturday, the day after reports that he had chosen New York Federal Reserve President Timothy Geithner as Treasury secretary rallied stock markets.
Obama, a Democrat, said swift and bold action was needed to prevent a deep slump, a spiral of falling prices and millions of job losses.

He signaled he was prepared to push for a much larger package than the $175 billion stimulus measure he called for in his election campaign. His plan would set a goal of creating 2.5 million more jobs by January 2011.

"The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions," Obama said.

In Lima, Chinese President Hu said the Asian powerhouse would work alongside the international community to strengthen cooperation and protect international markets.

China has been a major driver of the world economy as its rapid expansion fueled demand for raw materials. But with so many troubled countries looking to China to ease their financial woes, Beijing had been wary of taking a leading role.

"China is within the scope of its abilities taking major efforts to address the financial crisis," Hu said in a speech to business leaders.

This included providing support for liquidity for domestic financial institutions and coordinating macroeconomic policy with other countries.

The Wall Street Journal said General Motors was considering "all options" because of its liquidity problems. A GM spokesman told the paper that management was doing everything it could to avoid a bankruptcy filing.

Chief Executive Rick Wagoner, along with bosses from Ford Motor Co, and Chrysler, went to Capitol Hill this week to plea for $25 billion to bail out the auto industry.

Citigroup executives, meanwhile, met Federal Reserve and U.S. Treasury Department officials in recent days to discuss its options, which include another capital injection from the Treasury, a person familiar with the matter said.

The bank's management has also discussed selling off units or finding another bank to merge with.

In Germany, Chancellor Angela Merkel said she expected the first few months of next year to bear more bad news for Europe's largest economy, which is now in recession.

Merkel told Welt am Sonntag newspaper that economic development in Germany, Europe and the rest of the world was hard to predict, but "we have to expect the coming year, at least in the first months, to be a year of bad news."

George Soros, one of the world's first and best-known hedge fund managers, told Germany's Der Spiegel magazine the United States needed an infrastructure program and a large economic stimulus package to provide its cities and states with sufficient cash.

The U.S. government has launched a $700 billion financial bailout initiative in response to the turmoil. But the U.S. economy needed additional support measures of between $300 billion and $600 billion, Soros said.

He criticized U.S. Treasury Secretary Henry Paulson for having reacted too late to the crisis but said he had high hopes about Obama's ability to manage the situation.

"The duration of the crisis depends on the success of his policies," Soros said, according to Der Spiegel.

Sunday, November 16, 2008

This Weekend's Contemplation - A Bail-Out with Strings - Now You're Talkin'

It is about time that strings were attached to any discussion of a bail-out. Text in bold is my emphasis. From Market Watch:

Any federal bailouts of the auto industry, of strapped state governments or of homeowners should come with significant changes in the way business is done, top national and state officials said Sunday.

President-elect Barack Obama said that the auto industry needs federal help, but any rescue should come only if the industry makes major changes, according to the summary of an interview with CBS News' "60 Minutes" to air later Sunday.

Any assistance to the Big Three automakers -- General Motors, Ford, and Chrysler -- should be "a bridge loan to somewhere, as opposed to a bridge loan to nowhere," Obama said.

Obama said any assistance should be conditioned on "labor, management, suppliers, lenders -- all of the stakeholders -- coming together with a plan: What does a sustainable U.S. auto industry look like?"

In a lame-duck session later this week, Congress will look at providing additional money to the automakers beyond the $25 billion already authorized to help them build more efficient vehicles.
It's far from clear, however, whether Congress will approve any additional aid before the new Congress takes over in January.

Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate Banking Committee, remained adamantly opposed to any federal bailout of the auto industry. In comments on two Sunday talk shows, Shelby said federal aid would be "money wasted."

On the CBS program "Face the Nation," Shelby said he wouldn't support a bailout under any conditions.

"I wouldn't support it anyway, but I can tell you what, the management has got to go," Shelby said.
On NBC's "Meet the Press," Shelby said the automakers should file for bankruptcy if they can't make it on their own.

"We all agree that they need to make fundamental changes," said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. "The question is how much pain can the rest of the economy take while those changes are being implemented?" Frank spoke on "Face the Nation."

Sen. Carl Levin, D-Mich., said a bailout is urgently needed, because 3 million jobs could be lost if the Big Three shut down operations. He said the auto industry should be allowed to tap into the $700 billion bailout fund for banks. (This is just a scare tactic. These jobs would not go away immediately because the companies would not go away immediately, especially in bankruptcy.)

Corporate management should be replaced if necessary to win approval of the bailout, Levin said on "Meet the Press."

The Bush administration opposes opening up the $700 billion Troubled Asset Relief Program to the automakers, however. Instead, the administration has proposed speeding up approval of the $25 billion "green fund."

In his interview on "60 Minutes," Obama also said Washington should do more to help homeowners facing foreclosure.

"We've got to ... set up a negotiation between banks and borrowers so that people can stay in their homes. That is going to have an impact on the economy as a whole," Obama said.
In an interview on the ABC program "This Week With George Stephanopoulos," California Gov. Arnold Schwarzenegger said that even state and local governments need to "prove that we have our fiscal house in order" to deserve federal money that may come in the next stimulus package.

"Anyone that wants to go and think that they don't have to shift down and make changes -- if it is states, if it is local government, if it is the auto industry, or any other industry, as far as that goes -- they're living in a dream world or in a fantasy world," Schwarzenegger said.

"You've got to recognize that this is the time, now, to renegotiate and to work in a different way," the California Republican said.

Schwarzenegger has advocated steep spending cuts and tax increases to close an $11 billion budget shortfall in his state's budget.

"I hate taxes," Schwarzenegger said. "But there are certain times when you have to forget about the ideology, and ... fix problems."

Friday, November 14, 2008

Credit Defualt Swaps are Down for the Week

Does this mean the CDS market is beginning to unwind. Hard to tell, but at least we are headed in the correct direction. From Market Watch:

In another sign Wall Street is still in cash-raising mode, outstanding credit-default swaps fell last week, suggesting holders of these derivatives have been unwinding positions faster than they are putting on new ones, according to Barclays Capital.

The gross notional value of outstanding swaps, or the sum of all contracts bought or sold, fell 2.6%, or $866 billion, to $32.7 trillion, in the week ended Nov. 7, the Depository Trust & Clearing Corporation reported on its Web site earlier this week.

Net notional values outstanding fell 1.6%, or $49 billion, to $2.96 trillion.

The decline in net notional value "signals that customers are unwinding positions at a faster pace than they are putting on new ones," said Barclays Capital analyst Roger Freeman in a note to investors Friday.

President Bush will host leaders from 19 other countries as the G20 seeks a solution to the worldwide economic crisis.

Net notional balances, as opposed to gross balances, cancel out transactions that offset each other. For instance, if an investment bank buys $100 million in credit-default swaps to protect against a company default and sells $50 million of swaps for protection on the same company, the net notional value would be $50 million.

Unwinding their positions "could be driven by profit-taking, exiting trades to free up capital or a lack of interest in the market," Freeman wrote.

It was the second week DTCC, a clearing house for securities and over-the-counter derivatives, has published such information. The move followed calls for increased transparency into the vast but until recently obscure swaps market.

Buyers of credit-default swaps get, for a fee, protection against the risk that a company or even country will renege on its debt. The market ballooned in recent years as buyers, including many large financial institutions, looked to hedge credit exposure.

But fallout from the U.S. housing-market collapse exposed deep problems in the way credit-default swaps, or CDS's, are traded and settled.

AIG, one of the biggest dealers of CDS protection, was forced into what's become a $150 billion U.S. government bailout after buyers of its credit protection demanded more collateral to cover the possibility it would fail to make good on its contracts.

The Bush administration said Thursday that it was working on establishing central counterparties for credit-default swaps, some of which are to be in place before year-end.

"A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures," according to the President's Working Group on Financial Markets, which includes Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Chairman Ben Bernanke.

Observers have said the existence of a central clearing party, which could have stepped in if it looked as if a large swaps player was about to renege on its contracts, would have helped prevent some of the shocks stemming from the collapse of Bear Stearns and Lehman Brothers this year.

Wednesday, November 12, 2008

Strategy Change for the Bail-Out Plan

Hank Paulson signaled today that the Bail-Out Plan (TARP) would probably not be used to purchase toxic asset as originally planned, but instead would be used to support the financial system similar to the way the funds have already been used. Obviously, something did not work. Either the reverse auctions and the purchase of toxic assets was too slow, too clumsy, etc. or the Fed/Treasury realized that the most efficient way to re-capitalize the banks was to give them bail-out money. The latter allowed more direct investment and also made targeting easier. Text in bold is my emphasis. From

The Bush administration on Wednesday largely abandoned its plan to buy up toxic mortgage assets and said it will focus its $700 billion financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.

The U.S. Treasury Department initially promoted the financial rescue package approved by Congress last month as a vehicle to buy illiquid mortgage assets from banks and other institutions to spur fresh lending.

However, that plan never got off the ground and U.S. Treasury Secretary Henry Paulson told a news conference asset purchases were not the most effective use of the funds.

"This is not going to be the focus," he said. Paulson added, however, that the Treasury would continue to examine the usefulness of "targeted" purchases.

Treasury has already tapped the fund to inject capital into banks and ailing insurer American International Group (AIG.N). Paulson said he was considering a second round of preferred share purchases in both banks and non-bank institutions which, in a fresh twist, would match privately raised funds.

He also said the Treasury was working with the Federal Reserve on a plan to help restore credit flows to U.S. households by using financial rescue funds to lure investors back to markets for securitized debt, such as car loans, student loans and credit cards.

The administration's shifting focus disappointed Wall Street and U.S. stock prices tumbled sharply. The Dow Jones industrial average (.DJI) closed down 408 points, or 4.7 percent.

"This hasn't done the Treasury's credibility a world of good," said Alan Ruskin, chief international strategist at RBS Global Banking and Markets in New York. "Basically, they found that the market would applaud direct capital injections more readily than understanding the complexities of reverse auctions to buy assets, so it's a pragmatic choice."

Paulson was unapologetic, saying that by the time the rescue bill was passed on October 3, it was clear the asset purchase plan would take too long and would not be sufficient to calm roiling markets.

"I will never apologize for changing a strategy or an approach if the facts change," he said.

The $700 billion financial sector bailout is the United States' marquee effort to combat a credit crisis spawned by rising U.S. mortgage defaults that is now wreaking economic damage worldwide.

To help ease the crisis, the U.S. Treasury and bank regulators on Wednesday issued "guidance" for banks encouraging them to lend and to rein in any compensation plans that might lead executives to take excessive risks.

Earlier on Wednesday, Canada announced a plan to buy up another $41 billion in insured mortgages and other steps to try to free-up credit.

Paulson said the U.S. Treasury was duty-bound to help prevent mortgage foreclosures, but he warned that further aid would likely mean a significant government subsidy, signaling a lack of support for a Federal Deposit Insurance Corp. proposal for more aggressive aid to borrowers.

The regulator for the two largest U.S. mortgage finance companies -- Fannie Mae and Freddie Mac -- unveiled a plan on Tuesday to cut payments for hundreds of thousands of homeowners behind on their payments. That plan, however, would not touch the many loans held by mortgage investors.

Paulson sidestepped questions on whether the Treasury would use bailout funds to help struggling Detroit automakers, as the industry and some lawmakers have called for.

While he said the industry was a "critical" one for the United States, he said the purpose of the program was to provide financial system stability.

He said one option would be to amend legislation to allow $25 billion already approved for efficient vehicle production to be made available more quickly.

So far, the Treasury has focused on providing capital to federally regulated banks and thrifts, but Paulson said it was looking to broaden the effort to cover financial institutions that do not have a federal bank or thrift charter.

"Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions," he said.

The Treasury has allocated $250 billion of the bailout funds to inject capital into banks and thrifts and it has earmarked another $40 billion to shore up AIG, leaving just $60 billion to dole out before it would have to ask Congress to release the final $350 billion.

Paulson said he had no timeline for that request, which means the decision could be left to the incoming administration of President-elect Barack Obama, who takes office on January 20.

He also signaled he would not seek to increase the overall size of the bailout fund. "I still am comfortable that, with $700 billion, we have what we need," he said.

With an aim to restoring credit for households, Paulson said the Treasury and Fed were considering setting up a program to increase liquidity for top-rated asset-backed securities, but he provided few details.

"The initial shock of abandoning TARP is hitting stocks, but the support for consumer-level lending may be a silver lining as it goes to the root of what's ailing the economy, namely personal consumption," said Brian Dolan, chief currency strategist at in Bedminster, New Jersey.
The State of Help for Homeowners - Chaos

The article below gives a summary of the various groups and their efforts to help out homewoners with their mortgages. The question that is never asked in any of these articles is if you bought a reasonably priced house and made all the payments as expected (in other words you did what you agreed to do) what do you get out of this other than paying for other people's mistakes. Text in bold is my emphasis. From the WSJ:

Fannie Mae and Freddie Mac, which are under government control, said they would help streamline the modification of loans for potentially hundreds of thousands of homeowners who are 90 days or more behind on their mortgage payments.

The Bush administration said it would use the mortgage giants to extend aid to struggling homeowners, a move met with criticism from a top federal regulator, lawmakers and others, who charged it doesn't do enough to stem home foreclosures.

The response intensifies an already fraught debate over the government's approach to the mortgage crisis, which has cast a long shadow over the U.S. economy, from restaurants to auto makers to retail stores.

The Federal Deposit Insurance Corp. and some lawmakers support using part of the government's $700 billion in bailout funds to spur much broader loan modifications. So far, the Treasury and White House have resisted and questioned whether that idea would be effective given the costs to taxpayers.

The potential reach of the program is constrained by the large number of mortgages, especially subprime, which have been bundled into packages of securities and sold to investors around the world. The practical and contractual complexities surrounding these securities renders the mortgages hard to change.

The voluntary plan, which officials hope will be adapted by other mortgage holders, would enable certain borrowers to receive more affordable loans that would make their mortgage payments at most 38% of their monthly income.

James Lockhart, director of the Federal Housing Finance Agency, which controls Fannie and Freddie, called the plan "a bold attempt to move quickly in defining a nationwide program that can quickly and easily reach many of these troubled borrowers." Mortgage servicers would be paid $800 for every loan they modify.

Fannie Mae's and Freddie Mac's participation could make the program standard practice for other loan servicers. To qualify, borrowers must live in their homes, not be in bankruptcy proceedings and have to owe at least 90% of the value of their home.

FDIC Chairman Sheila Bair questioned the plan's effectiveness, saying it "falls short of what is needed to achieve widescale modifications of distressed mortgages." Ms. Bair, a Republican White House appointee, said the government should use some portion of the financial-market bailout package to reduce foreclosures.

The government's move is the latest attempt from Washington and Wall Street to modify mortgages en masse. Led by Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc., the banking industry has announced measures to make loans more affordable. Citi said Tuesday it would modify terms on as much as $20 billion in mortgages for borrowers who are current on their loan payments but could fall behind.

Driving this movement is the increasing cost of foreclosures to investors as home prices continue to plummet. LPS Applied Analytics estimates that losses from foreclosures are averaging about 44% of the loan amount, up from about 29% a year ago.

Given the scope of the crisis, working with borrowers "case by case doesn't work," says Mary Coffin, head of loan servicing for Wells Fargo Home Mortgage. "It probably hasn't for several months."

House Financial Services Committee Chairman Barney Frank (D., Mass.) said he wants to rewrite rules that servicers say make it hard for them to modify loans. Rep. Mel Watt (D., N.C.) said Democrats planned to push for a 90-day moratorium on foreclosures. President-elect Barack Obama has suggested that any bank receiving money from the government as part of the rescue package should temporarily halt foreclosures.

Congress passed a housing-rescue package in July and its central plank, a program known as Hope for Homeowners, went into effect Oct. 1. It allows banks to move borrowers into government-insured loans if lenders agree to write down a portion of the principal. The program was supposed to improve upon an earlier effort, called Hope Now.

Hope for Homeowners was expected to help as many as 400,000 people, but in its first two weeks it helped just 42 homeowners, according to agency records. The U.S. Department of Housing and Urban Development estimated earlier this month the plan could help 19,600 people by the end of 2009. An agency spokesman said it was too early to judge the program because it takes time for loans to be processed.

"The problem is we've used so many incremental steps, none of which have been big enough to get ahead of the problem," said Sen. Mel Martinez (R., Fla.), a supporter of Ms. Bair and former secretary of the Housing and Urban Development.

In a sign of continuing woes, luxury home builder Toll Brothers Inc. Tuesday reported sales hit record lows last month. Robert Toll, the company's chief executive, said the financial turmoil sparked a wave of cancellations. Fears of jobs losses and the plummeting stock market drove "home buyers' confidence and our traffic and demand down to record lows." Mr. Toll said.

Bush administration officials said the effort announced Tuesday doesn't preclude other foreclosure-prevention measures. It remains unclear what other steps might be taken.

Several weeks ago, Ms. Bair began privately floating a proposal that would use roughly $40 billion from Treasury's $700 billion program to help roughly three million homeowners move into more affordable loans. The White House has been cool to the idea. Bush administration officials have said the FDIC's proposal could offer perverse incentives that might push more people into foreclosure, such as encouraging people whose mortgages were underwater to stop making monthly payments in order to qualify for aid.

The Treasury Department has so far directed its rescue spending into financial institutions, and isn't currently expected to buy distressed assets such as mortgages.

Few believe even the giant loan-modification efforts announced by financial institutions will be enough. That's because the programs focus primarily on mortgages wholly owned by the participating institutions. Most mortgages in recent years were sold to investors, and efforts to modify those are proving to be vexing, particularly when those loans have been carved into mortgage-backed securities that don't carry some government guarantee.

Of the $11.3 trillion in mortgage loans outstanding, $2.03 trillion were packaged into mortgage-backed securities sold to investors by Wall Street, according to Inside Mortgage Finance. Another $4.5 trillion are owned or guaranteed by Fannie Mae or Freddie Mac.

Tuesday, November 11, 2008

The Most Contentious Issue of 2008 - 2009 - Bonuses for Executives

This will be the most contentious issue this year and next - if a firm takes bail-out money do they get to pay bonuses. I lived under bonus plans for many years. Basically, if the company did not make money then I received no bonus. Bonuses could only be paid out of profits. Sorry, about the bonuses, but I am afraid if you take taxpayer money there are no bonuses for anyone until the money is paid back with a reasonable return. It is time for those in the 90 - 95th percentile of earners to take a lesson from the rich during the Great Depression, it is time to keep a low profile. If the taxpayer feels really cheated (they are already there) maybe they will push to have executive pay capped by law. The pay that many sales and executive people now receive is socially irresponsible. Text in bold is my emphasis. From Bloomberg:

U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated. . . .

. . . . Compensation at Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and the six other banks that received the first $125 billion of the federal funds is under scrutiny by lawmakers, including Rep. Henry Waxman, a California Democrat, and New York Attorney General Andrew Cuomo, also a Democrat. President-elect Barack Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's ``not unduly rewarding the management of financial firms receiving government assistance.''

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms' most productive workers.

``There are instances where bonuses are justified, deserved, and in the best interests of the investment bank involved,'' said Dan Lufkin, a co-founder of Donaldson Lufkin & Jenrette Inc., the investment bank acquired by Credit Suisse Group AG in 2000. ``Your very best people are people you want to hold, and your very best people will have opportunities even in this environment to transfer allegiance.''

The companies, which set aside revenue throughout the year to pay bonuses, haven't commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent.

Wall Street firms' pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.
Blankfein's $67.9 Million

The nine banks that Waxman pressed to detail their bonus plans asked for more time to respond, according to his spokeswoman, Karen Lightfoot. She said they've been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company's annual meeting in April, because of Goldman's superior financial results.

``We're very much a performance-related firm,'' he said. ``If those results don't come in, I assure you at Goldman Sachs you won't see that compensation.''

Goldman's profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month. Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment on the company's plans for bonuses this year.

``The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,'' said S. Woods Bennett, a 57-year-old lawyer in Baltimore. ``Their sense of entitlement is appalling.''

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government's Troubled Asset Relief Program were
Merrill Lynch & Co., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., State Street Corp. and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven't been profitable since early last year. Earnings at each of the other firms
, except Boston-based State Street, have been dropping.

``Bonuses and severance packages will obsess the American public'' and become ``a humiliation and embarrassment,'' said Arthur Levitt, a senior adviser to the Carlyle Group, former chairman of the Securities and Exchange Commission, and a board member of Bloomberg LP, the parent company of Bloomberg News. ``Compensation committees, believe me, are paying close attention to this.''

Several of the companies -- including Citigroup and Wells
Fargo -- have said they won't use federal funds to pay bonuses. That's disputed by some, including former compensation consultant Graef Crystal.

``The argument of saying we're not using the bailout money is just crap because money's fungible, money's money,'' said Crystal, who writes the newsletter ``It exposes them to ridicule.''

A renegotiated government rescue for
American International Group Inc., which was once the world's largest insurance company, includes a freeze on the bonus pool for 70 top executives and imposes limits on severance benefits, the Treasury said in a statement yesterday. AIG's bailout is separate from the $125 billion being invested in nine banks.

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs, according to data compiled by Bloomberg.

A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

``This is the real economy these vultures have wrecked once again,'' said
Leo Gerard, president of the Pittsburgh-based United Steelworkers, which represents 1.2 million active and retired members. ``Workers are taking it on the chin through no fault of their own.''

``Please explain how miserable performance of biblical proportions warrants any bonuses, particularly using money from me the customer and taxpayer,'' said Glenn Brown, 67, who recently retired after 21 years as a researcher in the department of surgery at Beth Israel Deaconess in Boston and as an adjunct assistant professor at Harvard Medical School. ``I don't understand how they can even conceive of doing that.''

``If these guys were so talented how did this problem happen anyway?'' said Mark Whitling, 63, who works as the chief financial officer of a steel service company that employs 125 people in Eastern Ohio. ``We don't feel sorry for them.''

Attention is most focused on the top executives at the banks that are receiving federal money. They'll have to take the steepest pay cuts because their pay is disclosed in proxy filings, according to
Alan Johnson, managing director of Johnson Associates, the compensation consulting firm that estimates bonuses will decline between 10 percent and 70 percent.

``I'd advise the CEO to say he can't take anything if it's one of these firms getting bailed out by the government,'' said Crystal. ``I think he's just going to have to go down to just his salary.''

That's probably not the case for employees whose pay isn't disclosed, even those who get bonuses that exceed $1 million.

Both Johnson and Crystal say that top performers should receive bonuses this year or companies risk losing their best workers. Of about 600 people who responded to an online survey on the Web site, 46 percent said they would be unwilling to take any pay cut this year.

``You could build up, I would think, a lot of resentment on the part of people who say, `Look I did give my all this last year, and I know it's been a bad year, but everything that was asked of me I accomplished and then some,''' said Crystal. Eliminating bonuses across the board ``could be very demoralizing in the long run and it could lose you some people.''

Larry Frank, a 60-year-old retired software company owner who lives in Ormond Beach, Florida, said he told his broker at Merrill Lynch that he would pull his money from the company if it paid the $6.7 billion it has set aside this year to pay bonuses. While he thinks top managers should suffer, he doesn't think everybody should lose out on getting a bonus.

``Individual brokers, if they're performing and their areas are profitable and they're doing their job, I can't see punishing them,'' he said. ``The
CEO shouldn't get anything.''

Still, other people say that all employees working at companies receiving bailout funds should pay the price.

``It's crazy, it's all one company, it's the same thing,'' said
Scott Floyd, a 37-year-old marketing executive in Manhattan Beach, California. ``For people to say the guys in the brokerage should get bonuses because they did well, but it was just the mortgage lending division that did terribly, that's a bunch of BS.''

Amo, the retired ship captain in Seattle, said that since most financial companies are cutting jobs, they shouldn't worry about paying bonuses to keep people from leaving.

``Where are they going to go? Don't let the door hit you on your way out,'' he said. ``It's not like it's just one company -- the entire Street is frozen.''

Karlson, the Vietnam vet, said he thinks Wall Street executives are ``thumbing their noses at the common people'' if they pay themselves bonuses while people in the country are losing their homes.

``The rationale that they depend on their bonuses, come on, how are we supposed to relate to that?'' he said. ``You don't get a bonus from your company if it doesn't do a good job.''
Jim Beachboard, a 57-year-old lawyer in Little Rock, Arkansas, compared taking a bonus to ``kind of like being on the Titanic.''

``It was supposed to be women and children first, so the guys that tried to jump in the lifeboats weren't really looked upon with much kindness,'' he said. ``When you start thinking of this many tax dollars being injected into the system, I know there are all sorts of rationalizations and justifications that you can use to try to justify almost anything, but it's just really in very poor taste.''

Taking a bonus isn't something executives should be proud of, Beachboard added.

``My mother always told me, don't ever do anything that you would be too ashamed to tell me about, and I thought, would they really want to tell their mother that?''