FedUpUSA

Archive for the ‘Recession’ Category

Like most politicians, Treasury Secretary Tim Geithner likes to talk out of both sides of his mouth, generally saying contradictory things in sound bites that may sound reasonable at first glance, but look idiotic upon closer inspection.

For example please consider Private sector must drive economy: Geithner

During an interview on NBC’s “Meet the Press,” Geithner also said the government has big plans for reforming Fannie Mae and Freddie Mac, the housing finance giants that now stand behind most of the mortgages in the U.S. after being bailed out by taxpayers during the 2008 financial crisis.

Geithner said Sunday that he doesn’t expect a double-dip recession, citing encouraging signs in the economy. “The most likely thing is you see an economy that gradually strengthens over the next year or two,” he said. Watch Geithner on Meet the Press.

Businesses are still “very cautious” and are trying to get as much productivity from current employees as possible, Geithner explained.

“They are in a very strong financial condition though. I think that’s very promising because there’s a lot of pent-up demand and there’s a lot of capacity still for them to step up and start to invest and hire again,” he added. “The government can help but we need to make this transition now to a recovery led by private investment.”

There’s a “good case” for the government to support small businesses, the unemployed and help states keep teachers in classrooms, but the transition to growth led by the private sector must happen, Geithner said.

Still, he stressed that the current system of housing finance has to change.

“We’re not going to preserve Fannie and Freddie in anything like their current form. We’re going to have to bring fundamental change to that market,” Geithner said.

There’s still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession, he explained.

“We’re also going to have to take a look at the broad set of policies we put in place to help encourage home ownership and particularly help low income Americans get access to affordable housing,” Geithner said. “We’re going to take a very broad look at how best to do that.”

No Pent Up Demand

For starters Geithner is wrong about pent up demand. The only pent up demand is in the opposite sense Geithner suggests.

Pent Up Demand Reality

• There is pent up demand for baby boomers to save more
• There is pent up demand for baby boomers to downsize
• There is pent up demand for banks to dump shadow housing inventory on the market and that will further suppress housing
• There is pent up demand for anyone with credit card bills to pay them down given outrageous interest rates banks charge for revolving credit vs. what one can make in CDs.

Although those are all necessary, nothing in that list remotely have anything to do with a private sector recovery in the manner Geithner presumes. Indeed, I expect a Expect Second-Half Housing and Durable Goods Crash.

The key reason is consumer spending plans have crashed as noted in Consumption Inflection Point – No One Wants Credit; Consumer Spending Plans Plunge

Thus, in regards to pent up demand Geithner is a fool, is lying, or both.

Geithner Hypocrisy

If that was not bad enough, we have to suffer with Geithner talking out of both sides of his mouth. While I certainly agree that the private sector needs to drive the economy, note his many statements to the contrary.

• “The government can help but we need to make this transition …”.
• “There’s a good case for the government to support small businesses …”
• “There’s still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession …”

How long is the “transition”?

Geithner does not say, so I will offer a translation: Forever.

Geithner is a clueless Keynesian clown who has no idea how the economy works. Not only do we have to put up with his blatant lies, we have to deal with his hypocritical never-ending government solutions.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The war against the middle class is silent and has grown since the recession started.  We don’t hear much about this because in large part, those falling out of the middle class don’t have the funds to purchase airtime with the media who is wedded to Wall Street.  40 million Americans now receive food assistance.  How often do we hear about this?  Each month we add tens of thousands to this number yet we are somehow in a recovery?  A recovery for which group of people is the question we should be asking.  Clearly the middle class isn’t feeling this recovery.  Nearly 17 percent of our population is underemployed.  But then we add 20 percent of those who are employed who are part of the working poor.  If we look at the top 10 occupational sectors in the U.S. we start to realize that many in the middle class are giving up higher paying jobs to service the needs of a tiny elite class.

Take a look at the top 10 occupational sectors in the U.S.:

Source:  BLS

Keep in mind this group is part of the “fully employed” class.  When we think of those who are employed we tend to think that most work in sectors that offer them a decent wage.  That is not the case at all.  In fact, when we look at the median household income of $52,000 we realize that most people are working in the service sector with lower wages and only boost the stat higher because of the two income trap.  9 out of 10 of the above jobs from cashiers to janitors make median wages from $8 to $14.

“To even reach the middle class median income, someone would need to make $25 an hour.  So even looking at the higher end of the above pay scale for these jobs, you would need to have two people making the top $14 to squeak out the necessary $25 per hour to make the $52,000 median income figure.  Keep in mind the above is the top employment sectors in our economy.  In the past where we had a bulk of our population working in manufacturing making the median income wage with one job, now we have given that up for two jobs in service sector work.  I’m not sure many in the middle class wanted to make that trade off.”

Wall Street wouldn’t mind if most Americans were part of the working poor so long as they can keep their exploiting ways going.  In fact, these banks want to sink these people even further by creating this large class of middle class debt serfdom.  Enormous mortgages, student loan debt, and credit cards are the new chains to keep the working and middle class stuck in financial purgatory.  Keep in mind the money the banking industry funnels out is largely taxpayer dollars so the prison we are creating is largely with our own money.  Wall Street investment banks and the too big to fail financial sector is broke.  They would be nonexistent if it weren’t for the complete and generous handout from the U.S. Treasury and Federal Reserve.  How do they repay the people for this?  They begin by squeezing every ounce of productivity of those still working:

Now this is a fascinating chart.  Even in the worst economic crisis since the Great Depression somehow, we are able to become more productive.  Interestingly enough labor costs have fallen at the same time.  Of course the above translates to middle class workers having to put up with stagnant or falling wages while the bottom line keeps getting better.  But better for who?  The banking industry is juicing this game by gambling on Wall Street and not lending money out to the public.  This money was given to them under the pretense of keeping the loan channels alive for American workers.  So we have record foreclosures and bankruptcies while banks keep making billion dollar profits.  The raid on the middle class is like pirates taking the loot in broad daylight.

Yet the spin is out in full force.  Last month the rise in employment was largely from the government sector:

In fact, we can say that the entire rise in employment last month came because of temporary government work.  These Census jobs fall into the trend that we are seeing.  The middle class has to deal with transient work with no security and in order to have access to any semblance of a middle class lifestyle, must enter into a deal of debt serfdom with the banking elite.  We can see that we have hit an absolute structural tipping point in our society with the amount of long-term unemployed:

This is the largest percent of long-term unemployed in modern record keeping history.  What has happened is essentially the last hit against the middle class.  Without any security whatsoever, many are now unable to find work in a highly service oriented world.  The playing field is not level.  The banking sector fills the air with propaganda of the “free market” yet received trillions of dollars in handouts.  The hypocrisy is incredible and many Americans realize this.  This is why satisfaction with both Democrats and Republicans are at all time lows.  Both parties are beholden to the banking and Wall Street elite that work as a leech and are siphoning off every ounce of productivity from the American working and middle class.

The youth of our country are feeling this deeply:

The above chart would seem positive.  More students are taking summer school as opposed to working.  Yet this trend isn’t happening by choice.  It is happening by force.  There are little jobs for teens since they are competing with adults for low pay service sector jobs!  This is the idea of recovery in the new America.  A banking sector that is swimming in gold coins like Scrooge McDuck while middle class Americans find themselves competing with their own children for lower paying service sector jobs.

So what is the solution then?  How the argument is framed is completely false and the Federal Reserve is merely a protector of the banks.  They want to force austerity on the majority of Americans while banks and their predator executives still manage to keep their taxpayer subsidized yachts.  There is money but it went to the banking sector.  The game is fixed for most in the middle class.  Until we break up the too big to fail banks and have a government that truly represents the people’s best interest, there is little reason to believe that the overall trend will reverse.  The fact that 9 out of our top 10 job sectors are from the low paying service sector is not good news.

My Budget 360

There Is NO Economic Recovery Happening

Posted by Karl Denninger

Look folks, this is really quite simple.

Economic Stability and Recovery = Credit Expansion.

We cannot recover until we purge the excess debt from the system, and the longer we take to do that, the longer the pain will last and the worse it will be.

President Obama and Tim Geithner know this – that’s why they are constantly harping on banks to “lend more.”

Well, they may want banks to lend more but the people are fed up with being debt slaves and are borrowing less.

Today, we got the latest from The Fed on this subject:

Consumer credit decreased at an annual rate of 8-1/2 percent in November. Revolving credit decreased at an annual rate of 18-1/2 percent, and nonrevolving credit decreased at an annual rate of 3 percent.

I have updated the charts, and this is where we are as of November:

Non-revolving debt (basically auto loans) has pretty much stabilized since mid-year.  But consumer revolving debt – credit cards – continues to accelerate in its rate of decline.

The longer-term view looks like this:

These rates of decline are unprecedented and they are not slowing down.

The drop in credit card debt outstanding is on the largest on record since The Fed started keeping those records in 1943!

Consumer recovery? 

There is none!

It is axiomatic that you can pump yourself full of speedballs (e.g. government spending) and stay up for days at a time.  It is also true that if you do too many speedballs you will have a heart attack and die, and there is no way to know precisely which is the “one too many” until you shoot it – at which point it’s too late to change your mind!

The so-called “recovery” has been driven by pump-priming, which has had at its root one primary intent – to drive citizens into herd behavior and get them to spend more and more (that they don’t have!)

But at the same time this has been the message credit card rates have been ramped and lines slashed.  So now Joe Six Pack is faced with a 30% interest rate on his credit card – if he has any open line left!

There is no possible way for this program to work, since the entire problem originally - what began this recession – was people that were unable to make their debt payments in the first place!

Small business will not hire until their debt load comes down to a reasonable level.  This will take literal years if we don’t quit trying to prevent the contraction of both asset prices and credit levels.  In the mean time millions of Americans will remain in destitution!

There is no way to avoid the bankruptcy of those firms and individuals who are over-levered.  The best solution (take the pain now!) will not prevent the bankruptcies, but it will get them over with and let the nation begin to emerge from the morass within 12-18 months.  For every month we keep trying to prevent the liquidation of insoluble debt we add months of additional time to that required to resolve the bust and deepen the amount of pain that must be suffered, since all we are doing is adding more debt upon existing debt.

It is time for Washington DC, including The Fed and Congress along with President Obama to embrace the facts – we must finish the de-leveraging that is necessary to return the citizens and corporations of this nation to fiscal health.  At the same time the government must stop spending twice what it takes in in taxes.

We have consumed too many speedballs, our heart rate is now 160, and if we don’t cut it out the bond market is telling us that we are about to have a fatal heart attack.

SS Trust Fund – 2009 Full Year Results – Ugh!

Submitted by Bruce Krasting

The Social Security Trust Fund issued their November and December reports today. They also provided the payment data for January 2010. I think there is some significant information.

From my writings on the Trust Fund I have received many comments from those who believe that the SS is a bankrupt Ponzi scheme. That is not correct. The SSTF did an admirable job in a very tough year. They paid a total of $675 billion in benefits and ended the year with an even $100 billion surplus. On December 31st they were sitting on $2.5 Trillion of US Treasury IOU’s.

That said there are some very disturbing trends at the Fund. First a Macro Economic thought:

There was a onetime negative COLA adjustment that kicked in January 1. Rather than the usual increase, beneficiaries are getting smaller checks. The difference between the December and January payments comes to $475 million. That re-base means a reduced outlay for the full year of $6 billion. In the scheme of things that is peanuts. But this is going to be felt most in the Sunbelt states where the bulk of the beneficiaries reside. I believe that a significant percentage of SS payments goes right into consumption. Given that fixed costs are actually rising for this group of consumers (the hell with COLA) the 65+ set might not be going to the Wal-Mart in Boca as much as they used to. A year ago we were talking of ‘green shoots’. This ‘shoot’ is decidedly brown.


On the Fund itself:

I think that the recession of 08 and 09 and the anticipated high unemployment (low employment) in 2010 has crippled the Fund. Nothing short of a major overhaul can turn it around at this point. The damage has been too great.

In the 2009 Trustee Report to Congress (signed by Chairman Tim Geithner) the following information was provided:

Now look at the reports released today. Total tax receipts were less than the disbursements. This was not supposed to happen until 2016. It happened last year.

There was a $100 billion surplus for the year. But compare that to the $190 Billion surplus in 2007. We have lost $90 Billion in just two years. But this number should be much higher than the 07 surplus. It was assumed that the Fund would have larger and larger surpluses for years to come. The 2008 Trustee Report (signed by then Chairman Hank Paulson) provided a set of Intermediate Assumptions for the Fund’s surpluses looking forward. As you can see we missed the 2009 target of a $220b surplus by a cool $120 billion. As of 12/31/09 the funds assets are behind that 08 schedule by $155 billion.

In prior years the SSTF has financed up to 50% of the deficit through their purchases of Treasury paper. In 2009 that ratio fell to a measly 7% of the total new issuance. It will be a rounding error in a few years. At some point someone is going to look at this and conclude it is not a plus for the bond market.

We are in an election year. Any significant legislation on SS changes will have to be completed by June. After that no one will want to touch this. Given that Health Care is far from resolved and there is that thorny problem with the mortgages Agencies I can easily see that the problems at SS get buried for another year. It will be very difficult to fix this beast if we wait another year.

The most optimistic scenario is that out of the ether comes a bi-partisan effort to address the issue head on and make the necessary fixes. By my calculation that would require a 2% increase in payroll taxes and as much as a 20% reduction in benefits (over time). Taxes on benefits would have to increase as well.

Those combined actions are extremely deflationary. It would directly cut consumer demand. It would be another blow to the head of small businesses. This would not be a brown shoot. Think of this development as being Amber Waves of Grain. And that is the optimistic scenario.

My solution has always been a means test. If you have $100k in taxable income you don’t get paid. Finished. I’m not sure that is legally possible. But to me it is the only option. The alternative will impoverish those that are/will be dependent on SS benefits. Raising taxes on America’s 90 million workers and their employers is just bad economics. It should not be considered.

I am not the only one looking at these numbers. This issue will have to come on the table before June. The 2009 results of the Fund are like an elephant in a room. It’s too big to avoid.

Submitted by James Bianco of Bianco Research

•    The Wall Street Journal – Fed Proposes Tool to Drain Extra Cash
The Federal Reserve on Monday proposed selling interest-bearing term deposits to banks, a move the U.S. central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis. The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation. Fed Chairman Ben Bernanke has described term deposits as “roughly analogous to the certificates of deposit that banks offer to their customers.” Under the plan, the Fed would issue the term deposits to banks, potentially at several maturities up to one year. That would encourage banks to park reserves at the Fed rather than lending them out, taking money out of the lending stream.The central bank said the proposal “has no implications for monetary policy decisions in the near term.” “The Federal Reserve has addressed the financial market turmoil of the past two years in part by greatly expanding its balance sheet and by supplying an unprecedented volume of reserves to the banking system,” it said. “Term deposits could be part of the Federal Reserve’s tool kit to drain reserves, if necessary, and thus support the implementation of monetary policy.” Michael Feroli, an economist at J.P. Morgan Chase, said “it’s another step forward in the exit-strategy infrastructure, but it’s been well flagged in advance, so it’s not a surprise.” When Fed officials decide to tighten credit, they would likely use the term-deposits program ahead of — or in conjunction with — adjusting their traditional policy lever, the target for the federal funds interest rate at which banks lend to each other overnight. The Fed also said Monday that its balance sheet rose slightly to $2.2 trillion in the week ending Dec. 23. The Fed’s total portfolio of loans and securities has more than doubled since the beginning of the financial crisis. As part of its efforts to fight the downturn, the central bank is buying $1.25 trillion in mortgage-backed securities, a program it says will end in March. The Fed now holds $910.43 billion in mortgage-backed securities, it said Monday.

•    Bloomberg.com – Fed Proposes Term-Deposit Program to Drain Reserves
The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.  The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Fed Chairman Ben S. Bernanke is preparing tools and strategies to shrink or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales. Term deposits may help the central bank “assert operational control over the federal funds rate” once officials decide to lift the overnight bank lending rate from the current range of zero to 0.25 percent, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Excess cash “would be locked up” rather than put downward pressure on the federal funds rate, he said.The Fed won’t begin raising interest rates until the third quarter of 2010, according to the median estimate of 62 economists surveyed by Bloomberg News in the first week of December.

•    The Financial Times – Fed to offer term deposits to banks
The US Federal Reserve plans to offer term deposits to banks as part of its “exit strategy” from the exceptionally loose monetary policy used to fight the recession. In a consultation paper released on Monday the Fed said it planned to change its rules so that it could pay interest on money locked up at the central bank for a defined period. The Fed added that the well-flagged rule change – designed to allow it more influence over the $1,100bn in excess reserves held by banks – was part of “prudent planning. . . and has no implications for monetary policy decisions in the near term”. It is one of a number of measures that has been outlined over the past few months by Ben Bernanke, chairman of the Fed, as an option to drain liquidity from the financial system in a manner that protects the economic recovery while heading off the threat of inflation.

•    The Federal Reserve – Notice of proposed rulemaking; request for public comment.
The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks (”eligible institutions”) could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution’s master account at a Reserve Bank (”master account”) as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board’s Policy on Payment System Risk to address transactions associated with term deposits.

Comment

We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.  The fact is they have no plan and are still throwing everything on the wall to see what sticks. From the November 4 FOMC minutes:

Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee’s strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve’s balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee’s exit strategy more broadly.

The Federal Reserve first hinted at term deposits almost two months ago, although exactly what they were talking about was left vague until now.

Remember that the Federal Reserve has to withdraw over a trillion dollars of excess liquidity.  The easiest way to do this is to sell hundreds of billions of MBS, Treasuries and agencies.   As the bold highlighted passage above implies, they are scared to death of doing this, so they propose complicated schemes to withdraw liquidity like reverse repos and now term deposits.

We have argued that these schemes will not work.  They cannot be done in the sizes necessary or enough to even matter.  The Federal Reserve could possibly drain tens of billions of dollars via these schemes, but collectively that will amount to a rounding error when the goal is to withdraw over a trillion in excess reserves.

The Federal Reserve does not want to admit defeat, so they continue pursuing these strategies that will not make a difference.  We believe they also do it to “look busy” as they are taking measurements and notes as to how to withdraw all the liquidity they have pumped in.  They think this will give the market comfort that someone is on the case and that inflation expectations will not get out of control.  The market is not buying this.  Inflation expectations, s measured by TIPS inflation breakeven rates, are going vertical.

Reinvestment Risk

As to term deposits, the Federal Reserve is proposing an illiquid short term instrument for banks to invest in.  Banks would buy these instruments and “lock up” the excess reserves they now have.  This would have the same effect as draining excess reverses.  The maturities of these instruments would be as long as one year.

It is unclear if there will be a secondary market for these instruments, and if so, how liquid it will be.
Without a secondary market, buyers of these instruments face huge reinvestment risk.  The future course of short term interest rates is arguably to the most uncertain it has been in decades.  Will the Federal Reserve stay near zero until 2012 or will they be forced to raise rates in the first half of 2010?  Given all this uncertainty, who wants to lock up money in something that cannot be sold before maturity?  This is especially true given the Federal Reserve’s statement that the “maximum-allowable rate for each auction of term deposits would be no higher than the general level of short- term interest rates.”

The general level of short-term interest rates is set on known instruments that have generations of history and active secondary markets.  If the Federal Reserve wants to introduce a new, and wholly unknown instrument with an uncertain secondary market and offer no interest rate premium, then we cannot see how this will work beyond a token amount after some arm twisting to get them sold.  The Federal Reserve will have to offer a premium for uncertainty and illiquidy to make this fly in any major way, something they said they will not do.

Complicated Is Simple

The Federal Reserve owns 80% of AIG.  With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices.  That is, when faced with a financial problem, they create complicated tools (like CDS).  When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone.  Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer.  You might even be named TIME’s Person of the Year.

From Bloomberg, Citigroup Stock Sale Discount Prompts Treasury to Delay Disposal of Stake :

Dec. 17 (Bloomberg) — Citigroup Inc.,
the last of the four largest U.S. banks to seek funds to exit a
taxpayer bailout, raised $17 billion by selling stock for a price so
low that the U.S. delayed plans to shrink its one-third stake in the
lender.

Citigroup sold 5.4 billion shares at
$3.15 apiece, less than the $3.25 the government paid when it acquired
its stake in September. The New York-based bank said the Treasury won’t
sell any of its shares for at least 90 days.

Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co.,
which together raised more than $31 billion this month to exit the
Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup’s
bid to buy Wachovia Corp. last year, leapfrogged its rival by
completing a $12.25 billion share sale Dec. 15. JPMorgan Chase &
Co. repaid $25 billion in June.

“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca,
a managing director at Renaissance Financial Corp. in Leawood, Kansas.
“Citigroup needs to show steps to reinstall the quality of the brand.”

With
the sale, Citigroup’s common shares outstanding increased to 28.3
billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at
the end of 2007.

“More shares outstanding means less value per share,” said Edward Najarian,
an analyst at International Strategy and Investment Group in New York,
who has a “hold” rating on the shares. “The whole structure of their
deal to pay back TARP wasn’t very good for common shareholders and that
is being reflected in the pricing.”

I think
one of the most important points are being missed. Most of these banks
swore that they didn’t need TARP. Despite this, in order to return it,
they must go back out to the capital markets. Why do you have to hit
the market to return a loan that you said you didn’t need, unless you
needed it? This obvious lie has went unchallenged.

It gets
worse. Citi is diluting the hell out of it shareholders, as well as all
of the other TARP banks that are selling shares. Some may even be
taking on debt. They are doing this primarily to gain the freedom to
declare bonuses at higher rates despite uncertain credit condition
surrounding the toxic assets that caused the problem in the first
place. Why in the world would any lender or shareholder agree to
dilution and/or higher debt service “primarily” to pay higher bonuses
to employees in the highest compensated (as a percent of net revenue)
industry in the world???

Imagine if you ran this business, you
have rocky times during a recession with revenues in nearly all aspects
of your business down save the blatant risk taking of trading, and you
go to your bank and say I need a big loan so I can pay myself a $20
million bonus increase.
Do you think Citibank would give you this
loan? They expect it from their shareholders. The same goes for
Goldman, JPM, BAC, etc.

Also from Bloomberg: Weak Banks Should Face Curbs on Bonuses, Dividends, Basel Regulator Says

Dec. 17 (Bloomberg) — Global regulators urged national
authorities to limit bonus and dividend payments by banks with
weakened capital safety nets as part of proposals to reduce
risks to the financial system.

Banks should increase the quality of the capital they hold
to cope with losses, the Basel Committee on Banking Supervision
said in a report on bank capital and liquidity published today.
Banks with depleted capital buffers shouldn’t use predictions of
recovery to justify generous dividends to investors and
employees, the committee said.

Global regulators have been wrestling with plans to
increase supervision of banks following the worst economic
crisis since World War II. The Group of 20 Nations agreed in
April that banks should be required to hold more and better
quality capital to reduce risks to the financial system.

“It’s not acceptable for banks which have depleted their
capital buffers to try and use the distribution of capital as a
way to signal their financial strength,” the committee’s
statement said. “The proposed framework will reduce the
discretion of banks which have depleted their capital buffers to
further reduce them through generous distributions of
earnings.”

It’s amazing that this even needs to be said.