Boomer’s Blog

News stories about reckless excesses and outrageous “golden parachutes” for fallen Wall Street executives have punctuated wildly gyrating financial markets for the past few weeks, though for many of us, it may seem like forever.

Earlier this month, hearings on Lehman’s bankruptcy and AIG’s $85 billion bailout held by the Oversight Committee of the U.S. House of Representatives rocked the news media and diminished investor confidence, contributing to ongoing instability on the financial markets. Friday, the Dow Jones Industrial Average (DJIA) took an unprecedented 1,000-point roller coaster ride, finally closing down about 125 points.

Form the hearings came news that Lehman likely misled investors about its losses. At least three U.S. attorney offices are probing whether Lehman misled investors before its bankruptcy filing, as pressure grows to hold individuals accountable for the financial crisis, the Wall Street Journal reports.

Bridge Loan Over Troubled Waters
Striking the chords of insanity to most taxpayers was the news that AIG executives took a luxury spa retreat to cope with the stress of receiving an emergency $85 billion bridge loan from the Fed. Then, as if to add taxpayer insult to economic injury, The Fed announced late this week that would be fronting AIG another $40 billion to help shore up the giant insurer’s operations.

New Law Won’t Stop Golden Parachute Deployment
Though we’re supposed to draw some measure of reassurance that the bailout bill was revised from Treasury Secretary Henry Paulson’s plan to ban “golden parachutes,” they’re only prohibited under certain circumstances, Namely, when the company sells more than $300 million in assets to the government or only if the employment agreement was made during the bailout period.

According to the Motley Fool, if the severance language already exists or if a golden parachute is already in place, executives will still land on their cash mattresses.

Golden Parachutes Fly over Lower Manhattan
On the eve of the $700 billion bailout bill’s enactment, Bloomberg reported that five of Wall Street’s powerhouses paid more than $3 billion over the past five years to executive staff at the helm of packaging and selling the loans that would ultimately kill the investment-banking system.

The $3.1 billion paid to the top five executives at the firms between 2003 and 2007 in fact, was nearly three times what JPMorgan paid to buy Bear Stearns.

Top executives at Goldman Sachs, Merrill, Morgan Stanley, Lehman, and Bear Stearns made $613 million combined last year. And the worst obscenely paid of them all, Lehman, AIG, and government chartered enterprises (GSEs) Fannie Mae and Freddie Mac paid out more than $1.4 billion in total compensation since 2004, Motley Fool reports. Lehman even paid $23 million to three executives, two of whom were fired, as Lehman begged for Federal aid, mere days before it fell.

Read it and Weep
Though some of the top financial institution executives who made critical decisions linked to today’s meltdowns already have left the positions that made them rich, a look at some of their compensation packages is so obscene, it may require an NC-17 rating.

According to multiple reports, here are some compensations packages what may make an office job seem almost bearable.

Bear Stearns: James Cayne
Before the company did a face plant on Wall Street and was sold to JPMorgan in June, Cayne made $161 million.

Citigroup: Chuck Prince:
Paid: $16 million, and jobless after raising Citi’s exposure to mortgage and consumer credit markets.

Merrill Lynch: Stanley O’Neal:
Paid: $66 million, terminated after the investment bank’s disclosure of $7.9 billion in unexpected losses. (Note: O’Neal was paid $172 million between 2003 and 2007.)

Merrill Lynch: John Thain
Paid $86 million, including a signing bonus, when he started working at the firm last December. Merrill was acquired by Bank of America for about $50 billion on Sept. 15.

Wachovia: Ken Thompson
Paid: $5 million, fired after several mistakes, including the  $25 billion acquisition of a California mortgage lender that caused huge losses for the Charlotte, N.C.-based bank now being acquired by Wells Fargo.

Think last week was rough on Wall Street? Expect more waste to hit the fans in the next couple of weeks as the financial industry executives continue to air their dirty laundry in these House Oversight Committee hearings. I’ve caught some of this stuff on C-Span and it’s almost like watching a soap opera unfold.

October 16: The Regulation of Hedge Funds
Five fund managers who earned over $1 billion last year have been invited to testify about the role of hedge funds in the financial markets and their regulatory and tax status. The five witnesses are John Alfred Paulson, President, Paulson & Co., Inc.; George Soros, Chairman, Soros Fund Management; Philip  Falcone; Senior Managing Director, Harbinger Capital Partners; James Simons, Director, Renaissance Technologies; and Kenneth Griffin, CEO, Citadel Investment Group.

October 22: The Breakdown of Credit Rating Agencies
The CEOs of the nation’s three largest credit rating agencies have been invited to testify about the role of the credit rating agencies in the financial excesses on Wall Street. The three witnesses are Deven Sharma, President, Standard & Poors; Raymond McDaniel, CEO, Moody’s Corp.; and Stephen Joynt, CEO, Fitch Ratings.

October 23: The Role of Federal Regulators
Former Federal Reserve Chairman Alan Greenspan, former Treasury Secretary John Snow, and current SEC Chairman Christopher Cox have been invited to testify about the role and responsibility of federal regulators in the Wall Street financial crisis.

On March 20, the blog discussed a recent article from Fortune magazine I think is essential reading for REI investors seeking build their businesses while so many others seem to be failing. The title of the story begs the question: “How bad is the mortgage crisis going to get?”

The answers from Princeton economist Paul Krugman are chilling, and they echo my sentiments that things are going to get much worse for the economy before they get better. Krugman has predicted that the crisis that began when subprime lending spiraled out of control, is likely to result in an average property value drop of 25 percent for homeowners. The domino-effect is expected to continue leveling markets — and the economy — until 2010.

Folks, I made some bold statements in Q4, 2007 that included my prediction that a major Wall Street firm other than Goldman Sacs would fail. At the time, I suggested that Bear Stearns, Merrill Lynch, UBS or Lehman Brothers were all prime candidates for disaster.

And as I write, the Wall Street Journal reports that Fed staff are literally on-site at Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Bear Stearns, which consented to be sold to J.P. Morgan Chase in a deal brokered by the Fed in March.

Each of these brokerages has borrowed from the Fed since it opened its temporary lending program last month in hopes of preventing another Bear Stearns style bloodletting on Wall Street — and the fall-out that would likely permeate the greater economy. These efforts represent the first time that the Fed has supported loans to entities other than banks since the Great Depression. (For details on the Fed’s temporary program that was deployed in March to provide emergency cash to ailing security firms, see yesterday’s post: “Fed Defends Bear Loans, Supplies Cash Tourniquets.”)

The U.S. Senate wants answers about how all this turmoil has happened, and a bipartisan alliance has asked the General Accounting Office (GAO) office to review the SEC’s enforcement program.

All this leads me to believe that at least one more Wall Street monolith will hit the pavement this year. But that doesn’t mean that real estate investors have to hit the ground, too.

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