Pacino Unavailable, Cuomo Takes Over

Need a lawyer? Andrew Cuomo (above) can fill the bill, although right at the moment he is busy protecting the People of the State of New York. Cuomo is outraged that Merrill Lynch, in its dying days as a stand-alone company, funneled billions in year-end bonuses to executives. The hand-outs cannot reasonably be linked to employee performance, as Merrill lost money hand over fist in 2008. It is likely that Merrill's white knight, Bank of America, would have reduced or even denied the bonuses had they been considered after the two firms merged officially on January 1.

Cuomo, as the state's attorney general, believes that he has standing because taxpayers' money was used to grease the merger. He also raises a second, more troubling issue: that material financial information may have been withheld from Bank of America shareholders when they met on December 5 to approve the merger. They voted with knowledge neither of the coming bonuses nor of Merrill's stupendous fourth-quarter loss. Such a lack of disclosure would be a violation of New York securities laws.

President Barack Obama calls the bonuses "shameful," and Senate Banking Committee Chairman Christopher Dodd (D-CT) promises his own investigation. But they have themselves to blame as well, having pushed all along for a federal bailout of the banking industry. This is what happens when you let foxes into the hen-house. Bank of America alone has benefitted from $45 billion in cash infusions and another $118 billion in loan guarantees. Now it looks like some of that dough will be spent in litigation. And if the Treasury officials who masterminded the BofA-Merrill merger are somehow implicated in the cover-up of pertinent financial information, who knows what the eventual price tag for taxpayers will be?

It Ain't Over Yet

She's back, with a cautious outlook for 2009. Meredith Whitney, analyst for Oppenheimer & Co., was dead on a year ago when she found several of Wall Street's biggest investment banks to be technically insolvent. Since she first sounded the alarm, Citigroup has been broken apart, Lehman Bros. has gone bankrupt, and Merrill Lynch would have gone bankrupt had it not been taken over by Bank of America. Now it is Bank of America that gets to go bankrupt, taking with it the tens of billions of bailout bucks. [TARP now stands for Taxpayers Are Rightfully Pissed.]

[update, February 18, 2009--]
She's gone...to start her own firm.

Take the Money and Run

Still want to release the rest of that TARP money? Maybe not, when you see what it is being used for. Last night word got out that Merrill Lynch dispensed year-end bonuses to employees a month earlier than usual--and just days before Bank of America closed on its ill-advised acquisition of the venerable investment banking firm. Sneaky? You bet.

For one thing, who at Merrill Lynch deserved a bonus of any kind? After all, this is a company that has recorded cumulative losses since July 1, 2007, of $39 billion, with a "B." In its last quarter as an independent company, Merrill went out with a $15 billion loss. Coincidentally (or not), $15 billion is the amount handed out in bonuses at Merrill during 2008. $25 million of it went for a ritzy apartment in the New York City building pictured above.

You see, last May Merrill announced the hiring of a dude named Peter Kraus, straight from Goldman Sachs, as an executive vice-president. Two weeks after he reported for work, the feds pushed Merrill and Bank of America into a shotgun wedding, ostensibly to save Merrill, which was loaded with gazillions of dollars worth of bad debt. In the new corporate structure, Kraus was the odd man out, and he was let go in October with a nifty parachute. In December his wife paid $37 million for the new Park Avenue address (for a tour, go here).

Surely you recall that the TARP legislation passed by Congress in October placed restrictions on beneficiary firms, including "a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the [Treasury] Secretary holds an equity or debt position in the financial institution" ("senior executive officer" defined as among the "top 5"). Kraus gets off because his pay package was negotiated before the TARP enactment. Moreover, it was Bank of America, not Merrill, that got TARP money, and technically Kraus was never an employee of Bank of America. So he walks.

Still, Merrill Lynch, for all intents and purposes, came under federal receivership on that fateful September day when Lehman Bros. went bankrupt. What appeared at the time to be a private-sector take-out was in reality choreographed and eventually bankrolled by the Treasury Secretary, Henry Paulson, formerly Chairman and CEO at Kraus's old firm, Goldman Sachs. Merrill's CEO, it must not be forgotten, was John Thain, formerly President and CFO at...um...Goldman. (Is there an echo in here?)

Thain made a bid for a $10 million-dollar bonus of his own, but Merrill's compensation committee, meeting three days after B of A shareholders approved the merger on December 5, would have none of it. Thain was able, however, to take care of some buddies, persuading the committee to accelerate employee bonuses adding up to between $3 and $4 billion. That mission accomplished, Thain then notified B of A executives of Merrill's Q4 loss.

Not at all amused, Bank of America announced Thain's resignation this afternoon. Meanwhile, New York Attorney General Andrew Cuomo is investigating the lame-duck bonus awards, and B of A CEO Ken Lewis must contend with shareholder suits questioning his acquiescence to the Merrill deal. Behold your tax dollars at work.

Good Money After Bad

In case you thought Congress knew what it was doing when it passed the Emergency Economic Stabilization Act last October, refer to the graphic above, which charts Bank of America's stock price over the past six months. Does that look like a company that has been fixed?

As you can see, the first hiccup came in mid-September, when Bank of America agreed to rescue Merrill Lynch. Traders bid the stock down because Bank of America was over-paying for Merrill's troubled assets. Relief came a week later when Congress (ta-dah!) first started talking about a bailout bill for the banks. Then the stock tanked again when the House initially voted the bailout down--one of those rare instances when lawmakers actually listened to their constituents. The Senate, listening instead to their cronies on Wall Street, revived the bill. The end result was the Troubled Asset Relief Program (TARP), whereby the U.S. Treasury would spend up to $700 billion buying up those nasty Merrill assets, among others.

Treasury officials soon realized that this was a program built to fail. If they started pricing distressed assets, banks across the land would have to mark down balance sheets, inviting the mother of all bank runs. So TARP morphed into something else, a program to inject liquidity directly into the banks through purchases of equity. That way, mark-to-myth accounting could be prolonged a while longer.

Bank of America got $25 billion from TARP, essentially buying shareholders' approval of the Merrill takeover at a December 5 meeting. (In the interest of price discovery, I had hoped that B of A shareholders would nix the deal, but of course company executives control shareholders as securely as they do Congressmen and -women.) After the shareholders' vote, management let on that Merrill's portfolio was even more toxic than originally thought. The hand went out for more TARP money.

Early today they got it. In addition to a $20 billion cash infusion, the U.S. Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans," according to a joint statement by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. It is becoming increasingly clear that the Merrill deal was orchestrated by government officials as a gun-to-head proposition for Bank of America, which should be running, not walking, away from the acquisition. "They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal," says Cassandra Toroian at Bell Rock Capital.

Now they are going under. Hours after the latest TARP announce- ment, Bank of America released its earnings statement for the fourth quarter. Ug-LEE. Instead of an expected profit, B of A reported a 48-cents-per-share loss, with billions in charge-offs for uncollectable debts and coming layoffs of 35,000 employees. Revenues lagged the consensus estimate by 25%, a miss so bad that one wonders if anybody knows anything in the financial sector these days. Or else the ones who know aren't telling. In its last earnings report as an independent entity, Merrill Lynch announced its own loss of $15 billion. All yours, Ken Lewis.

In a speech Tuesday in London, Fed Chairman Ben Bernanke called for “a comprehensive plan to stabilize the financial system and restore normal flows of credit." Specifically, he talked about creating a so-called bad bank to "purchase assets from financial institutions in exchange for cash and equity." Funny, I thought that was what TARP was supposed to be doing. Look again at the graph up top and see how well that's working.

[update, 1:00 p.m.--]
Despite Uncle Sam's helping hand, BAC is down another 15% in today's trading to $7 a share. With the dividend all but gone, there is no longer any reason to own the common stock. Taking down bank equity these days is like wading into the Gulf of Maine on New Year's Day. Think shrinkage.

TED Spread Back Below 1.00

The TED Spread hit a five-month low today, falling to 98 basis points. The TED Spread is a measure of the premium that banks pay to borrow money from each other compared to the yield on the 3-month U.S. Treasury Bill. The so-called London interbank offer rate (LIBOR) is currently at 1.09 percent. Subtract from LIBOR the yield on 3-month T-bills (an absurdly low 0.11 percent because of the recent flight to safety by bond investors), and you get the TED.

The TED averaged 12 basis points during the year leading up to the onset of the credit crisis in August 2007. So this economic health indicator still has a way to go before we can entertain thoughts of a meaningful recovery. But at least we are headed in the right direction.

Lies, Damn Lies, and Government Statistics

The U.S. Bureau of Labor Statistics tried to put the best possible face on Friday's employment data, noting in its monthly press release that the U.S. economy lost "only" 524,000 jobs in December. Thus, if you squint at the graph above, you might jump to the conclusion that we have turned a corner. After all, 524K is less than November's 584K. Happy days are here again!

Two things about these numbers. First, the number for November is an upward revision of the figure announced one month ago, which was 533K. Expect December's number to be revised higher as well. Second, the headline numbers from month to month are "seasonally adjusted," which is bureaucrats' lingo for "messed with." To get the actual number for December, you have to scroll down to the bottom of the report and click on Table B-1. Then look at the figures in the top row that are NOT seasonally adjusted. Whoops, the job loss was more like 954K.

So that corner that you thought you saw--fuhgeddaboudit. Later on Friday Mainers were treated to more bad news when NewPage Corp., owner of the coated-paper mill in Rumford, announced plans to take 150,000 tons of downtime in 2009's first quarter. The company's press release was not specific as to which mills--or how many employees--would be affected. But there can be little doubt that NewPage will be impacting the job figures from BLS for January and beyond.

Global Constipation

See those idle containers? Stacked dockside in Shanghai, they are a sign that worldwide demand for Chinese goods has slackened. This means that fewer euros and U.S. dollars are finding their way to China, which makes it harder for the Chinese to keep buying foreign debt. They may no longer want so much foreign debt. After all, they have a domestic stimulus package of their own to bankroll, to the tune of about $600 billion.

President-elect Barack Obama hopes to trump that with $800 billion worth of stimulus here in the U.S. Since the U.S. Treasury does not have $800 billion, it will have to borrow it somewhere. Normally our Chinese buddies would be good for that, but they are already stuffed with $1 trillion of American debt. If the Chinese are backing away, why are the prices of U.S. Treasury bonds surging? Who is doing the buying?

Let us hazard a guess here. Could it be that American banks--you know, the ones that have taken down all that TARP money--are lending it back to the federal government? If that is the case, taxpayers would be borrowing from themselves, with the banks getting a handling fee. These are the same banks that would have failed (and may yet still) without taxpayer assistance. Sounds pretty incestuous to me.

Uncle Sam is not the only borrower out there. Governments around the world are expected to issue $3 trillion in debt in 2009 to stimulate slowing economies--three times more than in 2008. Yesterday the German government tried to auction off €6 billion in 10-year bonds, but could get rid of only 87 percent. The Bundesbank had to eat the rest. If the same thing starts happening at Treasury auctions, prepare for the mother of all meltdowns.