Britain’s fiscal year has ended, and the results of its 50% tax on bank bonuses have been tallied:
LONDON—U.S. banks have paid the bulk of the £2.5 billion ($3.81 billion) the U.K. has collected from its bonus tax designed to curb excessive pay, hitting banks’ second-quarter earnings while creating a windfall for the U.K.’s new government.
The one-time tax to collect 50% of bank bonuses above £25,000 was introduced in December by former Chancellor of the Exchequer Alistair Darling, who initially estimated it would raise £550 million. . . The charge applies to all bank employees working in the U.K., regardless of where the parent company is located.
According to statements in the past few days from J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc., the four banks collectively paid at least $2 billion toward the tax in the second quarter. The U.K. five major banks by assets–Barclays, HSBC Holdings PLC, Lloyds Banking Group, Royal Bank of Scotland Group PLC and Standard Chartered–collectively paid about $1.1 billion to cover their bonus tax bills.
(NOTE: The Wall Street Journal may ask you to pay to read the whole article. Don’t – read it for free.)
So that’s $2 billion less for these banks’ (predominantly U.S.) shareholders, or $2 billion less in available capital to modify underwater (American) mortgages, or $2 billion less to loan to (American) small businesses – take your pick. Either way, it occurs to me that as an employee, shareholder and customer of one or more of these banks, the British government just levied a tax on me, even though I didn’t get a vote in their election. And the recently elected government is “warn[ing] the industry to be on alert for further taxes and regulations, particularly relating to compensation.”
Haven’t we been down this road before, England? Don’t you remember what happened the last time? I’m pretty sure it made all the papers. Now, if you’ll excuse me, I think I’ll go get myself a cup of tea…
Those who even casually follow the Dow Jones Industrial Average know that a triple-digit swing (i.e., a change of more than 100 points in a given day) is a pretty big deal, and a change of 200 or more is worthy of a headline. Back in Sept/Oct of 2008, when the financial crisis was at its peak, we often saw swings of 400-500 points in a given day, which was simply astounding.
So you can imagine how strange this is to see (all quotes as per Yahoo! Finance):
That’s a 650-point drop in ten minutes followed by 650-point rise in the next ten minutes. The cause was concern over the European Central Bank’s handling of the financial crisis in Greece, and potentially a technical glitch with regard to the trading of Proctor & Gamble shares (P&G is a Dow component).
At any rate, I have a message for whoever invested a bunch of money in the stock market at 2:46pm today:
Building on the book theme from yesterday, we turn to this post from Megan McArdle at Asymmetrical Information. She relates a story about the American Booksellers Association, which is upset at Amazon, Target and Wal-Mart for selling us books too cheaply:
Wal-Mart announced that it would offer Walmart.com customers . . . the chance to buy the books in hardcover editions for just $10. Typically new hardcovers sell for $25 to $35, although some discounting is common. Amazon.com quickly matched Wal-Mart’s pre-order price on the same books.
Wal-Mart then lowered the price to $9, and Amazon followed suit. By late Friday afternoon Wal-Mart had cut another penny off the price. On Monday, Target entered the fray by offering six of the preorder titles on Target.com for $8.99. By Tuesday Wal-Mart had lowered the price on those titles to $8.98.
The association . . . accused the retailers of “devaluing the very concept of the book” and effectively selling the books at a loss in an “attempt to win control of the market for hardcover best sellers.” Retailers typically pay publishers a wholesale price of half the list price of a hardcover book — so on a $35 hardcover, the retailer pays $17.50, meaning that it loses money on a $9 consumer price.
Now, the story of the big chain taking over the Mom & Pop store is so common that Tom Hanks made his movie about it more than a decade ago. But that story usually relates to the big chain undercutting the small store by selling products at razor-thin margins, making its profits on high volume, and reducing overhead by deprioritizing customer service and amortizing its fixed costs (e.g., its employees, its rent) over a much wider customer base.
This time, it’s different. The big chains are offering these discounts on their websites. And they’re selling these books as loss leaders, in hopes that when people click over to buy their $8.98 book, they’ll throw another, more profitable item in their electronic shopping cart as well. The advantage Amazon, Target and Wal-Mart have here is the variety of products they offer and their high-value brand names that drives a lot of traffic to their web sites. Small booksellers could also choose to lose money on certain books by selling them for $8.98, but they’d run a greater risk that people would buy only those books, leaving them with a loss, rather than a profit, on the sale.
My question is this: in the online model, where customer service is mostly self-serve and Google searches, is this a good thing or a bad thing? Yes, the Kathleen Kelly‘s of the world may be forced out of business by these tactics, but then again, isn’t it the Kathleen Kelly’s of the world who would appreciate the chance to pick up the newest hot novel for $8.98, rather than $30? We may be putting the “little guy” bookseller out of business, but are we not providing the “little guy” consumer with equal quality merchandise at a much lower cost? Have we finally jumped off the cliff where the small, specialty shop isn’t so much “under attack” by the big chain, but has become a dying industry because it’s no longer the best way to serve the customer?
That’s your socio-economic question of the day. Discuss…
Remember when the Wall Street Journal’s online content was free? And then they decided to start charging for it? And then it was free again? But sometimes it’s not?
As it turns out, the Wall Street Journal has implemented a rather unique, some may even say bizarre, online access policy. If you go to their website and click on an article, you have to login with a paid subscription. But if you Google a particular topic and the same article comes back as a search result, you can click through and read the entire article for free. So, in other words, you can’t read the entire Wall Street Journal on their website without paying for it, but if you were curious enough to enquire about everything in it, they will gladly share their content with you for free.
Perhaps an example would be useful. Follow along in a separate browser instance if you like:
Read the rest of this entry »
I don’t speak for Bank of America. My words on this blog are mine and mine alone. No one at work reads them, approves them or, for all I know, even agrees with them. Still, I’ve made it a self-imposed, personal policy to steer clear of stories that involve the company, just to be safe. This morning, though, when I read about Kenneth Feinberg, the “Special Master for Compensation” (a.k.a., “The Pay Czar”), I felt compelled to speak out.
Just to be clear, though: these are my opinions. They don’t necessarily reflect the views of anyone else on the planet, whether they’re affiliated with Bank of America or not. Are we clear? OK, good.
Great news! The Obama administration has found a way to cut $488 billion from a government program, and reduce the total projected commitment of that program by a whopping $960 billion! I guess we can pay for healthcare now! OK, maybe not…
The program is the Public Private Investment Plan, or PPIP for short. PPIP was designed to achieve what Treasury Secretary Hank Paulson originally said the TARP money would be used for – buying mortgage-related assets from Wall Street firms in order to expand the power of their balance sheets. Of course, when they actually gave him the money, he decided to use it to buy equity in the banks instead.
That was back in September of 2008, when the worst financial crisis of our time demanded immediate, decisive action. Like suspending the two presidential campaigns for a photo-op at the White House.
Having failed to actually buy any of these so-called “toxic assets,” our government tried again in March of 2009, launching the PPIP program, which intended to use “$75 to $100 billion in TARP capital and capital from private investors [to] generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. ”
Because, you see, in March of 2009, the worst financial crisis of our time demanded immediate, decisive action. Like investigating the $18 billion in Wall Street bonuses that were distributed the previous year, and bailing out the auto industry.
In late June of 2009, The U.S. Treasury announced that the PPIP program would roll out sometime this week. At the time, nine private firms had agreed to participate, bringing the total purchasing power of the program to roughly $50 billion (NOTE: That is not a typo).
Because, you see, in late June, the worst financial crisis of our time demanded immediate, decisive action. Like revamping the nation’s healthcare system.
Which brings us to today – early October of 2009. According to the Wall Street Journal, the program now has five participants with a total purchasing power of $12.27 billion, who can “start buying [assets] next week.”
Because, you see, the worst financial crisis of our time demands…ah, nevermind.
So, to recap: the original PPIP program set a goal of purchasing $500 billion in mortgage-related assets, possibly expanding to $1 trillion. If the program actually does kick off next week (we’ve heard that before), it will be almost seven months later, and will be able to purchase just $12.27 billion in securities (2.5% of the plan). Further expansion is, apparently, still expected (despite the consistent shrinkage we’ve seen so far), so Treasury tells us the plan may one day expand to $40 billion.
On the upside, we’re investing $488 billion less than we planned to invest now, and if we hit our (new) expansion goals, our “savings” will total $960 billion!
It seems we’ve managed to save quite a bit of money by our inaction. Kind of makes you wonder how much more we could save if we didn’t enact some other programs as well…
Robert Benmosche, AIG’s new CEO had an internal meeting with his employees on August 4th. This being the Internet age and all, it took all of two weeks for a transcript to make itself available for public consumption. Check out some of these quotes:
- I don’t liquidate things, I build them. When we get the fair value for [subsidiaries that AIG is considering liquidating], that’s when we’re going to sell them; it’s not going to be before.
- We believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well.
- I have the luxury to say to the government, I’m not going to rush to do this. I’m appalled at how much pressure has been put on all of you [employees] to just sell [businesses] no matter what, because the Fed wants out, or the Treasury wants out. If they want out in a hurry, they shouldn’t have come in in the first place.
- My first charge is to get the company to operate at the level it used to operate, being the world’s best. The fact is we owe the U.S. government a lot of money and we are not going to be able to pay it back just by our profits, so we will sell some of the company off but only at the right time at the right price.
- I want to make sure we all get paid competitively. If you shoot the lights out in a given year, we should have enough flexibility to give you a big increase.
- It’s time the people in Congress stopped talking about you [employees] as the problem, because you’re the solution. It’s not your fault, it’s their fault, it’s the regulators’ fault.
- My fear is that you’ll say, ‘I don’t know if Treasury wants it, I don’t know if the Fed wants it, I don’t know if the lawyers want it, I don’t know whatever.’ If you sit there every day not making the right decisions to take us to the next level, we’ll miss an opportunity.
- [On his commitment to remain CEO of AIG until he's rebuilt it:] It’s not a question of, I’m here for a year, two years and then I’m going back to my retirement
Now, I’m sure most people will hear this kind of talk from a man who’s company owes the Federal Government $182.5 billion and think, “How dare he? What an incredible asshole!” But consider what it must be like to be an AIG employee, or even an AIG shareholder. To them, I think this probably sounds like the confidence and leadership required to turn the company around. Also, it sounds like a place where one can build and/or grow a career. Since the bailout, AIG has lost 45 of its managers to competing firms. Mr. Benmosche seems determined to retain his employees, even in the face of public pressure. He, himself, will receive a salary of $7 milion, with long-term incentives totalling as much as $3.5 million more (this, compared to the $1 that his predecessor, Edward Liddy, earned for the ten months he was at the helm).
Succeed or fail as he may, Mr. Benmosche seems determined to bring AIG back from the dead. If he succeeds, a lot of folks will likely be ticked off at him. Then again, we’ll get our $182.5 billion back, so maybe that’s not all bad…
If you’re an Ivy League football or basketball fan, you’re used to the occasional news story about Penn beating up on schools like Harvard, Yale, and Princeton. But here’s one area where you don’t often see Penn atop the standings:
The University of Pennsylvania, the Ivy League school founded by Benjamin Franklin, beat Harvard University’s endowment by choosing the right stock pickers, investing in credit strategies and boosting its Treasury bonds.
The Philadelphia university’s stocks outperformed market indexes, said Kristin Gilbertson, chief investment officer of the fund. Penn’s endowment fell 16 percent in the year ended June 30 to $5.2 billion, better than Harvard’s estimated 30 percent decline and the 26 percent loss for the Standard & Poor’s 500 Index, including dividends.
Penn, where endowment returns have funded 9 percent of the budget, has limited layoffs and spending cuts and will enter the school year with a balanced budget, President Amy Gutmann said this week. Investment losses at Harvard and Yale University, whose endowment declined an estimated 25 percent, have forced those universities to reduce budgets and fire workers. In the past year, endowment earnings covered more than a third of spending at Harvard and Yale, the wealthiest U.S. schools.
OK, so we’re crowing here about a 16% drop in value, but still – it could have been much worse. Way to go, Quakers!
From the top story on today’s Yahoo Finance page:
Investors are adding consumer confidence to their growing list of things to worry about.
Stocks reversed early gains Tuesday and moved lower after a private research group said consumer confidence unexpectedly fell in June. The Dow Jones industrials fell 105 points in late morning trading.
After months of economic data showing that the recession was not getting worse, investors are hungry for signs that the economy is actually growing. Investors have grown nervous that the economy’s rebound won’t be as robust as hoped.
So, basically, here’s the conversation we’ve been having with ourselves:
Investors (last few months): We’re finally starting to feel better about the economy. We’re going to buy some stocks.
Investors (day before yesterday): Still feeling better. Keep buying stocks…
Private Research Group (yesterday): We know you thought you were feeling better, but you’re not. You’re feeling worse.
Investors (this morning): Holy crap! This news has made me feel worse. Sell the stocks! Sell!! Sell!!!
Perhaps what we have here is an over abundance of information, which has crossed the “cause & effect” transom to become a self-fulfilling prophecy?
From March, 2009:
- The national foreclosure rate rocketed up 81% in 2008, to 1.8% (from 0.99% in 2007).
- Only nine states had foreclosure rates above the average — and just four had rates seriously above the average: Nevada at 7.4%, Arizona and Florida at 4.5%, and California at 4%
- Fully 41 states had below-average rates.
- Subtract those four states and the median foreclosure rate in 2008 was only 0.90%.
- Home prices increased in 28 states during the fourth quarter of 2008, according to the federal OFHEO State House Price Indexes (click on “State HPI Summary”).
- In most other states price declines were modest.
- Prices declined in Arizona by 2.91%, in Nevada by 2.66%, in California 2.61%, and in Florida by 5.47% — annual rates of decline from over-10% to over-20%.
Another Scrivener post has some other illuminating data which compares these four states (along with Michigan, which is almost as bad, but not quite as bad as these four) to New York (which is doing comparatively well) and the national mean.
With all the discussion of housing bubbles and credit crises, I’m amazed that I’ve never heard how localized the problem was. I also wonder if our federal government’s response would have been different if the general public knew that mortgages & housing prices in 45-46 of the states were actually doing fairly well.