(9/22/2008) Coughing up the cash for the 700 billion dollar U.S. bailout of troubled financial institutions
A Value Drain™ analysis by Sam Mishra, President, Franteractive
What do you get when you are Martha Stewart, the American Icon, and indulge in insider trading? You go to jail. What do you get when you pocket multi-million dollar bonus packages for skillfully selling bonds and other fixed assets based on thousands of mortgages pooled together (these are called mortgage backed securities) and then these bonds / securities under-perform in their promised yields? If you are a Bear Stearns, you get a Fed bailout to the tune of $30 billion. What do you get when you insured that these mortgage backed securities will be able to deliver their intended returns and then they don't and you can't pay for the damages in spite of insuring them? You get a Fed bailout of $85 billion, if you are AIG. And what if you originated some of these mortgages and / or guaranteed that the mortgage premiums would keep coming or else you will make up for it? You go belly up, for you are either Fannie Mae or Freddie Mac, and are ultimately rescued by the US Government. You also give violent jolts to the stock markets world-wide, and $10,000 or more per household in additional taxes to fund the $700 billion dollar US bailout plan that Bush and Paulson are now negotiating with the Congress. This is bad.When I heard fellow MIT alum Ben Bernanke chuckle while participating in the Senate hearing in the aftermath of the Bear Stearns bailout back in March of this year, I thought the esteemed Fed Chairman was on top of his game --- he knew how to avoid a world-wide financial meltdown. I thought being the Fed Chairman, he controlled enough resources to do a decent math job in terms of summing up of all outstanding mortgages, and derivatives thereof, and even though some fat cats in Bear Stearns were getting a helping hand, Americans and the world will be better off. Boy was I wrong! Ever since, the markets have been more and more volatile, a host of other loan originators like Countrywide and IndyMac and investment banks like Lehman / Merrill have gone either bankrupt or been sold to the next available purchaser; and the government is all set to drain another $10,000 in taxes from each American household to bail out big financial institutions run by CEOs with multi-million dollar pay packages and hundreds of thousands of dollar in pocketed cash bonus. This is terrible.
Let me explain how close to $800 billion ($700 billion in future bailouts plus $85 billion paid to AIG to own 80% of the company by the US government) will be drained out, by using a VALUE DRAIN™ framework. Now, there is no reason to panic. It is similar to the VALUE CHAIN framework we strategists are familiar with. In a Value Chain, each segment of the chain adds some value, so that the customer enjoys a margin. In other words, Value Chain Margin = Value Delivered to Customers - Value Created by the Business.
Similarly, what you see above is how the various stakeholders: flippers, real estate agents / loan consultants, mortgage loan originators, investment banks who sold mortgage-backed-securities, and the FED are all set to drain the $800 billion dollars out of American taxpayers. Here, Dollars Drained = $800 Billion U.S. Bailout = Financial value perceived by Americans from all the home related transactions and derivatives thereof (mortgage backed securities, bonds, stocks, options) - Financial value actually delivered to the Americans by the various stakeholders. This is outrageous! But where did the eight hundred billion dollars being sought for by the Government really vanish? Let me think really hard here --- Well I don't have to. All the Investment Bankers who pocketed hudred thousand dollar cash bonus each last December are expecting a bonus this year too. We still have enough executives in Wall Street (and also Main Street) gobbling up multi-million dollar compensation packages and turning them into beach houses, and they are not done yet. And some Americans did enjoy nice capital gains flipping houses during the housing bubble. Also, I still remember how selling mortgage loans by being employed as a loan consultant was still a lucrative career. And in these declining real-estate markets nation-wide, there are real-estate agents still touting that buying a home is a good idea --- the agents in just one county here in the SFO Bay Area as a group were earning a billion dollars in combined commissions not so long back.
Now I have the following words of persuasion for the various stakeholders:
1. Congress: Don't tax the poor Americans who never lived in a home; or for that matter, those renters who have been frugal and / or prescient about the housing bubble. What have these poor souls done for them to foot the bills of champagne drinking, caviar eating investment bankers from Lehman, Merrill Lynch, and Bear Stearns? Don't socialize the losses, please. Tax the flippers and those households who have gained from the bubble --- you have the data on this, don't you? If you don't, use a service like Zillow.com.
2. Americans: Don't take this lying down. It is our government, after all. Millions of us are suffering from foreclosure related woes, and millions more are on the verge of being foreclosed. The package must help out those who got duped by sub-prime mortgages with teaser rates, and not investment bankers with million dollar salaries and hundred thousand dollar cash bonus packages who pooled our mortgages into mortgage-backed securities, and hacked them into pieces to be sold off in the bond market for an annuity / perpetuity. While the going was good, these smart-alecs pocketed hundreds of thousands of dollars in cash bonuses; and now that the chickens have come home to roost, all of them have suddenly become pan-handlers. Refuse to pay them; let them foot the bills.
3. Congress: Enact laws so that the financial criminals who orchestrated these massive micro and macro-level bankruptcies while filling their own coffers with gold / fat bonus packages / multi-million dollar salaries are punished, and not allowed to roam free to orchestrate the next financial scam. Don't let these criminals run away with millions in their pockets, while the gullible American loses his home, and his job. Put some of these criminals in jail, so the others take deep breaths before committing these financial crimes.
4. Americans: Press your congressman and your senator to bring the financial criminals to justice. Demand that those who made the big bucks pay for bulk of the bail-out and not you. $785 billion in bailouts is fine. But, the lion's share should be borne by the rich CEOs / ex-CEOs of these failed financial institutions and the cash-guzzling investment bankers who profited from the VALUE DRAIN. Executives of financial institutions still dealing with mortgages and mortgage-backed assets should also be taxed heavily, for they are the ones indirectly responsible for this VALUE DRAIN™ . The more these fat-cats pay up, the less remains to be paid by the rest of us.
5. Executives of Financial Institutions (and public companies with million dollar executive pay packages) still standing: Good luck with your hundreds of thousands of dollars in cash bonus this year; and good-luck with your multi-million dollar executive compensation packages; and good luck with your multi-million dollar severance packages, if you were to lose your jobs.
Update 1 on 2/6/2009: As per the table maintained by NY Times, the top 3 TARP (troubled asset relief program) recipients are Citigroup, the troubled financial giant; Bank of America which gobbled up Merrill Lynch of the John Thain fame; and AIG, the troubled insurance giant. If you check our current news regularly, you will realize that most of these financial institutions are firing their politically unsavvy / powerless / lowly employees while paying huge bonuses to their executives (total Wall-Street bonus has been to the tune of $18 billion plus by some estimates), and begging for more and more taxpayer funded bailout money. And the gullible American thinks that it is in the best interest of the nation and the world!
Update 2 on 2/26/2009: To listen to the associated fifteen-minute long podcast released on exploding this Value Drain further, please click here. Thank you.
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