More Money More Problems: The Auto Industry Bailout

Though I talked about the $700 billion bailout in a previous post, I thought it would be prudent to discuss the second proposed bailout in as many months. This time, instead of bailing out financial institutions, Congress is debating bailing out the auto industry. More specifically, they are talking about saving the “Big Three”: GM (see below, right), Ford, and Chrysler, from potential bankruptcy. The numbers are staggering. The United States government has already passed a $25 billion relief program set to come into effect in early 2009. However, leaders at GM came out to declare that the company may run out of cash by the end of 2008, and that they would be forced to declare bankruptcy before they would be able to receive any federal aid. Thus, they came to the government asking for more money with fewer strings attached. Under the current program, the money, coming in the form of loans, would only be used to help the companies develop more fuel efficient cars. Leaders in the federal government are torn. Generally, Republicans believe that the problems American car manufacturers are experiencing are a result of their financial mismanagement and faulty business plan (see below, left). They do not believe we should bail them out, for it would be another instance of taxpayers paying for poor management of companies. Democrats claim that failure in the domestic auto manufacturing industry would be detrimental to the health of our economy and would cost Americans up to 3 million jobs. Because of how divided our government is on the issue and despite the fact that I have come to my own conclusions about the $700 billion Troubled Assets Relief Program (TARP), I decided to explore the blogosphere to get a feel for what the public and experts believe about this bailout and to leave my feedback on them. The result was overwhelming. I expected to find equal parts positive and negative feedback on the issue, but I found it hard to find any supporting commentary by economists or financial experts. Of those sites, I found two that were especially interesting. The first, “Demand More for Your Auto Bailout Dollar; Oil Patch Should Bounce Back Long Term” by Michael Fitzsimmons of Seeking Alpha, Fitzsimmons discusses what conditions the government should put on any money they give to the auto industry in order to maximize its benefit to the country as a whole. Peter Cohan, of BloggingStocks, writes about how taxpayer dollars can be best utilized to help the auto industry, and GM in particular, in a post entitled “Six Steps to Restructure GM”. Overall, I agree that the current bailout is not justified. There need to be more restrictions and covenants on the money that is being given to the auto industry. Whether that is to make the companies greener or to save taxpayers more money, it does not matter. In addition to posting my comments on the blogs, I have copied them below.

“Demand More for Your Auto Bailout Dollar; Oil Patch Should Bounce Back Long Term”
Comment:
Thank you for your thoughtful and insightful commentary on the proposed bailout of the American automobile industry. I liked how you approached the issue not as a simple yes or no to the bailout, but more of constructive commentary as to how the terms of any loans to the automobile companies can be amended to create a sustainable industry dynamic and to best benefit the country as a whole. I agree that U.S. automakers are to blame for much of the problems our economy is experiencing by producing sub-par products that increased our dependence on foreign oil and pushed consumers to foreign products. In the end, I do not believe the question is if the automobile industry will receive more money from the government. Based on its track record, the question is more when and under what terms.

I agree with your ideas that they must make a natural gas powered car and that they should strive to make cars that get over 40 MPG. That is the most sustainable approach and it also benefits every person in the country by reducing our emissions However, I do not agree that every vehicle must get over 40 MPG or that “every vehicle they make must be natural gas, hybrid, or electric”. Engines and batteries have not reached the level of technology that they are capable of being reliably installed in every vehicle. Did you forget about commercial vehicles that must be used to tow heavy loads? How can you expect vehicles like that to use a less powerful hybrid or electric engine or to achieve such a high gas mileage? Additionally, until there are better ways of getting natural gas to every consumer, it does not make sense for a large percentage of vehicles to be powered exclusively by natural gas.

Once again, thank you for taking a different approach to this issue than many other people do. It is so easy to say no without giving any sort of alternative. Hopefully, the federal government will pay attention to people like you and realize that there are better ways to approach this problem and use this money to actually improve our automobile industry rather than temporarily slow its failure.

“Six Steps to Restructure GM”
Comment:
Thank you for an interesting piece on your approach to the problems the U.S. automobile industry. I liked the fact that you took a stance that so many people have overlooked or deemed impossible, despite the fact that it is one that makes the most sense. Bankruptcy was created for companies in GM’s exact situation and it does not make sense that people cannot see that. Admittedly, we are living in a time of potentially extenuating circumstances, for the economy is in such bad shape and the stock markets so volatile that news of GM declaring for Chapter 11 protection might trigger a chain reaction that would end up destroying our economy.

The government eventually will have to put some money into the automobile industry, but not in the way it is currently planning. I think your ideas make the most sense. If people really do want to see change in companies like General Motors, then force it to declare bankruptcy and then provide the financing to restructure once it has done so. Your talking points, of merging with Chrysler, getting rid of unprofitable brands, closing related dealerships, merging Chrysler and GM brands, and cutting pay all make sense and should have been done if not for one problem that you also provide a remedy for. The management must be replaced. Your fact that GM’s CEO has “presided over a 95% decline in the company stock over his tenure” is shocking, and I agree that we cannot expect any changes if the person who started this decline remains in a position of authority.

One thing I would have liked to have seen is more talk about how to address the issue of renewable energy and increased vehicle efficiency. I agree that it may not make sense to set an immediate requirement for achieving a certain level of emissions, but does it not make sense to set some sort of timetable for requiring them to get on the right track in terms of research and development and future models?

The Golden Parachute: Why Current CEO Compensation in America is Unjustified

Now that the presidential election has passed and the future Commander in Chief of the United States is known, attention has shifted from the promises of change in the future to fixing the country’s deteriorating economy. One of the biggest issues that have elicited cries of outrage is the topic of CEO compensation in public companies, especially the ones that have been failing during this financial crisis. For example, Richard Fuld, former chief executive of Lehman Brothers Holdings Inc. received $484 million in compensation from 2000 until it filed for bankruptcy in September. Similar payouts have been recorded at other failed institutions like AIG and Countrywide. Considering that those individuals led their companies to failure, the question must be raised as to whether or not these CEOs are deserving of the outrageous pay packages they are given. Is it necessary to pay the top men in Corporate America tens or hundreds of millions of dollars in salary, stock, and other benefits? Additionally, is it fair that their bonus packages are often not directly linked to the performance of their company’s stock? When I started my research for this post, I was of the belief that CEO compensation in America is mostly justified, except for the extreme cases like Lehman Brothers and Countrywide. However, the more I looked into the topic, the more I came to believe the opposite. Except for certain cases where a CEO significantly increases the value of a company’s stock, the current level of pay for CEOs in America is not justified, for the amount of value they add to it is exceeded by their cost of services.

For most employees in the world, the amount of money and other benefits they are given for their work is directly correlated to their performance and the value they add to their employers. Recently in America, it seems that CEOs of large public companies have become exempt from that policy. One of the responsibilities of a CEO is to maximize value for shareholders. The problem has been that, looking at some of the highest earning CEOs in 2007, their pay is an unjustifiably large percentage of the company's earnings (see below, left). For those institutions that do link executive income to performance, they have developed too narrow of a focus on earnings. As Leo Hindery, Jr. observes in BusinessWeek, “from the end of World War II until the mid 1990s, prominent public and private company CEOs almost universally viewed their responsibilities as being equally split among shareholders, employees, customers, and the nation.” However, as time passed and companies became less regulated and their owners more greedy, shareholders became the most important. Hindery also points out that “at that point, because of the prevalence of stock option and restricted stock grants, shareholders included many if not most senior managers at a large number of publicly traded companies.” The problem that arises when the focus of a company turns towards making a profit and not towards accountability and responsibility is that encourages short-term profiteering and long-term irresponsibility, the American Federation of Labor and Congress of Industrial Organizations argues in an article entitled “Why the Mortgage Crisis Matters”. This attitude lead to the use of the complex financial instruments that produced large short-term gains, but in the end, is at the root of the credit crisis our country is suffering from right now.

In addition to being unjustified, bad for the company, and unhealthy for the economy, giving CEOs these huge salaries and stock options with even larger severance packages only grows the gap between the rich and the poor. On average, during 2007, average CEO pay was 344 times that of an average worker in the United States. Hindery points out that in other industrialized nations like Britain, Canada, and Japan, that multiple drops to 22, 20, and 11, respectively. What is it about the average CEO that makes him or her hundreds of times more important to a company than its average employee? Would the average CEO be more useful to a company than an additional 344 employees? Freek Vermeulen discusses how the boards of directors in these companies (the people who determine how much a CEO makes) use a comparison to a company’s “peer group” to justify the number they choose. Unfortunately, the problem with this logic is that the overcompensation of executives is system wide. It is a rare instance when the head of a company is not making at least upper seven digits. In reality, there are only a handful of individuals who are actually worth the kind of money CEOs are being given today. They are the Warren Buffet’s and the Jack Welch’s of the world. They are the people who, if the company were to lose them, they would potentially lose billions of dollars of value. The average CEO is not that person. He or she is skilled or intelligent, but there are many skilled and intelligent people in the world. The only difference between the two groups is that one is being paid millions and millions of dollars, while the other may be making little over what the average worker makes. I see that as a cruel injustice which polarizes our society and harms our economy. It must be changed.

Luckily, executive compensation has become a top issue in our government today. Considering the fact that the United States government is making hundreds of billions of dollars available to these companies, it absolutely should be an issue. Taxpayers should not be the ones supporting the lavish lifestyles of the people who caused the economic downturn in the first place (see right). Unfortunately, the current bailout package has loopholes in it that would allow this spending to continue unchecked, a fact which some legislators have not overlooked. They are calling for caps on CEOs salaries if they receive money from the bailout. While the bailout is a special situation, I think that there should be broader changes across the market. Stockholders, not a board of directors, should be the ones who determine how much a company’s executive makes. They are the ones who stand to make or lose money depending on how the company performs, and so they are more likely to reward smart, sustainable decisions. There may be better ways to remedy this issue, but the fact of the matter is that the amount CEOs of American companies make is excessive, and as such, is a problem. It is a detriment to the growth of a company and disease that, if allowed to continue, will keep our economy from truly regaining its health.

Bear or Bull: Has the Stock Market Bottomed Out?

Over the past few weeks, I have spent time discussing various issues in the economy, from the $700 billion bailout plan to presidential fiscal policies. In the end, no matter what any analyst or I think of these issues, the ultimate judgment is made by the stock market. It is the number one indicator for the health of the economy, and over the past year the S&P 500 has declined ­­­34 percent, making it one of the worst bear markets yet (see below, left). The thing that makes this market so odd is not the fact that it has been declining; many people anticipated the burst of this current bubble. It is how volatile and unpredictable this market has been that makes it so odd. Drops of hundreds of points one day are followed by gains of hundreds of points the next. Negative economic news makes the market rise, positive news makes it drop. Recently, however, the market has been especially unpredictable. October was the worst month in 21 years, but the last month of October marked the largest weekly gains the market has seen in 34 years (see below, right). Does this indicate the market has bottomed out, or is it just another example of the market’s odd and irrational volatility? With this question in mind, I decided to explore the blogosphere and see what others believed. Like before, I found two blogs that had especially interesting discussions about the topic and left my feedback on them. In the first blog, The Big Picture, Barry Ritholtz discusses other predictions for the bottom in an entry titled “Race to Call the Bottom.” He does not try to predict the end of the bear market but instead talks about the absurdity of some of the predictions out there as well as how unlikely it is for someone to be able to know the market well enough to predict when it is going to bottom. In his blog on the website Seeking Alpha, Ian Cooper tries to address the issue in an entry entitled, “The Economy’s Worst is Still Ahead of Us.” He believes the worst of the crisis is ahead of us, and quotes Nouriel Roubini, a New York University professor, in order to back his point. Roubini was one of the few who has predicted this financial crisis for years and, according to Cooper, has emerged as a leading commentator on the crisis. For your convenience, in addition to posting my comments on each respective blog, I have copied them below.

“Race to Call the Bottom”
Comment:
Thank you for your article about the absurdity of trying to predict a bottom of the market and how every media outlet is searching for “experts” to give them a number the market is going to bottom out at. The entire concept that a person is able to accurately predict a number at which the stock market will bottom out, even within 100 points, is asinine. There are so many factors that control and direct the stock market. Some are measureable, others are not. I can understand how analysts arrive at their estimates and their importance to investors, but in the end, they are only estimates. For a news outlet to take those numbers and quote them as if they are an assertion of fact by that analyst is just irresponsible. I especially liked your example of Peter Boockvar being quoted in the New York Times as believing the Dow would bottom at 5,000, despite the fact that he had really only come up with a range of 5,000 to 7,000 in which he could see the market reaching its bottom. His quote is especially meaningful, when he says, “No one’s smart enough to answer the question as to where we’ll be a year from now. I think it’s silly to pick a number.” Is this fact such a difficult concept to grasp? As you say yourself, “The track record of economists and strategists is notoriously poor, no one ever consistently gets the year out forecasts correct several years in a row – it’s just totally random.” Do reporters and analysts actually believe that they are going to be correct when they throw out these seemingly arbitrary numbers of where the market will bottom, or are they only creating these numbers for others to read so that they can get some publicity or sell copies of their articles?

All in all, thank you again for this commentary on the folly of market forecasts, especially the narrow forecasts we have been seeing lately. In the future, I would love to see more discussion of the extreme forecasts you mention earlier in your article or a continued discussion of other forecasts for this particular market. Really, all an analyst can do is give a broad range of numbers he or she believes the market will drop to or give an opinion as to whether the current market is at its bottom at the time. I believe these specific forecasts to oftentimes be little more than publicity tools, yet people will continue to look upon them as fact until more people like you come out and call them out for what they are: overly speculative educated guesses.

“The Economy’s Worst is Still Ahead of Us”
Comment:
Thank you for your interesting piece about how the market has not reached its bottom. It is interesting to see how often Wall Street is dominated by a group think mentality. I feel that all it takes for a temporary spike in the stock market is for a handful of analysts to come out with a positive outlook on the market and everyone else will buy into it. Are these people not supposed to be some of the brightest in the country? Are they incapable of looking at some of these facts and realizing that, although we do not know exactly when the market is going to turn around, it probably is not at this exact moment? Looking at the past week, it is shocking to see how irrational the market has been. Consumer confidence fell to an all time low (almost 15 points below the Street’s estimate) and yet the market rallied nearly 900 points. Additionally, the United States GDP declined for the first time since 9/11 and real consumer spending fell for the first time since 1991, and the most since 1980. I am not sure which part of this news indicates to investors that the market has bottomed out.

If what you and Roubini say is true, and that hundreds of hedge funds will go belly up and the Option ARM loans result in a second financial crisis, those optimists are in for a rude awakening. On that note, I wish you had gone into greater detail about why the hedge funds are going to fail or when the Option ARM loans are going to begin resetting. The prediction that the hedge funds will go belly up loses some of its credence when you do not back it with any reasoning, only repercussions. You explained the Option ARM loans well, but by not including an idea of when to expect that crisis to begin, all you did is raise my blood pressure. However, those two do not take away from the fact that this was an eye opening piece about where the market has the potential to go. I am hoping none of your predictions come true, but look forward to continuing reading your blog in the future.

Redistributing the Wealth: Understanding the Presidential Candidates’ Economic Policies

With the presidential election looming in the next week, I thought it would be appropriate to write about the plan each candidate has for the economy if they are elected, as well as a brief analysis of the strengths and weaknesses of each person’s ideas. As John McCain’s “Jobs for America” economic plan is around thirteen pages long and Barack Obama’s “At a Glance” section of his economic policies is around five pages long, I realized I could not include every detail of what each candidate hopes to accomplish during their term. Instead, I have identified three important categories (taxes, international trade, and energy) in which they have differing points of view and will briefly outline their plans in each.

One of Barack Obama’s major points during this campaign has been that he wants to provide tax relief for lower and middle class Americans and compensate for that by increasing taxes on the top 1% of wage earners. In fact, according to Martin Crutsinger, an economic writer for the Associated Press, under Obama the top 1% would see an average increase in taxes of $93,709 annually while the bottom 20% and middle 20% would experience average annual declines in taxes of $567 and $1,118, respectively (see another forecast, left). All told, Obama’s taxation plans would result in an increase in federal revenues of approximately $627 billion over the next decade. Additionally, Obama’s international trade policies would be tailored towards keeping jobs in America and fighting for fair trade internationally. Obama is not a strong believer in free trade between nations. He believes the North American Free Trade Agreement (NAFTA) should be amended to be more fair to American workers, and that, not only should companies no longer receive tax breaks for sending jobs overseas, but that tax breaks should be given to companies that support American workers. Finally, Obama hopes to invest heavily in green energies to reduce our dependence on foreign oil as well as create new jobs. He wants to invest $150 billion over 10 years to advance the development of green energies and energy infrastructure, as well as create a federal Renewable Portfolio Standard (RPS) that will require 25% of American electricity to be derived from renewable sources by the year 2025.

Unlike Barack Obama, John McCain’s economic policies are rooted more in his confidence in a free trade economy. Interestingly, in an article for the Media General News Service, Dan Griswold, director of the Center for Trade Policy Studies at the Cato Institute, calls McCain an “unabashed free trader,” and that “there's a stark contrast between the two major presidential candidates on trade, probably the starkest…in decades.” McCain wants to reduce barriers to international trade, level the global playing field, and create a way to effectively enforce global trading rules. With regards to taxes, McCain believes that tax rates should be kept low; promising to keep the top tax rate at 35 percent, maintain the 15 percent rates on dividends and capital gains, and phase-out the Alternative Minimum Tax. Additionally, he believes the corporate tax rate should be cut from 35% to 25% and the Estate Tax rate should be reduced to 15%. Compared to Obama, McCain’s energy plan is less focused on funding research for new forms of energy, but rather on finding ways to make energy more affordable. His energy plan calls for increased domestic exploration of oil and natural gas, and he hopes to build 45 new nuclear power plants by the year 2030, devote $2 billion to finding a clean way of using coal, and more strictly regulate the oil futures markets to prevent the speculative pricing of oil. The fact that he is focused on lowering current energy costs does not mean that he does not support other research. He has proposed a $300 million prize for an improved battery technology that has the size, capacity, cost, and power to be able to deliver a viable power source for hybrids at 30% of the current costs.

Originally, being a fiscal conservative, I believed that John McCain’s economic plan would be better than Barack Obama’s. However, as I read more and more about each plan, I found that there were things I liked and disliked about each one. I liked McCain’s plan to build 45 new nuclear power plants by 2030 and his $300 million prize for creating an improved battery technology. Nuclear energy is safer than people give it credit for (see below, right), and it is also a low emission and relatively inexpensive source of energy. Combined with a battery that would make electric cars or hybrids cheaper and more efficient, the United States could reduce its emissions as a country drastically. Conversely, I do not like his plan to increase domestic energy exploration or his encouragement of the use of coal as an energy source. No matter how clean we may make them, they are still non-renewable resources. If he wants to make a significant impact on the availability of oil, McCain should fund the development of an efficient oil shale extraction method. As Michael Schirber points out in U.S. News and World Report, American shale reserves contain approximately 2 trillion barrels of oil – more than double the amount of crude oil humans have ever used. On the other hand, despite my conservative inclinations, I liked many of Obama’s ideas. I agree the NAFTA needs to be amended. In a 2006 Economic Policy Institute (EPI) research report, Robert Scott, an analyst for the EPI, found that NAFTA “eliminated a net total of more than 1 million jobs in the United States, 65% of which were in the manufacturing sector.” Additionally, I agree that the government should raise the minimum wage and eliminate income taxes for seniors making less than $50,000 a year. Taxing seniors living on social security and their retirement accounts is unnecessary and makes it harder for people to make enough money to retire. This is especially true if they are making minimum wage. Having worked for minimum wage before (which is significantly higher in California than in other parts of the country), I can attest that it is not enough to cover one’s cost of living. While I liked many of Obama’s ideas, there were some that I did not agree with. I think that giving more protections for unions (such as banning the permanent replacement of striking workers) and expanding the Family and Medical Leave Act to companies that have more than 25 employees (rather than more than 50) would only hurt our economy, especially the small businesses Obama claims to be encouraging. If an individual decides to stop working out of protest, they should not be guaranteed the right to keep their job. They elected to stop doing it in the first place. And while I would love to see the Family and Medical Leave Act expanded, companies that are smaller than 50 people are reliant on every single employee they have, so being forced to allow one to take time off would significantly affect their ability to operate.

Having looked at each candidate’s economic policies, I realized that it is hard to decide which candidate is better based on economic criteria alone. I agree with some ideas by both McCain and Obama, but disagree with some as well. Choosing a candidate is an issue of deciding which issues are most important. To me, taxation is one of the largest issues, and, as economist Arthur Laffer is quoted saying in the Victorville Daily Press, “”If you tax people who work, and give it to people who don't, pretty soon you're going to have an awful lot of people who don't work.” I could not agree more.

A Wealth of Knowledge: An Exploration of the Online Financial Community

As I was sitting down this week to do my daily perusing of the internet to see what is happening in the world and the economy, I realized that my blog is lacking any reference to the vast financial and economic online community, the goal of which is to keep its readers up to date on all that is happening in the economy. With this in mind, I chose to explore the internet and develop a robust linkroll of resources to complement my own posts. In order to ensure I only included the best sites, I used the Webby and IMSA criteria when evaluating these external sources, evaluating them by their content, structure, visual design, functionality, interactivity, depth, and activity. After extensive research, what I found were twenty resources that provide unique and valuable insight into finance and the economy. I have included links to them in my linkroll on the right. These sites can be broken into four categories: news, government, research and opinion, and private equity/investment banking. In order to further educate my readers, I have chosen to give a summary of the strengths and weaknesses of each.

The news sources offer up to date commentary and reports of what is going on in the world. They are laid out similarly, but are often difficult to navigate due to the abundance of information on their pages. For the most part, they also lack in-depth analysis of current issues. Among the news sources listed, American Banker is the least known. Its site is simply laid out and reports the major economic headlines as well as giving an analysis of that news. However, its navigation bar was vague and is grouped into odd categories like mortgages and retail delivery. The Wall Street Journal is the best known of the news sources, and its U.S. Business site’s “What’s News” section (see left) offers brief summaries of the headlines for the day. However, the reader looking for headlines across a broad scope of industries and economies will become frustrated, as the website is segmented into over ten categories, each of which has between five and ten sub-categories. Those looking for more general news should go to CNNMoney.com. Its homepage has headlines spanning a wide variety of classifications, but due to the large quantity of headlines it covers, the site is cluttered with news that is often trivial or unhelpful. While the previous three sites are more traditional news sources that give a report of what happened earlier, Yahoo! Finance and Bloomberg Market Data offer real time updates on the market and major news. The two sites complement each other well; Bloomberg Market Data has detailed data of the market’s performance with no explanation of why while Yahoo! Finance focuses on top stories that affect the market with data on only the major U.S. indices.

When reading the previous news sources, readers may notice references to various statistics as indications of the health of the economy. Rather than wait for one of these statistics to be referenced in an article, The White House Economic Statistics has every statistic that offers any indication of the health of the economy. However, these statistics are not always intuitive, and the site offers little explanation of the significance of the different numbers. A simpler way to gauge the health of the economy is to go to the Federal Reserve website and see what the recent developments are. They give a good indication of how the economy is faring, but the data is incomplete, for the Fed only offers information on things it has done, not those it is considering doing. For those more concerned about the future performance of the economy than its current health, Barack Obama and John McCain’s economic policy pages give a hint as to what the regulatory environment will be for business in the next four years. Though Barack Obama’s page is much better organized than John McCain’s, I find both to be overly flashy and lacking a concise summary of what they want to do.

Some of the least flashy pages are the best sources of news or in-depth analysis of various news items. These sites are the ones I have classified as research and opinion. Economy Society is business consultant Bill Birnbaum’s forum for discussing his predictions for the future of the economy. His blog has interesting information and opinions, but its credibility is reduced by how cheap the website looks. Focusing on more current issues, Rogue Economist Rants and The Common Man’s Politics provide alternative perspectives on many issues. Their major problem is that they lack credentials. The Common Man’s Politics provides no credentials for its author, while Rogue Economist Rants only offers vague credentials for its author as having experience as a banker and consultant. The final three blogs in this category do not suffer from such a lack of credentials. Financionomics is written by an MBA candidate with a Post-Graduate degree in Economics, Freakonomics is written by the bestselling authors of the book Freakonomics, and The Conscience of a Liberal is written by Paul Krugman (see right), who was awarded the Nobel Prize for economics on Monday. Of these three, Freakonomics is my favorite, because it comments on such a wide scope of issues and makes bold statements whenever it can. These blogs are hard to critique, and my only complaint would be that their entries tend to be shorter, as they do not seem to ever settle on a single topic.

Outside of the resources focused on the market and economy, the sites that discuss private equity and investment banking are the most interesting to me, as those are the industries in which I plan to pursue a career in the future. DealBook, peHUB, and Financial News: Private Equity News are all fantastic resources for updates on recent mergers and acquisitions activity as well as other developments in the industry. Their main shortfall is how difficult each one is to navigate. A last resource anyone interested in investment banking or even finance in general should be aware of is Thomson Reuters League Tables. This resource provides information on the number and size of deals each major investment bank has announced or completed, and is used to rank investment banks as well as determine trends in the investment banking industry. It is a bit difficult to navigate and its files are often slow to load, but to investment bankers, the information it holds is well worth the wait.

Wall Street vs. Main Street: Why the Treasury Bailout Plan Failed

Last week I wrote about the rise of socialist economics in American policy-making, citing the bailouts of Fannie Mae, Freddie Mac, and AIG as examples of this rising socialism. I also addressed the question of whether or not this marked the decline of capitalism in the United States. Since that time, there has been increasing turmoil in the financial markets as well as increased involvement by the government in the economy, most especially the proposed $700 billion bailout plan by the United States Treasury. When this plan was shot down in the House of Representatives on September 29th, it acted as a catalyst for the single largest dollar decline of the Dow Jones Industrial Average (over 777 points) as well as the Standard & Poor’s 500 Index (over 106 points) (see below, right). This reduction in stock values translated into an approximately $1.2 trillion decline in market value of the entire U.S. stock market. Considering the implications of the House of Representatives’ decision, I decided to explore various blogs to answer two questions of mine: why was the bailout plan deemed inadequate, and did the House of Representatives make the right choice in voting against it? After noting how close the vote was in the House of Representatives (228-205), I was surprised to see that most blogs agreed that the bill did not deserve to be passed. Admittedly, this is my own opinion as well, but I imagined there would be more of a counter-argument than there actually was. The question that more blogs disagreed on was why the House of Representatives decided to vote against the proposed bailout. I found two blogs that gave the most interesting insight into this decision and left my feedback on them. In the first blog, Amateur Economists, Evelyn Black addresses the issue in an entry entitled “Why Did Paulson’s Bailout Plan Fail in the Congress?” Black claims that the issues raised were the lack of regulation of CEO pay for companies that choose to receive money from the bailout plan as well as the fact that there is no guarantee the bailout would work. In the second blog, Church of the Customer, Ben McConnell briefly addresses the issue in an entry titled “Why the Bailout Package Failed.” He claims there are three main issues: the concentration of too much authority in the hands of Treasury Secretary Henry Paulson (see below, left), the lack of transparency about the administration, and, like Black, the lack of regulation of Wall Street CEO pay. For your convenience, in addition to posting my comments on their respective blogs, I have copied them below.

“Why Did Paulson’s Bailout Plan Fail in Congress?”
Comment:
Thank you for your useful insight into why Paulson’s bailout plan was voted down in the House of Representatives. It really helped to shed some light on the faults of this $700 billion piece of legislation With the market’s record-setting drop after this news was released, I think many people are wondering why exactly Congress voted against this plan and, had it been passed, whether the economy would have taken the downturn it had on Monday. Your analogy of the lobbying for this plan to an old western film is depressingly fitting, as Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke seem to be convinced that the only way to turn our economy around is by taking money out of the hands of the public and into the hands of the people who started this crisis in the first place.

I liked how you used the comments on New York Times editorials as evidence of a confrontation between Main Street and Wall Street. It adds a tangible aspect to a claim that is otherwise hard to quantify. I also liked your analysis of the analogy between this bailout plan and the Resolution Trust Corporation of 1989. I have seen the link made between the two before, especially in the context of the bailout not costing taxpayers as much as initially thought, but did not know enough about the Resolution Trust Corporation to be able to make the comparison. I agree that the comparison is not valid, for the RTC bought and sold actual assets, while this proposed bailout plan would be buying faulty financial instruments, the mortgage-backed securities.

Though I thought your blog was well researched and informative, I have some questions and comments about it. First, do you think the only reasons for the public outrage were CEO salaries? I don’t see any other reasons in the article other than the lack of a guarantee that the plan would work. Also, while you say that Congress negotiated some governmental oversight and provisions for helping homeowners keep their homes, I think this article would have benefitted by explaining those changes in more detail. The current description is relatively vague.

Thanks again for the helpful insight and I am looking forward to continuing reading your blog as the financial crisis progresses.

“Why the Bailout Package Failed”
Comment:
Thank you for your succinct article on why the bailout package failed to clear Congress. Like most people, I have been following the credit crisis closely over the past year and was especially following the progress of this bailout package. The way you opened the article with five especially gloomy headlines from a single day’s Wall Street Journal (and not even on the front page!) really painted a picture of just how dismal our economy is right now and put the entire bailout package into context perfectly.

In the body of your article, I liked how you very clearly laid out the three reasons why you believe Congress voted against the bailout. It was clear, concise, and eye-opening. I agree that the biggest issue with this bailout package was the lack of transparency in the system, especially given how much power Paulson would have been given. It is as if the government is trying to test the phrase “power corrupts, absolute power corrupts absolutely.” It was heartening to hear how the public became involved in this legislation, and I found your statistic that calls were averaging 100-1 against the bailout especially interesting. It solidified your statement that “vast numbers of citizens” were calling their representatives to reject the bailout and added credence to your argument that this financial crisis might bring about transparency in business and government.

Though I loved the article and I liked the way you started your article, I think you would have benefitted by saying what the front page headlines actually were. I understood your intentions behind what you did, but I believe it is more confusing that it has to be. Also, do you think that some of the outrage came from the fact that the government was giving money to the companies that caused this crisis rather than the people who have been hurt by it? The way you talk about rich fat-cats makes me think that you are one of the people who would rather see the money go into a stimulus package than bailing out Wall Street.

The Red Flag: An Examination of the Social and Economic Implications of the Recent Government Bailouts

Bailout. This one word has inspired more commentary than any other in the past few weeks. However, with every news outlet in the world talking about the bailouts of Fannie Mae, Freddie Mac, and AIG, I find it interesting how the ideological implications of these actions are only now starting to receive some attention. Most media has been focused on the direct, economic impact of Congress's decisions on the stock market now and in the near future, as well as the simple dollar figures for what the bailouts are going to cost taxpayers (see below, left). While this aspect is obviously important, there are deeper, more long-term consequences to the government’s actions. With the most recent buyouts, federal insurance for risky mortgages, economic stimulus packages, and ban on short selling of financial stocks, the government has been taking actions contrary in nature to the free market economy it was founded upon and more in line with the communist, government backed system it has been fighting against for the better part of a century. Is this the end of capitalism as we know it? Did the government take a step in the wrong direction by bailing out this country’s financial system? No, probably not. While the recent government buyouts of Fannie Mae, Freddie Mac, and AIG go against the capitalistic ideals of this country, they were necessary in order to help keep the country out of the depression it was headed towards and will eventually be seen as the right decision by the federal government. Assuming the government does not continue to take over companies or impose its will too much on the companies it already controls, these actions will be seen as temporary socialist interventions like those during the Great Depression and not the beginning of the decline of capitalism in America.

Despite the fact that most of the actions the government has taken in the recent past have be socialist in nature, the United States is not moving down a path away from capitalism; rather, it has simply been following a history of free market capitalism supported by moderately socialist government policy. Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decisions and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. Socialism is the opposite. It is composed of a government controlled economy in which the means of production are federally controlled. Today, the American economy cannot be accurately described by either word in itself, but more of a combination of the two. Originally, the it represented the epitome of a capitalist society. People spoke of the “American Dream,” of common men coming to the United States and working their way into fame and fortune. However, the American economy has gradually shifted away from a true free market economy towards a mix between capitalism and socialism. True, the most recent wave of attempts to revitalize the economy by the United States government have been some of the most extreme ever, but regulation of our financial markets has been a critical part of our economy since the Great Depression. In fact, one of the reasons these problems arose was the deregulation of the financial markets that allowed instruments like mortgage-backed securities to exist and subprime loans to be issued. Like it or not, the government has a history of stepping in during times of financial crisis and taking extreme measures to protect the economy (see the New Deal). For the most part, it has always been justified and ended up having a positive influence on the economy. If the United States government had not stepped in and taken the actions it did, the economic fallout would cost taxpayers much more than what it has cost to effectively bail out the housing market. According to Jeanne Sahadi, a senior writer for CNNMoney.com, “If Fannie and Freddie went under…the housing industry could seize up, causing the loss of millions of jobs.” Or, in terms of actual dollars and cents, an article by James Pethokoukis, the money and politics blogger for U.S. News & World Report, claims that the dollar cost of not bailing out Wall Street could range anywhere from $15 trillion over four years to upwards of $30 trillion. The financial markets would crash and credit markets would completely freeze, making it impossible for students to get loans and families to get mortgages. If these estimates are anywhere close to the truth, the government intervention in this financial crisis will prove to be a brilliant move that effectively saved the American economy.

There are those who argue that these bailouts set a poor example for financial institutions, especially how it guarantees money for the larger financial institutions at the expense of everyone else (see below, right). As Andrew Horowitz, founder of Horowitz & Company, says, “In a capitalistic society that relies on a free market system, we should only look to the government to guide and regulate against fraud and the manipulation of the system... it is not to be a business partner and a sugar daddy there to provide a backstop to the bad business practices of the banking system.” True, there is the potential for companies to take these bailouts as a figurative safety net for them, guaranteeing their continued existence despite any risky practices they might engage in. However, given the necessity for a dramatic move by the federal government to turn the economy around, there were not many other options. Ideally the government would not have to come in and financially back the banking system, but in times like today, people have to look past their ideals to what is the most prudent and effective solution for our financial crisis. Like the co-host of CNBC’s “Squawk on the Street” Mark Haines observed on “Morning Joe”, “Nobody really likes this on a philosophical basis, but we live in a real world and we can’t, can’t dither with philosophy when such serious matters are at stake.” Only time will tell whether or not the government made the right decision, but given the situation at the time, it made the best possible move by intervening in our failing economy. Either way, this bailout is only a temporary fix. Unless we do something about the unchecked greed that is at the root of all these problems, we will not be able to fully recover from this recession.