Tomorrow’s report on the employment situation in November is widely expected to show a steepish increase in joblessness. The number of first-time claims filed for unemployment insurance benefits last month was about 2.2 million, or about 50 percent higher than in the same month last year and about 23 percent higher than in October, based on seasonally unadjusted numbers.
If overall unemployment rose by the same percentage from October to November, then the unemployment rate ought to have been about 7.4 percent last month, the highest level in about 15 years. Of course, the feds can tinker with labor force numbers and seasonal adjustments (November normally is a month that sees strong hiring in anticipation of the holiday retail season) and the actual reported unemployment rate may not be that bad; the Wall Street consensus is for a figure of just 6.7 percent, up from 6.5 percent in October.
Not contributing significantly to whatever increase does get reported will be the top executives of America’s largest publicly traded corporations, because layoffs never extend to the boardroom no matter how bad a job the managers have been doing. On the other side of the coin, the trillion-dollar-plus economic rescue plan to date hasn’t come anywhere near helping the average worker.
So who has it helped? Well, we might suppose that the shareholders of the nation’s biggest financial companies have benefited; those companies, which have been the biggest recipients of our money, might well have seen their shares fall even lower than they are now if Messrs. Paulson and Bernanke hadn’t generously shoveled our money into their vaults.
And just who are those shareholders? Regular folks like you and me, who’ve saved a penny here and there and patriotically invested in the companies that make America great, right? Um, no, not so much.
Bank of America, for example, the country’s biggest banking firm, is 55.5 percent owned by “institutions,” meaning other banking firms, big Wall Street brokerage houses and, yes, some pension funds and mutual fund companies. Citigroup is 63.3 percent institionally owned, and struggling insurer American International Group is 55.9 percent owned by institutions.
Just which institutions are they? In fact, it’s a pretty cozy little group: Of the top 25 holders of each of these three companies as of Sept. 30, 15 are the same ones in all three cases. Here’s the list:
AXA
Bank of New York Mellon
Barclays Global Investments
Barrow Hanley Mewhinney & Strauss
Brandes Investment
Capital Research Global
Capital World Investment
Deutsche Bank
FMR LLC
Geode Capital Management
Goldman Sachs Group
Northern Trust Corp.
T. Rowe Price
State Street Corp.
Vanguard Group Inc.
Note in particular that Goldman Sachs is the big brokerage house that used to be headed by Daddy Warbucks, I mean Henry Paulson.
This sort of thing helps explain why executives of these kinds of companies continue to receive unconscionable “compensation” packages no matter how the companies perform: because the biggest shareholders and the “independent” directors are all members of the same club or subculture. If anyone started holding one of them to reasonable standards, they’d all be in trouble.
Showing posts with label Henry Paulson. Show all posts
Showing posts with label Henry Paulson. Show all posts
Thursday, December 4, 2008
Wednesday, November 26, 2008
Off Balance
The economic news the past few days has been pretty thoroughly awful: a bigger decline in third-quarter gross domestic product than previously estimated, declines in consumer spending, sales of new houses, industrial production, consumer confidence, etc. etc. Yet the stock market has been rising.
Some of the financial media are attributing the gains to “bargain-hunting,” or speculative buying of beaten-down shares in the belief that the selloff of the past several weeks was overdone. But that strategy would have to be based on an additional belief that the economy won’t continue to deteriorate, and I don’t see much indication that any such belief is widely held (whether true or not).
Another possible cause of the rebound: Maybe investors have decided that the steps being taken by Washington to stem the economic washout will actually work, finally – at least as far as Wall Street’s needs are concerned.
For example, this week Treasury Secretary and former Goldman Sachs CEO Henry Paulson announced that we (you and me, taxpayers) are going to give the nation’s fourth-largest banking company, Citigroup, an additional $300 billion in loan guarantees and a $45 billion cash infusion, on top of the $25 billion we already handed them in the first round of “TARP” investments, which of course did us no discernible good.
Citigroup, as of Sept. 30, reported total assets of $2.05 trillion. You would think that might be enough to enable them to cover their own bad bets. And indeed, the company reported total liabilities of just $1.92 trillion, leaving them with $126.1 billion in stockholder equity.
However, like many other large financial companies, Citigroup has what it refers to (in its latest financial filing with the Securities and Exchange Commission) as “off-balance-sheet arrangements.” As the name implies, these “arrangements” enable companies to take liabilities off their balance sheets by setting up a separate business entity, called a “special-purpose entity,” or SPE. The liabilities are, as Citigroup explains, “recorded on the balance sheet of the SPE and not reflected on the transferring company's balance sheet, assuming applicable accounting requirements are satisfied.” Although SPEs were used by the notorious Enron Corp. to deceive investors and regulators, they’re perfectly legal when used appropriately.
So how much has Citigroup taken “off-balance-sheet” by this method? Again, according to its latest filing with the SEC, the company’s “total involvement” in off-balance-sheet arrangements was $1.29 trillion at the end of September.
Now, it’s very unclear how much of that “involvement” might end up back on Citigroup’s balance sheets if it were required to “consolidate” it, as the Financial Accounting Standards Board has suggested it might decide to decree. But just for the sake of argument, if we suppose that the company were forced to put the whole amount back on its statement of liabilities, the effect would be to drop its stockholder equity from a positive $126.1 billion to a negative $1.16 trillion.
Based on its officially reported positive equity, Citigroup currently has stockholder equity per share, or “book value”, of $23.13. In normal times, stocks of major companies customarily sell for a multiple of book value, but Citigroup’s shares currently are trading below book value. Today’s close, $7.05, was just 30 percent of reported book value; at the low on Friday, before the latest handout was announced, the stock closed at just 16 percent of book value.
On the other hand, if my hypothetical numbers above were used, Citigroup would have a book value of minus $212.87 per share.
So maybe the reason Citigroup’s shares are selling below reported book value is that investors are worried that Citigroup may, indeed, have to “consolidate” some significant portion of its off-balance-sheet liabilities, which would mean its current reported book value is a wee bit unrealistically high. And maybe that has something to do with why our Secretary of Wall Street is so anxious to hand the company big piles of our money.
Some of the financial media are attributing the gains to “bargain-hunting,” or speculative buying of beaten-down shares in the belief that the selloff of the past several weeks was overdone. But that strategy would have to be based on an additional belief that the economy won’t continue to deteriorate, and I don’t see much indication that any such belief is widely held (whether true or not).
Another possible cause of the rebound: Maybe investors have decided that the steps being taken by Washington to stem the economic washout will actually work, finally – at least as far as Wall Street’s needs are concerned.
For example, this week Treasury Secretary and former Goldman Sachs CEO Henry Paulson announced that we (you and me, taxpayers) are going to give the nation’s fourth-largest banking company, Citigroup, an additional $300 billion in loan guarantees and a $45 billion cash infusion, on top of the $25 billion we already handed them in the first round of “TARP” investments, which of course did us no discernible good.
Citigroup, as of Sept. 30, reported total assets of $2.05 trillion. You would think that might be enough to enable them to cover their own bad bets. And indeed, the company reported total liabilities of just $1.92 trillion, leaving them with $126.1 billion in stockholder equity.
However, like many other large financial companies, Citigroup has what it refers to (in its latest financial filing with the Securities and Exchange Commission) as “off-balance-sheet arrangements.” As the name implies, these “arrangements” enable companies to take liabilities off their balance sheets by setting up a separate business entity, called a “special-purpose entity,” or SPE. The liabilities are, as Citigroup explains, “recorded on the balance sheet of the SPE and not reflected on the transferring company's balance sheet, assuming applicable accounting requirements are satisfied.” Although SPEs were used by the notorious Enron Corp. to deceive investors and regulators, they’re perfectly legal when used appropriately.
So how much has Citigroup taken “off-balance-sheet” by this method? Again, according to its latest filing with the SEC, the company’s “total involvement” in off-balance-sheet arrangements was $1.29 trillion at the end of September.
Now, it’s very unclear how much of that “involvement” might end up back on Citigroup’s balance sheets if it were required to “consolidate” it, as the Financial Accounting Standards Board has suggested it might decide to decree. But just for the sake of argument, if we suppose that the company were forced to put the whole amount back on its statement of liabilities, the effect would be to drop its stockholder equity from a positive $126.1 billion to a negative $1.16 trillion.
Based on its officially reported positive equity, Citigroup currently has stockholder equity per share, or “book value”, of $23.13. In normal times, stocks of major companies customarily sell for a multiple of book value, but Citigroup’s shares currently are trading below book value. Today’s close, $7.05, was just 30 percent of reported book value; at the low on Friday, before the latest handout was announced, the stock closed at just 16 percent of book value.
On the other hand, if my hypothetical numbers above were used, Citigroup would have a book value of minus $212.87 per share.
So maybe the reason Citigroup’s shares are selling below reported book value is that investors are worried that Citigroup may, indeed, have to “consolidate” some significant portion of its off-balance-sheet liabilities, which would mean its current reported book value is a wee bit unrealistically high. And maybe that has something to do with why our Secretary of Wall Street is so anxious to hand the company big piles of our money.
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