Bonuses Slashed :)

nice smiley face. weak.

they still make a hell lot of money

Wall Street’s Pay Is Expected to Plummet

The first clues are emerging that Wall Street pay will plummet this year — but perhaps not enough to satisfy the financial industry’s critics.

Bonuses, which soared to record heights in recent years, could drop by 20 to 35 percent across the industry, according to a private study to be released on Thursday. Bonuses for top executives could plunge by 70 percent.

But to some, those figures, from the consulting firm Johnson Associates, demand the question: Why should Wall Street executives get any bonuses at all? Banks’ profits have plunged, and the government is spending hundreds of billions of dollars to shore up the industry and prevent its problems from dragging down the economy.

A report on Wednesday from the New York State Assembly said Wall Street bonuses could tumble 41.3 percent next year, which could further widen a budget deficit.

The annual Johnson study, a closely watched analysis based on a survey of banks and money management firms, as well as on compensation figures disclosed in corporate filings, arrives as the industry is under growing political pressure to hold down pay.

http://www.nytimes.com/2008/11/06/business/06pay.html?hp

There is no silver lining for Manhattan real estate:

Sales in Manhattan
We found 9,134 listings
Median price: $1,195,000 Median size: 1,150 ft² Median price per ft²: $1,138

That's nearly twice the inventory level of last year, and is over a 1 year's supply at current absorption rates with tons of overpriced new development coming online. At current absorption rates it will probably be a 3-year supply by 2009.

And the bad news hasn't begun. The Merrill massacre hasn't started yet, the closure of NYC Washington Mutual branches and operations hasn't begun yet. Goldman and Morgan Stanley aren't commercial banks yet, they haven't finished laying people off. New regulations have yet to be written, hedge funds have yet to be reined in. Prices are still twice market-rate rentals, credit is still expensive and hard to get. Property taxes are going up, income taxes are going up.

This looks very, very bad for Manhattan, and it's occurring just at the time the rest of the country is starting to come out of its funk. I maintain my prediction of a 50% nominal decrease in prices, to 2003 levels.

Bonuses down only 20-35% across the board? That's it?? Doesn't that put 2008 bonuses at the level they were at in 2006? Honestly, that's pretty pathetic (and should be much more than the bankers were expecting / hoping for). Good for NYC economy, bad for the taxpayer.

Bears shouldn't be bragging that its down only 20-35%.

2006 was 33.7Bln
2007 was 33.2Bln

2008 will likely be total of around 16-18Bln

50% down is more what I was thinking. Though still better than they deserve IMHO.

"Bears shouldn't be bragging that its down only 20-35%."

Tech guy, i completely agree with you. To me that's inappropriate. If they didn't take a dime of taxpayer money, then God bless them for making whatever they can make. If I'm bailing them out with my hard earned money, they better be getting 50% less at the very least! UD, if your numbers are correct, that would be more like it. Though since # employees has decreased significantly from 07 to 08, the bonus/person will fall less than the aggregate comp.

New York is anticipating a 50% decline in bonuses. Not everyone who gets a bonus lives here. But it's far more than bonuses - it's the loss of jobs to Charlotte, the restructuring of the industry, the disconnect between market-rate rentals and home prices. And Wall Street is not alone - there's advertising, fashion, publishing. All suffering.

Steve - Was the inventory number a year ago at 4500? I feel like I remember it more at like 6,000 /-, but I could easily be wrong. Can you confirm that or does anyone have that information? I would find that interesting and helpful.

thing is about bonuses, is this will be a mulit year thing. Some people here still think its just going to be this years bonuses, and then back to normal.

I know a corporate hy debt trader at a major firm that survived, Ill leave it at that. Generated revenue by this person in 2008 was very good, down from peak years, but still very profitable. The bonus being given to this person will be close to total salary + bonus received at 1998 levels. I am not exaggerating here.

We have to keep in mind that there are a lot of low level employees who had nothing to do with the disgraceful decisions of senior management who still need to make a living. Bonus is a very significant part of compensation and at some levels, the base is really not enough to cover expenses. I am talking about people in operations, tech support etc. who were never in my view seriously overpaid and have nothing to fall back on.

I completely appreciate everyone's anger at the industry and agree that the bonuses shouldn't come out of bailout funds. As a matter of fact, I have been accused of being a socialist for suggesting that the compensation paid over the past 5 years to the most senior ranks of these institutions (read: criminals) should be claimed back and pooled into a severance packages for all the low and middle level employees who are going to have a hell of a tough time finding a job elsewhere.

Guess Bloomberg was a little to conservative with his service cuts / tax raises based on this info....

Its going to get ugly as a 15% increase in income tax, 7% increase in property tax and increased sales tax looks like a good deal at this point...

God knows what its going to be in January

garelj, the mayor can't get blood from a stone. Increasing taxes is not going to do anything but put us right back to the 1970's: there's no money to increase taxes from. Already Wall Street is in shambles, New York City has the highest taxes in the country. Increasing them will only drive people out.

Another interesting tidbit:

UBS Bonuses Will Need Regulator's Approval After Aid Package

http://www.bloomberg.com/apps/news?pid=20601087&sid=alhG2JEkHaTU&refer=home

The party is over.

Blood from a stone? I could have sworn city taxes were taken out of my last pay check... sales tax added to my lunch... and my coop board must be pocketing the extra money because my maintenance still includes what used to be property taxes.

When will I stop having to pay all these taxes?

Wall Street Firms Expected To Slash Annual Bonuses

By Charlie Gasparino, On-Air Editor | 05 Nov 2008 | 03:54 PM ET

Major Wall Street firms are expected to slash annual bonuses for executives an average 50 percent or more, according to senior executives.

The move comes as the big broker-banks begin laying off as much as 15 percent of their workforce due to the economic slowdown.

The expected cuts in bonuses not only reflect sharply lower profits at the financial giants. Congress and New York Attorney General Andrew Cuomo are targeting compensation at big Wall Street firms that have received injections of government capital due to the global credit crisis.

Morgan Stanley is just starting to discuss bonuses, so no firm number is set. But sources there say bonuses will be sharply lower.

Goldman Sachs is planning the biggest cuts in bonuses, primarily because executives there made the most last year. Senior executives are expected to take a 75 percent cut in bonuses, while less senior executives could see a 50 percent cut.

Goldman CEO Llyod Blankfein—who pocketed a bonus of close to $70 million last year—might not take any bonus this year, sources told CNBC.

At JP Morgan Chase, the most successful of the big financial firms, bonuses will be cut 30 to 40 percent.

Goldman, meanwhile, notified roughly 3,200 employees this week that they have been laid off, part of previously reported plans to slash 10 percent of the firm's global work force.

At Merrill Lynch 10,000 employees could be jettisoned as a result of the merger with Bank of America.
Barclay's purchase of Lehman Brothers' investment banking unit also will mean layoffs.

Morgan Stanley may lay off 15 percent of its workforce due to the lack of merger and acquisitions and initial public offerings.

JPMorgan Chase is also likely to lay off 10 to 15 percent of its workforce.

http://www.cnbc.com/id/27559114

The party, dudes, is over. The crash in property prices is real, and long-lasting.

50%.

When will I stop having to pay all these taxes?

tech....when your...you know.......cease to exist.

"When will I stop having to pay all these taxes?"

From what I can tell, you you're one of the ones who still has a job in NYC, then you're going to have to make up the money for all the ones who don't. So teachers can remain overpaid for not doing anything.

Believe me, I hate taxes like the next guy...cutting services will only achieve so much....but i agree we should do that and then some...

But being a realist, in the end its not if our taxes will go up, but by how much....

Yes, saying that taxes will go up is a fair prediction. Saying Bloomberg is trying to squeeze blood out of a stone is your incorrect commentary. Property taxes collected will remain stable - apartment buildings aren't disappearing, and even if the value of the apartments themselves drop, that won't be reflected in lower property taxes for quite some time afterwards.

NYC will also be able to recover at a greater pace than other towns/cities. It is hit harder in the downturn, but rebounds better due to the money generated by tourism and the increases in tax money that comes during a recovery and growth phase. Obviously, we have to get there first, but it is important to remember that things will improve and NYC will be able to make up a lot of ground at that point in ways that other cities cannot.

"Property taxes collected will remain stable"

First, not if people can't pay them. Second, as assessments fall so does revenue. We have a city budget bloated with Medicaid payments that cover podiatry and teachers being paid to sit around and do nothing. I think that cutting services isn't the problem - the police department proved that by changing methods it's possible to reduce crime and the police force simultaneously. The same should go for the rest of the budget.

Just take a look at the mayor's financial presentation, the part about pension and healthcare costs: a 50% increase in 8 years. Who precisely is going to have to pay that?

I'll add this thought. If all these numbers from prior years are cash bonuses, then fine, its bad out there. But if all the numbers cited for prior years include the cash+stock value of the bonus award, and the stock portion doesn't vest for 3-5 yrs, then think about what has ALREADY happened to LAST YEAR's bonus. For LEH and BSC employees the stock portion (generally 10-30% depending on the level) became worthless. And the 2006 and 2005 stock bonuses were likely lost as well. A really dangerous one-two punch for many.

In short, 30% of compensation for high level employees is tied to stock performance over a 2-4 year period. That hurts as much as the current cuts.

"Property taxes collected will remain stable"

Lets also not forget that TRANSFER taxes are big portion of RE tax revenue. And those are in the total shitter with sales volume down.

Also, didn't cuomo just announce that no federal money can be used for bonuses?

That's nice. But money is fungible.

"money is fungible."

True, but it's pretty easy to tell where it's coming from.

A large number of banks were paying no more than $750k in cash last few years. Meaning its more like 50-70-90% for a lot of folks in now worthless (or 50% less at least)...

Switzerland's banking regulators are making UBS get approval before they distribute the bonuses. 13 of the top executives are not getting anything and the rest of the bonus payment going to be reduced to what is "absolutely necessary". This is because the aid package prompted protests over the bankers pays across the country.

Why is there no protests in this country regarding these outrageous bonuses? Firms that are surviving because they got tax payers money, should NOT be paying out bonuses - they would be out of JOBs as well as bonuses if it wasn't for the bailouts, so just be thankful they are getting their paychecks. IS there no common sense left in this country? Employees who have made alot of money for the firm should be compensated - prorated to the firms profit - which was close to nothing. But those groups that generated losses should get close to nothing! Just be thankful government is not asking for money back from compensations received during previous years when there were building up these catastrophies!

And argument for retaining talent is a sorry excuse! If people decide to leave, good! there are so many qualified people out there looking for jobs, it won't be difficult recruiting someone new.

The difference is UBS "needed" it to survive while the majority of the banks here were "forced" to take it so everyone was on the same playing field....

Realistically, none of the top 10 banks needed this money at all....but since the world was doing it since half the UK banks are going down the toilet we agreed to jump on....

> Why is there no protests in this country regarding these outrageous bonuses?

Not sure what you mean... there are... tons of 'em. Barney Frank, Andrew Cuomo, the press... hell, all of us are talking about it.

garelj, ARE YOU KIDDING ME? Trust me, most of these banks "needed" it. Lot of these brokerage/banks that was "forced" to take the money would have eventually gone under if they didn't/don't merge with a well capitalized bank or get bailouts.

nyc10022, well it seems like people are hearing the protests with a "mute" button on. Did you see the BB article "Wall Street's Top Executives Face 70% Bonus Cuts...Thanks in part to the financial bailouts and mergers we've seen recently, the decline in incentive payments won't be as drastic as first thought".

I say we should be given a choice to select where our tax money goes. I'm not paying 45% tax to give anyone in Wallstreet their bonuses, when I have lost so much money in the stock market largely due to them!

"ARE YOU KIDDING ME? Trust me, most of these banks "needed" it. Lot of these brokerage/banks that was "forced" to take the money would have eventually gone under if they didn't/don't merge with a well capitalized bank or get bailouts."

Name me one...

Exactly...

garelj, were you living in a different planet? Now that a partial fire has been put off, you completely forgot the dire situation all these brokerage/banks were placed in?? Did you miss the whole fiasco when all the ibanks were scrambling for capital? Even GS who managed to hedge their risks had to entice Warren Buffet to invest billions of dollars (with a super sweet deal!) The banking and credit crises were just at the tip of the iceberg (and trust me, during the course of this severe recession many more banks will going belly up and will not be rescued because they are not "too big to fail"). You don't think, if this bailout plan and other stimulus packages were introduced/executed to stablize the banking systems, that other banks would not have gone bankrupt? The capital injection into the banks were part of the rescue plan to stablize the market from panic, if you've forgotten! You know why ML had to be bought out by BOA? they were the first ones to write down their losses. And you don't know what's in the other's books. Many economist estimate that the financial crisis will lead to credit losses of at least $1 trillion and most likely will be closer to $2 trillion for these banks - That means there are more losses to come, garelj.

I'm not one to believe in conspiracy theory but here's some thought provoking article for your amusement

http://www.informationclearinghouse.info/article21116.htm
http://marketoracle.co.uk/Article6826.html

Quote, "JPMorgan is a monster predator at work...After the Fannie Mae experience, covering their giant raft of CDSwap contracts, making huge payout's, JPMorgan was close to a bankruptcy. They needed to feed off another bank, to consume private deposits and thus shore up the balance sheet...The Lehman CDSwap resolution has cost roughly $300 billion, paying 91 cents per dollar of coverage on their failed bonds. The Wall Street Powers permitted Lehman to fail, so as to prevent a JPMorgan failure, thus risking that the fires caused could be contained in CDSwap fallout. The irony is that JPMorgan undoubtedly suffered considerably from that fire in fallout. Now JPMorgan might need another Wall Street failure, for to consume another block of assets, but with yet another ensuing CDSwap fire...JPMorgan will need more deaths to survive, but each death causes more deadly CDSwap fires...AIG has caused major complications, another monster that will resurface periodically at feeding time...In done my way, not a single additional US Congressional bill would be approved and granted for a bailout or rescue without rapid investigation, prosecution, turn to state's evidence, asset seizure, restitution, and imprisonment for dozens of Wall Street executives, starting with Hank Paulson..."

It's astonishing how people can be in denial, even when all this happened right in front of our faces.

And garelj, now that I think about it more, you're are making me really mad. The fact that you are suggesting that billions of dollars were injected into those banks when they didn't need it??? WHY THE F DID THE GOVERNMENT INJECT MONEY INTO THESE BANKS THAT WE"LL NEED TO PAY WITH OUR HARD EARNED MONEY AND GIVE IT TO THESE LOSERS IF THEY DIDN"T NEED IT!?!
It comes down to accountability and justice. They put us in this situation, they should atleast have the decency to forego that dirty bonuses they have earned through other's expense.

If the feds didn't save AIG, Goldman would have gone under. There is no doubt that too much risk was taken by these people who bonused themselves to High Heaven, and now we're left with the detritus.

I wouldn't go so far as the conspiracy theorists, but with the exception of Wells Fargo they all needed the cash. But this is all besides the point. The point is real estate in Manhattan, and if Wall Street is what drove it up, then it's what will drive it down.

How many people other than Wall Street make enough to pay $15,000 a month for a 2-bedroom apartment? Just about nobody - not doctors, not lawyers, not Indian Chiefs. There's no one left to buy these overpriced properties, and they're not coming back.

the bottom line is people did not pay their debt obligations. (mortgages)

boohoo, homeowners got tricked because they cant read a contract.... if these bigwigs can legally get paid (bonus), stop your crying. A-rod gets paid millions of dollars to hit and catch a ball while some 18 year old risks his life in the military(ex- Iraq) for peanuts..... this is america! You get paid for the hustle.

the feds were forced to save AIg because they issued many CDS contracts that had to be settled with the help of govt backing. or funds that AIG didnt have or would have bankrupt the company. They have amazing other businesses, but CDS took them down on the wrong side of the trade. If those CDS werent settled, it would have caused a systemic crisis globally. And yes, Goldman and others would have likely gotten murdered as an end result.

But Steve is right, who is going to buy apartments at 2007 peak pricing? If you guys know the level that deals are happening at now, you would argue with me and accuse me of spreading lies. I think deals are happening at 15-20% below peak levels at this point. Of course peak levels is peak levels, and you have to know what that means and how that translates to a similar unit that may not have sold at peak levels

Deritives and associated CDO's, Sivs are valued at a quadrillion dollars.....it's a house of cards that is unraveling. Believe me the banks needed it because the storm is coming. Commercial real estate is collapsing,Credit card debt is massive, Private equity firms which finance merger and acquisitions, hedge funds etc.... bonds are also starting to collapse(http://businessdailyreview.com/teasers/business/blackstone-quarterly-loss-widens-to-340-million-private-equity-giant-cuts-carrying-value-of-some-po.html) which will make sub-prime look like play money.

garelj.......IT’S THE DERIVATIVES, STUPID!
WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT

Ellen Brown, September 18, 2008
www.webofdebt.com/articles/its_the_derivatives.php

“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
The Anatomy of a Bubble

Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.”1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2

Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.
The Best Game in Town

In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. The federal government and the financiers pulling its strings naturally feel compelled to step in to prevent such a disaster, even though this rewards the profligate speculators at the expense of the Fannie/Freddie shareholders who will get wiped out. Amerman concludes:

“[I]t’s the best game in town. Take a huge amount of risk, be paid exceedingly well for it and if you screw up -- you have absolute proof that the government will come in and bail you out at the expense of the rest of the population (who did not share in your profits in the first place).”4
Desperate Measures for Desperate Times

It was the best game in town until September 14, when Treasury Secretary Paulson, Fed Chairman Ben Bernanke, and New York Fed Head Tim Geithner closed the bailout window to Lehman Brothers, a 158-year-old Wall Street investment firm and major derivatives player. Why? “There is no political will for a federal bailout,” said Geithner. Bailing out Fannie and Freddie had created a furor of protest, and the taxpayers could not afford to underwrite the whole quadrillion dollar derivatives bubble. The line had to be drawn somewhere, and this was apparently it.

Or was the Fed just saving its ammunition for AIG? Recent downgrades in AIG’s ratings meant that the counterparties to its massive derivatives contracts could force it to come up with $10.5 billion in additional capital reserves immediately or file for bankruptcy. Treasury Secretary Paulson resisted advancing taxpayer money; but on Monday, September 15, stock trading was ugly, with the S & P 500 registering the largest one-day percent drop since September 11, 2001. Alan Kohler wrote in the Australian Business Spectator:

“[I]t’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.”5

Kohler quoted the September 14 newsletter of Professor Nouriel Roubini, who has a popular website called Global EconoMonitor. Roubini warned:

“What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank.”

The risk posed to the system was evidently too great. On September 16, while Barclay’s Bank was offering to buy the banking divisions of Lehman Brothers, the Federal Reserve agreed to bail out AIG in return for 80% of its stock. Why the Federal Reserve instead of the U.S. Treasury? Perhaps because the Treasury would take too much heat for putting yet more taxpayer money on the line. The Federal Reserve could do it quietly through its “Open Market Operations,” the ruse by which it “monetizes” government debt, turning Treasury bills (government I.O.U.s) into dollars. The taxpayers would still have to pick up the tab, but the Federal Reserve would not have to get approval from Congress first.
Time for a 21st Century New Deal?

Another hole has been plugged in a very leaky boat, keeping it afloat another day; but how long can these stopgap measures be sustained? Professor Roubini maintains:

“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”6

We may soon hear that “the credit market is frozen” – that there is no money to keep homeowners in their homes, workers gainfully employed, or infrastructure maintained. But this is not true. The underlying source of all money is government credit – our own public credit. We don’t need to borrow it from the Chinese or the Saudis or private banks. The government can issue its own credit – the “full faith and credit of the United States.” That was the model followed by the Pennsylvania colonists in the eighteenth century, and it worked brilliantly well. Before the provincial government came up with this plan, the Pennsylvania economy was languishing. There was little gold to conduct trade, and the British bankers were charging 8% interest to borrow what was available. The government solved the credit problem by issuing and lending its own paper scrip. A publicly-owned bank lent the money to farmers at 5% interest. The money was returned to the government, preventing inflation; and the interest paid the government’s expenses, replacing taxes. During the period the system was in place, the economy flourished, prices remained stable, and the Pennsylvania colonists paid no taxes at all. (For more on this, see E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,” webofdebt.com/articles, November 5, 2007.)

Today’s credit crisis is very similar to that facing Herbert Hoover and Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.

The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the Pennsylvania provincial government, which originated the money it lent, the RFC had to borrow the money first. The RFC was funded by issuing government bonds and relending the proceeds. Then as now, new money entered the money supply chiefly in the form of private bank loans. In a “fractional reserve” banking system, banks are allowed to lend their “reserves” many times over, effectively multiplying the amount of money in circulation. Today a system of public banks might be set up on the model of the RFC to fund productive endeavors – industry, agriculture, housing, energy -- but we could go a step further than the RFC and give the new public banks the power to create credit themselves, just as the Pennsylvania government did and as private banks do now. At the rate banks are going into FDIC receivership, the federal government will soon own a string of banks, which it might as well put to productive use. Establishing a new RFC might be an easier move politically than trying to nationalize the Federal Reserve, but that is what should properly, logically be done. If we the taxpayers are putting up the money for the Fed to own the world’s largest insurance company, we should own the Fed.

Proposals for reforming the banking system are not even on the radar screen of Prime Time politics today; but the current system is collapsing at train-wreck speed, and the “change” called for in Washington may soon be taking a direction undreamt of a few years ago. We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.

McHale...

What does AIG, Freddie, Fannie have to do with the bailout...nothing because it was a separate initiative, but thanks for the copy and paste...go back to teaching 2nd grade and make sure you tell all the kids to vote Obama early and vote Obama often...

jjun4733...

Still waiting for you to tell me which bank was in dire need of capital from the gov't...if you can show me a direct quote where the fire was burning and a bank needed capital to survive maybe ill listen...but there is a reason Nat City and Wachovia didn't get a lifeline...cause we choose they are done and others should survive...

Seriously....do you really not know why the banks got an injection....stop reading the Metro on the way to work (cause its free) and pick up a Financial Times and maybe you'll get the picture....

Bonuses (while reduced) are coming out of revenue and the gov't money will go to M&A, dividends and/or retained capital....suck it up

stevejhx What time frame do you believe is necessary to see the 50% in prices?
And why 50%? Is it because..
"Major Wall Street firms are expected to slash annual bonuses for executives an average 50 percent or more, according to senior executives."?

garelj - the banks neededthe capital injections because of two reasons:

a) TARP, when started, marks will likely be above floor levels but below marks currently held on the books of financials as they gobble up toxic holdings in an attempt to recapitalize. In this environment, raising capital or share dilution is getting very difficult. So, inject capital first so that when writedowns come, the initial wave will be cushioned by the 25Bln capital injection already provided. A 1-2 punch.

b) many more securities are about to be downgraded resulting in more capital needed to be raised to meet requirements. Alt-a, prime, commercial, etc.. has not seen the end of these downgrades and its coming by years end.

After 4 quarters of writedowns and the damage that it does and the resulting capital raise that results, they learned that for the next wave, they are probably better off injecting capital first so that when the next wave comes, capital raising initially will be cushioned.

Its as simple as this. Dividends should be eliminated if taxpayer funds are being used, and Im sure we havent seen the end yet of this story for some of the financials

"What time frame do you believe is necessary to see the 50% in prices?"

I don't know - probably at least 2 years, depending on the evolution of the economy, which came to a grinding halt on September 17, when these morons let Lehman fail. The jobs numbers are about to come out today and they won't be pretty, retail sales yesterday were abysmal.

50% because that is the current average difference in Manhattan between market-rate rentals and sale prices on a cash-flow basis. However, market-rate rentals are falling in price faster, so it may be more.

I believe we will return to 2003 prices, when a 2-bedroom apartment in prime Manhattan could be had for about $700,000, rather than today's $1.4 million. Nothing goes up that far that fast for no fundamental reason except excess liquidity. If I'm wrong then I'm undershooting, as markets tend to overcorrect.

Here's why:

Sales in Manhattan
We found 9,177 listings
Median price: $1,195,000 Median size: 1,150 ft² Median price per ft²: $1,138

That is the figure for Manhattan apartments listed but not in contract. This is the figure for Manhattan apartments listed (total):

Sales in Manhattan
We found 11,856 listings
Median price: $1,195,000 Median size: 1,134 ft² Median price per ft²: $1,166

The difference used to be 100%. It's now 23%. You're looking at a new absorption rate of around of about 3,000 a year excluding listings going into contract before all this mess started. That means there's a 3-year supply of apartments at the current level, with thousands more under construction, all aimed at a market that no long exists.

Who, precisely, is going to buy them all? "Swoop in," as malraux used to say? Well, his gauge, the international art market, has also ground to a halt. Perhaps I would have swooped in at Dow 11,000. But at Dow 8,500...?

50% would be closer to 2001 prices right after SEPT 11th...I bought my place NOV 2001, closed April 2002 because I was a equities trader after dot com bust and couldnt get a loan (1093sft jr4 with 650 sft terrace for 500K) and sold in July 2006. You can check it out..245 e 93, 2M.

I think we are down 15-17% right now or around 2006 levels. The price that deals are happening at, especially those who must sell, is quickly approaching previous year levels. The carnage happens when the job losses really hit home, stocks are probably at lower levels, and buyers simply lose interest here. That is yet to come and we see where people are willing to get deals done at. Wait until public price data starts coming down and media takes over and scares away buyers even more.

I go with these data, UD:

http://350bleecker.com/policy/sales.html

because they're reliable.

07/23/08 LJ $699,500
04/04/03 LJ $377,500

An 85% increase in 5 years. Unsustainable.

12/10/07 1M $825,000
08/29/02 1M $385,000

A 114% increase in 5 years. Unsustainable.

09/03/03 3X $335,000
05/10/01 3X $245,000

A 37% increase in 2 years. Unsustainable.

Incomes DID rise in Manhattan sufficiently in that time period to support the price increases (bonuses) if you add in easy credit. Get rid of both, and there's no way for the prices to hold.

crazy. all I know is, things fall faster than they rise

If you do that math on any of these apartments, you will see that on a cash-flow basis market rents are approximately equal to the 2003 prices. LJ, for instance, at $377,500 with an 80/20 30-year mortgage at 7% (if you can get one) will give you monthly payments of $2,009.21 + about $700 a month in common charges gives you about $2,700 a month. A comparable studio at 24 Fifth Avenue goes for:

$2,500 Studio at 24 Fifth Avenue Brodsky Organization 01/Nov/2008 31/Oct/2008

It should cost exactly the same to rent and buy these two apartments. Obviously, at $699,500, it is far more expensive to own it.

Another favorite of mine is this:

10/22/03 3W $225,000
09/03/03 3X $335,000

Combined 2003 price $560,000. Currently listed for:

3WX* 2-BR/2-Bath $1,500,000

Neat. Knock down a wall and you get a 267% increase in 5 years.

I mean, come on. Where is the reality in this?

You're still not taking the tax benefit into account.

garelj..I don't know if it's your arrogance or your ignorance that's more irritating. Believe me, I know more about what's going on in the world than what you presume I know. If my mba degree is not enough and evenif I don't want to know, the bloomberg terminal in my computer and cnbc channel installed in our office won't let me. I guess the ignorant part of you won't let you understand the previous posts - JPmorgan, Citigroup, Merrill Lynch & Co.(acquired by Bank of America - both received it) - now granted these are names that we know the govn't wouldn't let failed, but to assume that without gov't intervention, they would have survived, tells me you don't know jack what you are talking about. Anyone who has any brain know they would have gone under along with the world as we know it without an intervention . The whole bailout plan and the notion of such plan to buyout the toxic assets were announced/put in place to assure calmness into the market, how it was materialized? direct injection into the banks. And if you recall, finance stocks soared when the $250 bn injection plan for banks came out. Now, I don't know whether that was right decision or not, only history will tell, but whether government bailed them out thru injection or by purchasing the assets under TARP, either way WHO DO YOU THINK IS PAYING TO BAIL OUT THESE F*ING BANKS?

The bonuses are not coming from revenues, they would have gone under if not for the government intervention and most of these firms has net losses. And garelj, I'm not going to just suck it up. I'm going to make sure that those wallstreet arrogant #&*$ pay for the pain they caused on the rest of us by making sure my voice gets heard and they pay for it. Especially if they all have attitudes like yours, I want to make sure they are the ones who takes the bigger bite out of the pain pie. make them eat what they cooked up.

"Still waiting for you to tell me which bank was in dire need of capital from the gov't...if you can show me a direct quote where the fire was burning and a bank needed capital to survive maybe ill listen"

I've heard that some of the banks were not happy about being "forced" to take the capital. But jjun is right on the money here, that was all lip service and positioning. Sure, some of them needed it less than others. But make no mistake, if they didn't do that massive injection, they all would have fallen one by one - domino style, like we saw right after lehman went under. You want some names? MS and GS were next up to bat and everyone knew it.

You think they are going to go out there and tell everyone -hey guys, we really, really need capital. They would have gone under in a course of a few days. Ken Lewis, CEO of Bofa said it best - he said Hank got everyone together and basically told him and others that they need to take this capital, that it was their "patriotic duty" to do so, even if he may have felt he didn't need it at the time. The reason? 1) Because then the weaker banks don't get branded as such by taking the capital when everyone takes it and 2) it shores up capital in the entire system and bank CEOs have been very bad at admitting they need capital until it's too late.

And as for bonuses being slashed, it would make me sick if they didn't cut them by at least 50%. Truth be told, i'd be happier if it was 80%+. Even w/ hedge funds and PE funds, you effectively get no bonus if your firm has no incentive fee and loses tons of money. in fact, there's this thing called a watermark where they have to MAKE BACK THAT LOST MONEY before they get a dime of incentive fee. Meanwhile banks paid out record bonuses year after year (07 was flattish to 06 - the alltime record) and then when these businesses lost hundreds of billions, wiping out all the prior years earnings during the boom, AND they need my money to bridge their depleted capital. To me, they shouldn't get paid a dime until they can pay back that capital with interest!

Are they scared of "talent" leaving? Where are they going to go?

They could work for Joe the Plumber.

karlchad, no one is whinning here except you. I just want to make sure my money (tax) gets spent justifiably. Oh and don't worry, I believe it's our duty as citizens of this country to make sure they will get what is "legally" coming to them.

Btw, I like this article " FORMER executives at a German bank have been told to pay back millions of euros in bonuses earned before the bank had to be rescued by the government"
http://www.news.com.au/business/story/0,27753,24544330-31037,00.html

"You're still not taking the tax benefit into account."

And I never will tech_guy, for all the reasons I've cited a million times before. The correlation over time is that, on an out-of-pocket basis, rents = carrying costs. The tax benefit is offset by the opportunity cost of not investing the full (leveraged) amount elsewhere. It's that simple. Sorry you are congenitally unable to understand it.

steve, the funny thing about the market is you can do whatever you want, and it won't change the market. The rest of the world takes the tax benefit into account. The rest of the world knows its impossible to get a 30 year fixed loan at mortgage interest rates, 20% down, to invest in stocks and bonds as you see fit. That's why the rest of the world doesn't use your valuation.

The market will be set by everyone else, not by you.

Steve - if the cost of renting should equal the cost of buying, then why should anyone buy ever?

"The bonuses are not coming from revenues"

Then where are they coming from smart guy?

steve's valuation (rent vs. buy) model is horribly wrong. At this point though, he's argued it so hard that he won't admit its wrong, even though I get the sense he realizes whats wrong about it. Using his model, nobody would ever buy. Thing is, nobody but him uses his model.

I think it's a valid question. If I can rent apartment A for $2,000/month and I can buy apartment A for $2,000/month why should I buy it?

UD - didn't you once post that you sold it because you could not afford the place? I seem to recall something of that nature...

garelj, ha ha, you are such a jackass. You are my first, "ignore this person". no point in talking with someone who has no brains.

"if the cost of renting should equal the cost of buying, then why should anyone buy ever?"

Because sometimes the cost of buying is cheaper, when you calculate it as amortizing capitalized rent.

"the funny thing about the market is you can do whatever you want, and it won't change the market."

tech_guy, you are tiresome, though you probably are in the right industry since obviously you don't understand anything about markets. So, let's look at it in a different way - using the theory of imputed rent. Just so you can get a grasp on the concept - it's a difficult one - here's where you can find the definition:

http://www.bea.gov/regional/definitions/nextpage.cfm?key=Imputed%20rent

Now, let's say you're buying an apartment for the specific purpose of renting it to yourself. An "arm's length" transaction. Here's what I wrote:

"LJ, for instance, at $377,500 with an 80/20 30-year mortgage at 7% (if you can get one) will give you monthly payments of $2,009.21 + about $700 a month in common charges gives you about $2,700 a month."

Full stop. If you were to rent this apartment out to yourself (or to anyone else) you could deduct from your income EVERYTHING - taxes, interest, etc. - EXCEPT principal. Principal in the first year averages $250 a month. That means that of your $2,700 a month in income, you can offset it by $250, giving you monthly expense$ of $2,450, fully tax deductible. Look at the rent on a comparable market rate rental:

$2,500 Studio at 24 Fifth Avenue

So if you were to buy this apartment to rent it out, in the first year you would have a profit of $50 a month. Basically, you would break even.

But let's say you were to buy that apartment at the current price of $699,500. The same mortgage would give you monthly mortgage payments of $3,723.03 + $700 a month in maintenance, for total costs of about $4,400. Of which about $450 a month is principal and therefore not deductible. So your monthly expenses to maintain that apartment would be $3,950, but your rental income is only $2,500, so you are losing $1,450 a month, or approximately half of your expenses.

Would you make that investment?

Absolutely not.

AND - it includes ALL DEDUCTIBLE EXPENSES, which because it is a rental property are not subject to AMT deductions, $1 million mortgage interest deductions, etc., and it's STILL a bad investment. Given that imputed rent is a fundamental economic principle (on which your property tax is based in New York City, by the way) based on the fact that whether your buy or rent you're getting the same good in return, you'd be a fool to buy at that price.

Even including the tax benefit.

I hope that's understandable to you now. Your "theory" of the tax benefit only includes one side of the equation - the benefit side, not the (opportunity) cost side. If you wouldn't buy an apartment at these prices to rent out to a third party because you'd lose your shirt on it all benefits included, why on earth would you buy it to essentially rent it out to yourself?

Only a fool would do such a thing.

eah - Yes. I sold it for a number of reasons that aligned nicely for me

1) I cashed out equity, my taxes went up and I had shortage spread on monthly tax payments, and the cost to live there rose about 50% in the 4 years I had it making much less affordable for me giving my income at the time.

2) value appreciated about 90% in 4 years

3) 2nd ave subway construction was about to begin 7-8 months after I sold, and I was in between 93rd & 94th, on 2nd avenue, facing east on 2nd floor. didnt want to deal with living there or selling under those conditions.

all together, it was a very easy decsion although I loved that place!

Simple question, yet you seem to not be able to answer it...i know where my bonus is coming from...and no its not from the gov't as that money is "ring fenced"...

So again, if the bonuses are not coming from revenues where are they coming from?

Or did you misspeak?

huh. must have had a low mortgage, probably was less than 3k monthly to carry it. for a married couple that's nothing.

my mortgage started out at 3400 in April 2002...by the time I sold it it was up to about 5100. My budget in 2001 when I started looking was $375,000- 400K for a starter apartment, given I was an independant trader after the dot com bust and didnt feel like quitting. My income was no where near what it was from 1998-2001, especially after some big losses I took taking a chunk out of what I did make, and taxes I paid to Sam. My maint increased, my taxes doubled, and I took on HELOC at not the best rates. My mortgage rate when I bought was 7%, and I had to go to three lenders because nobody wanted to give an unemployed day trader a loan with declining income at that time.

They say you should keep housing costs below 1/3 of your take home gross pay, and thats the high end. Well if it cost me 5100 month to live, with me being the main bread winner in the family, i would have to earn close to 183,000/yr and that wasnt the case in 2004-2006, as I began a new career from scratch in real estate in summer of 2004. I had to dip into savings to live there toward the end, but the place was appreciating in a very fast moving market, and I knew I took a risk when I bought the place, and spent way more than I wanted to. I figured I could comfortably afford 2600-2700/mth or so at the time. It ended considerably higher. Remember, in 2001 a 1093 sft JR4 sold for 500K, and at the time, people thought I was nuts and overpaid.

my mortgage started out at 3400 in April 2002...by the time I sold it it was up to about 5100. My budget in 2001 when I started looking was $375,000- 400K for a starter apartment, given I was an independant trader after the dot com bust and didnt feel like quitting. My income was no where near what it was from 1998-2001, especially after some big losses I took taking a chunk out of what I did make, and taxes I paid to Sam. My maint increased, my taxes doubled, and I took on HELOC at not the best rates. My mortgage rate when I bought was 7%, and I had to go to three lenders because nobody wanted to give an unemployed day trader a loan with declining income at that time.

They say you should keep housing costs below 1/3 of your take home gross pay, and thats the high end. Well if it cost me 5100 month to live, with me being the main bread winner in the family, i would have to earn close to 183,000/yr and that wasnt the case in 2004-2006, as I began a new career from scratch in real estate in summer of 2004. I had to dip into savings to live there toward the end, but the place was appreciating in a very fast moving market, and I knew I took a risk when I bought the place, and spent way more than I wanted to. I figured I could comfortably afford 2600-2700/mth or so at the time. It ended considerably higher. Remember, in 2001 a 1093 sft JR4 sold for 500K, and at the time, people thought I was nuts and overpaid.

my mortgage started out at 3400 in April 2002...by the time I sold it it was up to about 5100. My budget in 2001 when I started looking was $375,000- 400K for a starter apartment, given I was an independant trader after the dot com bust and didnt feel like quitting. My income was no where near what it was from 1998-2001, especially after some big losses I took taking a chunk out of what I did make, and taxes I paid to Sam. My maint increased, my taxes doubled, and I took on HELOC at not the best rates. My mortgage rate when I bought was 7%, and I had to go to three lenders because nobody wanted to give an unemployed day trader a loan with declining income at that time.

They say you should keep housing costs below 1/3 of your take home gross pay, and thats the high end. Well if it cost me 5100 month to live, with me being the main bread winner in the family, i would have to earn close to 183,000/yr and that wasnt the case in 2004-2006, as I began a new career from scratch in real estate in summer of 2004. I had to dip into savings to live there toward the end, but the place was appreciating in a very fast moving market, and I knew I took a risk when I bought the place, and spent way more than I wanted to. I figured I could comfortably afford 2600-2700/mth or so at the time. It ended considerably higher. Remember, in 2001 a 1093 sft JR4 sold for 500K, and at the time, people thought I was nuts and overpaid.

why is this here 3 times?

i hear you. mistakes are all part of the game.

GREAT learning experience. Both in real estate and in trading. part of life. Live, learn, do things differently, preserve capital, and spot opportunities. I dig learning, and real life experiences and mistakes in general, is the best way to learn.

tech_guy - i'm with you on the whole tax deductibility thing. but isn't it better at some point to just drop it? steve obviously has a different viewpoint so rather than rehash the same arguments over and over, why not just agree to disagree?

steve: Now you're claiming that being a landlord is equivalent to an owner-occupied home? With a model tenant, maybe, but what percentage of tenants are model? You honestly can't conceive of any costs a landlord has that's above and beyond an owner-occupied home?

You can come up with a billion contrived round-about reasons for why my tax benefit doesn't count (I know this because you already have). I've shot each one down. But really, it doesn't matter what you and I say. At the end of the year, I'll have extra money in my pocket that would have gone to the IRS if I rented. I count that money. The rest of the world does too.

Keep holding your head in the sand and screaming at us that it doesn't count. If you scream loud enough, those dollar bills in my pocket might actually vanish.

"You can come up with a billion contrived round-about reasons for why my tax benefit doesn't count"

I never said it "didn't count." I said it was offset. Read the economic theory of imputed rent.

"You honestly can't conceive of any costs a landlord has that's above and beyond an owner-occupied home?"

Of course I can, and I can conceive of costs that an owner-occupier has that a tenant doesn't have.

"At the end of the year, I'll have extra money in my pocket that would have gone to the IRS if I rented. I count that money. The rest of the world does too."

No you don't. Because you fail to count what you could have had if you hadn't been overpaying all year long for that apartment.

I have yet to see you quote anything but housemath.us that supports your conclusion, and it supports it by using an erroneous assumption about how to calculate opportunity cost. I showed you an academic paper from the Federal Reserve that provides one way of calculating it. I've provided you another way above. Owner's equivalent rent is a third way. Price/earnings ratio is a fourth way. All of them point to the same thing - yet you accuse me of "holding my head in the sand and screaming that it doesn't count." Of course it counts. What you discount is the opportunity cost, which is clearly shown in the example above.

You would NOT buy an apartment to rent to a third party at current prices - tax benefit included - because you'd lose your shirt. Yet you insist that you would buy one to rent for yourself at current prices because of the "tax benefit." That is plainly stupid, and not worth arguing about.

The reason that rental property is profitable is not because of historic increases in housing prices - they increase very slowly over time. The reason is because someone else pays the principal for you, offsetting the low return on investment.

Do the numbers. Show me a theory that proves your point. And if you point to housemath.us again, show me their algorithm. You're a computer programmer - you know about GIGO. You're relying on their algorithm and you don't even know what it is because they don't publish it. That's just plain dumb.

jjun is right, garelj has no brains. But if my 2 kids have taught me anything, it's alot of patience. I'll explain it to garelj as I would to my kids.

It's simple, garelj is saying that the yoke, these wall street fetus will feed on, came from the egg. It was there all along. But what jjun has been saying everso indignantly, is that the chicken would have died and laid no eggs if it wasn't for corns(government bailout) that the chickens ate. So, it is only right if the government (lets call this the farmer) decides to collect the eggs and fry it or boil it or hatch it as a chick.. whichever way it wants it to, as the chicken's life is dependent on the farmer. Now, garelj will argue that the chicken would have survived on it's own evenif the farmer didn't feed or protect it, right? That's where garelj's stupidity sparkles. You see, the chickens would not only have starved to death because there is no food to feed on, but it would have been eaten up by the vultures before it could say "bonus".

The bonuses are coming from the revenues? ahahahahhahaa that is the stupidest thing I ever heard. garelj, Lehman had revenues before it went bankrupt. Do you know anything about accounting? Revenue is the top line, all companies have revenues, those that thrive as well as those that goes under. The problem is the balance sheet, or rather what was (and is still) off- balance sheet for these firms.
It's toxic, disstrous and would have killed all of us if not for the government bailout.

Now who pays the farmer(government) for the corns? me! So it's right for us to have a say on whether or not we want the yoke to be fried, thrown against the wall, or just be given to the fetus in the egg, so that we could hatch it grow it and eat it.

garelj, are you going to pull out another line (sentence) from the entire context again, just to make another stupid argument? save it. we already know you are stupid.

"The bonuses are coming from the revenues?"

Of course they come from revenue. The problem is they don't come from income. Revenue is top line, income is bottom line. You can have all the revenue in the world, but when your expenses exceed it, you're screwed, because the only place left to take it from is capital.

Oh! But the government just gave the banks capital! Maybe that's where it's coming from?

I made 1MIL in revenue this year, except that I lost 1.1M because my assets got burned and I lost a ton.

Ill pay myself a bonus from my revenue though.

Chicken, eggs, roosters, corns, capital, scotch. Ahh scotch, Ill take that for 200 Alex

MillA, my head is spinning from your analogy. but it did get me thinking about a 3 piece KFC meal...

Ditto the scotch.

This is the first time ever I see a chicken farmer posting on Streeteasy.

Not that there's anything wrong with it.

Bonuses are accrued throughout the year as an expense...they do not come out of income...how do you think bonuses are paid when there are losses on the year....you take them out of the revenue just like any other cost....

You can argue all you want about if this is fair or not, but that is how the compensation structures are setup in the banking world....Asset Mgmt / Hedge Fund comp structures are totally different as they are much more in line with if you have no income you get no bonus

So as you see, bonuses come out of the revenues generated and the bailout $$$ will go towards paying dividends on RSU's that are given on said bonuses...

"Simple question, yet you seem to not be able to answer it"

?? garelj, everyone has been answering all your questions, to the point.

The way you demand for answers is like, not only are you asking to be fed but also that they open your mouth for you, put the food in, move your mouth, teeth and tongue, make you swallow and digest. well, I don't think anyone will stand around for your shit.

KFC, that reminds me, lunch.

Garelj,
True, comp at a bank is generally taken as some percentage of revenue. Or rather, it's acrrued as some % of revenue. But it's a plug. During the boom years, ibanks typically wanted to have a net income margins of around 15% (give or take). So once they figured out how much revenue they made, they can accrue comp as appropriate to get that target net income margin. As an example, Goldman had the following net income margins
2003 - 17%
2004 - 18%
2005 - 14%
2006 - 16%
2007 - 15%
So what happens when there is no or very little net income because of massive writedowns/losses? You have to reduce comp and in a big way. As an example of this, Merrill is estimated to have -$13 billion of net income in 2008, so why should they be given any bonus accrual in the face of this?

They probably shouldn't be given a bonus, but will they is the question....you see the massive accruals being booked as we speak....now the fun starts...will they allocate them to writedowns/reserves or compensation (with a healthy cut)...I think we know the answer....

Again, i'm not arguing that's its right, I'm just saying how it is...

Graelj,

Bonuses in wall street would not be there if it wasn't for the bailout. (think about it for a while.)
The only reason wall street can even contemplate giving out bonuses is because, "us" tax payers have bailed the banks out. (think about it for a while.)
For you to argue where the bonus is coming from is meaningless when Wall street is generating "revenue" thanks to government intervention which has helped it from going bankrupt. (think about if for a while)
So in essense, the bankers are getting it's bonus from the bailout. (think about it for a while.)

think about it for a while. no really. think about it for a while before you focus on another minor detail and start picking on it.

"So in essense, the bankers are getting it's bonus from the bailout."

Not according to Barney Frank who said ``Any use of these funds for any purpose other than lending -- for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. -- is a violation of the terms of the act.''

I dont think the bankers would want to piss of Barney anymore than he already is....which would mean from the above that bonuses are not to be paid for by any of the bailout funds...

garelj, yet again, you are picking on one line without understanding things in entirety. Just because you are a frog that lives in a well, doesn't mean there is a whole big world outside. stop picking on the little moss on the wall.

So, if I take your money and pay my rent with it, and then I take my rent money and blow it on drugs, I didn't use your money to buy drugs?

sticks and stones....

Nothing from tech_guy? Tecchi: don't you have the housemath.us algorithm yet? Because without that we can't decide if it's worth its weight in salt, or gold, right?

Regarding the "opportunity cost" being on your down payment, let's say you have a $100,000 house with an $80,000 mortgage. The house gets destroyed in a flood and you have no insurance. How much have you lost?

$20,000 down payment? $80,000 mortgage? $100,000 total investment?

Oh! $100,000 total investment, because you still owe the mortgage even if you don't have the house.

Therefore, what MUST your opportunity cost be?

Oh! $100,000, because that's the amount I have at risk.

Then - I proved to you that at current prices you would not purchase an apartment to rent to a third party because you'd lose your shirt even with the tax benefit. Do you still hold that it makes sense to rent that apartment to yourself - effectively what you're doing when you buy a place to live - with the implicit negative cash flow, even with the full tax benefit?

If so, LMAO.

Here are the ways I have proved to you that housing is overpriced:

1) Imputed rent (above - cash-flow equivalence between rents and carrying costs)
2) Imputed rent (Fed paper - different methodology, explicitly includes expected future price changes)
3) Owner's equivalent rent (used as a measure of inflation)
4) Historic price-to-rent ratio (p/e = 12x annual rents)
5) PITI (40x annual rent = 30% PITI)
6) Price-to-income ratio with falling NYC incomes.

You come back with housemath.us, and you can't even tell me what their methodology is. And if it only counts the opportunity cost on the down payment it is plainly wrong, as can be seen above.

garelj - you're lost. If a bank shows an operating loss (negative income) and still pays a bonus, then that bonus can only come from capital. The government injected the banks with capital. Ergo, any bonus not paid out of net positive operating income comes from the government.

"I dont think the bankers would want to piss of Barney anymore than he already is."

That would represent the first time an investment banker would worry about anybody but himself. They didn't seem too concerned about burning investors during the dot.com fake research bust, the housing fake risk ratings / securitization bust, the Asian currency speculation bust, the commodities bust, the impending gold bust, because they all got bonuses from creating the bubble and bursting it. Do you really think they'll change their ways because of what Barney Frank thinks?

LMAO.

"The government injected the banks with capital. Ergo, any bonus not paid out of net positive operating income comes from the government"

Because banks didnt get capital injections from anyone but the government...how about I choose this piece of capital from the SWF's and use it for bonuses and then choose this piece of capital from the government and lend it out to all the over leveraged consumers and companies out there....

LMAO!

"Because banks didnt get capital injections from anyone but the government"

Some did, some didn't, it depends on the bank. To determine where the money comes from you would have to look at the specific capital structure and allocate it in priority. That said, ALL capital is included simultaneously as part of the capital requirements, so if any amount of capital were used to pay bonuses that would have put the bank under the capital requirements, and the government's money is then used to top off the capital so that those requirements are met, then the government's money is effectively being used.

C lost $2.8 billion in the 3rd quarter. V.P. says, ""I am very proud of my Citi colleagues."

Where did that $2.8 billion come from?

It came from the $12.5 billion investment from outside investors that it received earlier in the year...with plenty to spare....

"It came from the $12.5 billion investment from outside investors that it received earlier in the year...with plenty to spare...."

And if that were true, do you really think that anyone would invest in a money-losing enterprise like C to have that investment pissed into the wind by paying exorbitant bonuses to the very people who made the deals that necessitated the cash?

Methinks not.

Many have referred to the fact that capital going in could ultimately be used to pay for comp, whether directly or indirectly. There is another way that our capital injections directly increase the wealth of wall street employees - the stock. Most people at these banks, and certainly the ones that will get multi-million dollar paydays, have significant unvested stock. By injecting capital at high risk to taxpayers, the government bailout basically helps save these companies, and greatly increases their stock value. See where Morgan Stanley was trading when people thought the Mitsubishi money was at risk. If it wasn't high risk, then people like Buffett wouldn't need such egregious terms to give money to Goldman (arguably the strongest of the bunch). So this is a tangible and immediate transfer of wealth from taxpayers to the employees of these firms. What's worse, in many cases the same people responsible for this whole debacle.

The median income in NYC is what $48k? Assuming these guys are more educated than the average person, I figure a cap of $100k on direct compensation is pretty generous. What do you guys think?

"I figure a cap of $100k on direct compensation is pretty generous."

I think they're entirely unnecessary. "Financial engineering" is going the way of the $2 bill.

> The median income in NYC is what $48k

Manhattan median income is over $100k

garelj, I know wallstreet messed up pretty badly this time, but last time I worked in JPM, the ibankers I knew were rather smart. That's why I'm pretty sure you are not one.(For one thing, your arguments don't make any sense). So it's rather interesting to me to see you siding with those whose bonuses are on the line.

It is clear that these outrageous bonuses are clearly NOT supported by the firms' income, don't care what their revenue is, their bottom line net losses does not justify all these expense going out as bonuses, and I'm not talking about their helfty salaries. Bonus by definition is 1. something given or paid over and above what is due. 2. a sum of money granted or given to an employee in addition to regular pay, usually in appreciation for outperformance at work.

And well, if it was any other times, they decided to just give themself a hefty bonus regardless of the loss they have created for the stockholders and what not, that's fine. If you have a problem with it, join the firm and receive those bonuses along side them and stop whinning. BUT, this is of different level.They have put the entire country at risk. Most everyone lost alot of money in someway or another. On top we have bailed them out with our money. that's you and me and our children, who'll be paying for that very money they received to survive.

AND YET, they have the nerve to still want to get majority of their BONUSES?????????

Okay, I admit some of these people did really well, yes they did generate alot of "revenue" for the firm, but hey, their company still would have gone belly up if it wasn't for MY money. So even those who performed superbly should get a cut in bonus. why? that's the risk you took in joining firms that does risky business, big upside as well as the downside - but why is it that people like my friend gets the downside instead? He lost half his net worth thru stocks and 401K, his home is underwater, on top he just got laid off because his company went bankrupt because the banks won't lend.

No way no how no bonuses for wallstreet!