Tuesday, January 12, 2010

Shareholders Receive a Pile of Dung as Bankers Run Off With the Loot

Bank shareholders are proving to be an especially retarded bunch. No matter how much the banks pummel them, they don't seem to so much as care. In any other industry, shareholders would be up in arms protesting and demanding management changes and restrictions on bonuses after the incredible destruction of wealth they incurred. Not these guys, they are like the faithful dog the banking elite keep kicking, knowing it will never leave. Consider this - from the start of the financial implosion in August 2008, to today:
1. Bank shareholders have incurred hundreds of billions of dollars in losses as some of the largest U.S. banks imploded (recall Lehman, Bear Stearns, Wachovia, Wamu and Merrill Lynch). In addition, they lost billions of dollars in steady dividend income as the remaining standing banks cut dividend payments.
2. Shareholders tolerated massive equity dilutions as banks were forced to raise capital to shore up capital ratios and pay back TARP funds. Bank of America shareholders had it especially rough when Ken Lewis acquiesced to government pressure and over paid for the ill-fated acquisition of Merrill Lynch.
3. A look at the stock performance (see table on the left) of the top banks since August 2008 reveals that shareholders are yet to breakeven on their August 2008 investment. Bank shares are either languishing at the bottom of the pond (such as Citigroup, Bank of America and Morgan Stanley), or if the shares have more or less recovered (Goldman Sachs, JP Morgan, Wells Fargo) then shareholders have still lost out on a year and a half's worth of returns.
4. The one government that decided to stand up to the bankers and levy a 50% tax on bonuses, was that of the U.K. However, the tax did not have its intended effect as the government purposely left in a loophole, to placate the "irate" bankers. The loophole gave the banks the right to choose whether the 50% tax would be 1) paid out of the bankers bonus pool (thus reducing individual bonuses) or 2) paid from net income (keeping banker bonuses intact, but shafting shareholders). Needless to say the greedy bankers chose to make shareholders foot the bill for the economic chaos they created. So while bankers in the U.S. and U.K. are gleefully marching away with a £40bn bonus pot, shareholders are bracing for a £2bn hit to their equity position, from the UK government's taxes.
What is even more outrageous is that the "ticked" off bankers are now grouping to sue the UK government. According to Bloomberg: "Large banks including Goldman Sachs Group, Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase. took part in a conference call with the Securities Industry and Financial Markets Association (of the U.K.) on Jan. 6 to discuss whether to take legal action against the government over the new tax". Bankers truly seem to dwell in a parallel universe where the current laws of physics and sanity do not hold.
5. Recent news reports indicate that the Obama administration is also setting up to follow the UK government's footsteps. According to the Financial Times, the administration is planning on imposing a levy on top US banks. Faced with congressional elections this year, Democrats are attempting a last ditch effort to placate an angry public. According to FT, "the surcharge will aim to recoup the full cost of the Tarp bail-out fund, which the administration estimates at $120bn. The levy is seen as an alternative to ideas such as a financial transactions tax, or a super tax on bank bonuses as in the UK". But pray who will pay for this $120bn levy? The faithful banking shareholder of course.
6. Now off late one brave shareholder has risen to the occasion and filed a lawsuit against Goldman Sachs. According to the FT:
A pension fund for fire and police officers has sued the board of Goldman Sachs, seeking to stop the investment bank from paying out billions of dollars in bonuses to the bank's staff. Lawyers representing the Security Police and Fire Professionals of America Retirement Fund argue that the board has "abdicated" its responsibility to shareholders and "blindly "rewarded" executives for "corporate performance that has absolutely nothing to do with the skill of the company's employees". The lawsuit, filed in New York late on Monday, claims that Goldman's 2009 profits are due to direct taxpayer help and $13bn used to bail out American International Group , a Goldman counter-party. Lawyers from the firm Grant  and Eisenhofer wrote in the complaint that paying 50 per cent of net revenues to staff constitutes "waste" and "elevates the interest of senior Goldman employees over those of shareholders".
Unfortunately this pension fund is the lone voice of sanity among lethargic bank shareholders who have long ago abdicated their responsibility and duty to watch over management. The majority have choose the easy path and now stand as mute witnesses to management's destruction of not only shareholder value but also much of the global economy. And since it is not easy to bring the global economy to its knees, for this herculean effort our banking class believes their massive bonuses are duly justified. So they blithely pay themselves the bulk of the companies earning and nearly 50% of its revenues, as bonuses.
There is no other industry in the world that pays its employees this much. For the rest of the U.S. industry our banking brethren duly advocate layoffs and job outsourcing to save wage expense and improve shareholder returns.
This mute shareholder action also flies in the face of the "self-regulated free market" hypothesis propagated by Alan Greenspan. A tradition now continued by the "talking bubble heads" on CNBC. In a December 2008 testimony before Congress Greenspan sputtered "I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms". Not only has bank management failed to protect shareholder interest, the shareholders have failed to protect their OWN interest. As we are learning with democracy, the right to exercise a vote is not a passive job. For democracy to flourish citizens need to be vigilant in pressing their demands to the ruling class. Being a shareholder is no different. It is time to wake up.

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