*****Apparently we’ll hear more about the bank bailout plan over the next couple of days; In the meantime, President Obama will sign his massive tax and spending bill into law today.
The bill is being called the biggest piece of legislation since FDR. We’ll see how the market likes it. It occurs to me that passage of this stimulus bill was very much in doubt until the amended version passed the House on Friday. It may be that we still get some upside in the stock market now that it’s passed.
*****The final bill contains $300 billion of tax cuts, $200 billion in infrastructure spending and $250 billion in state aid. Despite the indignation with which most Americans view this bill, most economists don’t think nearly $800 billion is enough to get the economy moving again. They also don’t believe tax cuts will really help.
But the one aspect of the stimulus bill I absolutely love is the executive compensation restrictions. This is something I touched on the other day.
*****It’s not that I think the CEOs and top 20 earners (sounds like the Sopranos, doesn’t it?) should be punished, per se. I get the argument that bonuses attract top people, and you’ve got to take care of your earners.
Alan Johnson of Johnson Associates Inc. told Bloomberg that the new rules may be "catastrophic" to Wall Street’s talent base. Of course, Johnson is a New York-based compensation consultant.
And even though Citigroup CEO Pandit has said he will work for 8.3 cents a month until Citi is profitable again, others aren’t so charitable. Bank of America CEO Ken Lewis replied with a flat "No" when he was asked if he’d work for a $1 a year.
Bank of America made $5.8 million in the first 9 months of 2008. On its own, Bank of America lost $1.8 billion in the 4th quarter. Throw in losses at its recent acquisition Merrill and it’s nearly $17 billion.
It’s not for me to say if Lewis deserves a bonus. I’m neither on the board nor a shareholder. But it is the government’s prerogative to issue demands with the capital it sends Bank of America’s way.
*****These companies are getting hit right where it hurts the most – in the wallet. This may be the one measure that will guarantee the fastest balance sheet scrubbing in history. You can bet I’d do everything possible to get my bonus money flowing again.
And you can also imagine that any company where the executives decide to take a drastic pay cut and forego cash bonus compensation should be considered insolvent.
*****I wonder how the "let ’em fail" crowd would respond if the new stock issued for nationalized banks were given to taxpayers as the cleaned up banks went public again?
That was the suggestion of one creative thinker I read over the weekend. And it makes some sense. Once the banks were healthy again, there’d be no reason not to own the stock. And the fact that many Americans would simply dump the stock would keep the price down and allow the stock to be accumulated by strong hands.
I have only anecdotal evidence from a few companies, but it seems that when a company declares bankruptcy and cancels its outstanding common stock and re-issues new shares, those shares do quite well. I’ve seen this happen with a wireless company called Leap Wireless, engineering firm Foster-Wheeler and Global Crossing.
The debilitating effect of a debt-laden balance sheet can’t be underestimated.
This may be a pertinent observation, too. Sirius XM Radio (Nasdaq:SIRI) may seek bankruptcy protection this week. That’s bad for current investors. But once the company emerges with a significantly lightened debt-load, the company could prove to be viable.
*****The gold ETF I bought for my Recovery Portfolio made a 14% gain last week. Apparently I’m not the only one who sees significant upside for gold prices.
Given the recent gains in gold prices, it’s reasonable to expect a little profit-taking in the next day or two. In my opinion, any dip in gold prices will be met quickly with buyers. And that could give you a great entry point. For more on this gold investment and my Recovery Portfolio, please click HERE
*****It figures. As soon as I announce a regular "reader mail" day, there’s a Monday holiday and a new law that can’t be ignored. That means you’ll see reader mail tomorrow.