Some things just never change -- especially in the banking industry, where there's a whole lot of the "same old, same old" taking place once again.

The U.S. government is a major shareholder in the largest banks today -- financial institutions that came crawling to the U.S. government to be bailed out when they were injured.

The government has repeatedly commanded these institutions to stop excessive executive pay and bonuses.  But, who listens to major shareholders anyway?

Every other industry has had to contend with lowered compensation.  Just look at the "new" General Motors (GM) salary concessions:

Active workers: 

• Wages frozen
• Starting salaries less than half of what they were before
• No cost-of-living adjustments
• No more overtime
• Performance benefits suspended
• Changes to time-off policies
• Vacation pay must be taken before the end of the year

Retirees:

• Vision and dental benefits canceled
• Medical prescription co-payments doubled on medications

One would like to think that brokers and bankers, in particular -- having direct access to weekly economic reports -- could see that the world is hurting and make some (at least paltry) allowances.  But no, not these bankers and brokers.

When Will the Banks Ever Learn?

Morgan Stanley (MS) actually announced that it was boosting executive salaries.  Why?  Because the government said that bonuses would not be tolerated.  Clearly Morgan Stanley, the sixth-largest U.S. bank, does not get the picture.  In fact, the company announced that it intends to double its CFO's pay. 

Are they alone? Hmmmm ... hardly.

UBS AG (UBS), the European bank with the largest financial losses, plans to raise "senior banker" compensation by 50%.  This equates to $811 million. 

Remember that UBS, under the direction of "senior bankers," amassed the biggest loss in the bank's corporate history in just one year, 2008.  Why raise salaries?  Because the Swiss government, like the U.S. government, bailed out UBS and said "no more executive bonuses."  Increased salaries come from the same pool of money as bonuses, even if accounting rules put them in another category.  It's the old "robbing Peter to pay Paul syndrum."

Royal Bank of Scotland's (RBS) executive pay has increased dramatically with the rise in value of the bank shares just over the last two months.  Now RBS is under pressure because its executive pay scale has not been made transparent. 

Like UBS, RBS is nearly wholly owned by the Swiss government.  Yet, the company continues to talk about raising executive pay levels ... despite the fact that RBS' losses in 2008 were nearly $42 billion.

Bank of America (BAC) said the company is boosting salaries for senior executives.  How much?  By as much as 70% for its investment bankers. 

Remember, B-of-A received $45 billion in taxpayer bailout money. After the infamous "bank stress tests," B-of-A needs to raise $34 billion in private equity.  So, what would its salaries look like after the pay raise?  Managing directors' salaries would increase to $300,000 from $180,000.  Less-senior directors would receive $250,000, up from $150,000. 

But it's "OK," because bonuses would become "smaller," said Brian Moynihan, B-of-A's president of investment banking and wealth management. “We believe it is responsible, and consistent with the emerging public consensus, that a greater percentage of overall compensation come from fixed base salary.”

Citigroup (C)  expects to raise base salaries in compensation for reduced bonuses as well.  Why?  To deflect key employee resignations.  But aren't these the same investment bankers who were the masterminds of Citi's $8.29 billion loss in Q4 2008, along with another $966 million in Q1 2009? 

And isn't it Citigroup that desperately needed $45 billion in bailout funds, while simultaneously purchasing a $50 million, 12-seat plane for these same senior investment bankers?

And let's not forget Goldman Sachs (GS).  Remember them? Didn't they borrow a cool $12 billion from taxpayers and receive an additional $12.9 billion from AIG (that was also bailout-funded)?  Goldman just announced that 50% of its revenue is now set aside for salaries, bonuses and benefits -- up 48% from one year ago.  The amount: $4.7 billion ($168,000 per employee). 

Goldman reps have repeatedly talked about the company's "duty" to repay the bailout money. Why?  Is it really because of a sense of "duty" or because bailout money gives the U.S. government the right to oversee/restrict executive pay?

The company's seven top execs were required to give up their multimillion-dollar compensation bonus packages. Once the money is repaid, however, government control of bonuses is over. 

But does it really matter? Since when does Goldman Sachs kowtow to the likes of the U.S. government?  The U.S. is now a major shareholder in Goldman and still the company is planning to spend $4.7 billion in executive pay increases.

Here's the rub for U.S. taxpayers.  We were forced to bail out investment bankers and brokers who caused the collapse of the stock market in 2008.  Only a few of them lost their jobs for what they did. Now they are actually demanding pay increases. 

To get what they want, these bankers/brokers need to repay the bailout funds -- thus removing government oversight restrictions.  But if the government allows the bankers to repay the bailout funds, (now that they are doing better and able to raise private equity), the taxpayers once again get squeezed.  Why? Because they would be returning the funds at below-market prices.

Governments that bailed out banks/brokerages received warrants from the banks in exchange for the original loan. Those warrants gave the governments the option to buy bank/brokerage stocks at a set price over 10 years. 

In just a few months, stock values have more than doubled -- adding significant value to those warrants.  Now the banks want to repay the loans and, in so doing, buy back their warrants. It was Treasury Secretary Tim Geithner who sold the U.S. taxpayers on bailing out the banks because he said that once the banks recovered, taxpayers would benefit from long-term stock gains. 

Now, it seems that several of the banks will be allowed to return their funds as early as June 2009, including Goldman Sachs, JPMorgan (JPM) and Morgan Stanley.  When asked about why they should be allowed to buy back their warrants, they said that, because of the stock market's March/April/May recovery, the value of the warrants have increased beyond a level that the bankers feel they are worth.

They quickly forgot about crawling on their hands and knees, begging for bailout.  Citi and B-of-A in particualr quickly forgot that they were nearly dismantled.  Perhaps they need a reminder that that, if it were not for the taxpayers, those warrants would not be worth the paper they were printed on.

Amazing how some things just never change.





Barbara Cohen
Chief Investment Officer
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Economic Calendar for the Week of June 1-5

MONDAY, JUNE 1

10 a.m., Institute for Supply Management Index

    * Importance (A-F): This release merits an A-.
    * Source: Institute for Supply Management
    * Release Time: 10:00 ET on the first business day of the month for the prior month.
    * Raw Data Available At: http://www.ism.ws

The ISM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.

The total index is calculated based on a weighted average of the following five sub-indexes, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).

Highlights

    * The ISM Index for April rose to 40.1 from 36.3 in March, according to the Institute for Supply Management. The reading was better than the consensus estimate of 38.4.

    * The improvement from March was driven by a jump in the new orders index to 47.2 from 41.2.

    * The other series indexes broke down as follows: production to 40.4 from 36.4; employment to 34.4 from 28.1; supplier deliveries to 44.9 from 43.6; inventories to 33.6 from 32.2; customers' inventories to 49.5 from 54.0; prices to 32.0 from 31.0; backlog of orders to 40.5 from 35.5; exports to 44.0 from 39.0; and imports to 42.0 from 33.0.

Key Factors

    * The dividing line between expansion and contraction in the manufacturing sector is 50.0, although the ISM points out that a PMI in excess of 41.2, over a period of time, generally indicates expansion of the overall economy.

    * The ISM report for April trended in a manner that supports the idea the economy is in a bottoming process.  In that respect, it is encouraging news.  Still, the key takeaway from the survey is that the transition to growth hasn't happened yet.

Big Picture

    * This is a highly overrated index.  It is merely a survey of purchasing managers.  It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse.  It does not weight for size of the firm, or for the degree of better/worse.  It can therefore underestimate conditions if there is a great deal of strength in a few firms.  The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle.  It must be recognized that the index is not hard data of any kind, but simply a survey that provides broader indications of trends.


WEDNESDAY, JUNE 3

10 a.m., Institute for Supply Management Services

    * Importance (A-F): This release merits an improved B-.
    * Source: Institute for Supply Management
    * Release Time: 10:00 ET on the third business day of the month for the prior month.
    * Raw Data Available At: http://www.napm.org

The non-manufacturing ISM report is a national survey of purchasing managers which covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.

The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates.

Highlights

    * The ISM Services survey for April revealed an improvement versus March, as the index jumped to 43.7% from 40.8%.  The former number was ahead of the consensus estimate of 42.2%, but still connotes a contraction in the non-manufacturing realm since it falls below the line of demarcation at 50%.

    * The more gripping message for the market, though, is that the uptick from March suggests the pace of contraction is slowing.  The April report, incidentally, marked the seventh straight month the index has been below 50%.

    * Like the ISM manufacturing report, the new orders component in the ISM Services report provided one of the more hopeful signs as it rose to 47.0% from 38.8%.  The biggest improvements, however, were seen in the import and export indexes.  Imports jumped to 48.5% from 37.0% while exports increased to 48.5% from 39.0%.

    * The remainder of the series indexes broke down as follows: employment to 37.0% from 32.3%; supplier deliveries to 45.5% from 48.0%; inventories to 43.0% from 40.0%; prices to 40.0% from 39.1%; backlog of orders to 44.0% from 41.0%; and inventory sentiment to 62.5% from 60.0%.

Key Factors

    * The overall report fits neatly with the bottoming-out thesis and can be viewed from that perspective in a positive light.  Still, it lacks the more convincing growth indication that would be a more meaningful driver for the market at this point.


FRIDAY, JUNE 5

8:30 a.m., Employment Report

    * Importance (A-F): This release merits an A.
    * Source: Bureau of Labor Statistics, U.S. Department of Labor.
    * Release Time: First Friday of the month at 8:30 ET for the prior month
    * Raw Data Available At: http://stats.bls.gov/news.release/empsit.toc.htm

The employment report is actually two separate reports that are the results of two separate surveys. The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate. The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few. Both surveys cover the payroll period which includes the 12th of each month.

The reports both measure employment levels, just from different angles. Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month. The household survey is used only for the unemployment measure -- the market focusses primarily on the more comprehensive establishment survey. Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.

Highlights

    * The April decline in payrolls of 539,000 was a smaller decline than the published economist median expectation of 600,000, but still represents bad economic news. Part of the smaller decline is explained by a 72,000 jump in government payrolls, which hardly helps the wealth-producing private sector.

    * Widespread losses occurred in the private sector, including a drop of 149,000 in manufacturing and 110,000 in construction.

    * The 0.4 increase in the unemployment rate to 8.9% was in-line with expectations.

    * Hourly earnings growth did not add much to consumer buying power. Hourly earnings were up $0.01 to $18.51 an hour, which is reported as a 0.1% increase.

Key Factors

    * It is hard to derive a positive spin from the recent market argument that at least the rate of decline in economic data is slowing.

    * The increase in the unemployment rate is noteworthy for other reasons.  The 2009 Obama administration budget (ended Sept. 30, 2009) called for a $1.7 trillion deficit. The economic assumptions assumed an 8.1% average unemployment rate for 2009.  That looks like a very long stretch at this time, as the rate is likely to move higher the next few months.  That implies that the deficit this fiscal year will be higher than forecast.

    * There have been hopes recently of a steadying in consumer spending leading to a stabilization in economic trends this fall or later this year, but the hourly earnings data does not provide much support for that argument.

    * These are still massive job losses and wage gains are minimal.  Granted, payroll trends do lag overall economic trends, but unless businesses start to show a willingness to hire and not just to lay off fewer people, the market may be ahead of itself in looking at the recent economic data as harbingers of much better trends.

Big Picture

    * Employment conditions have worsened significantly in recent months.  Through August 2008, payroll declines were moderate, and not at recessionary levels.  The September and October declines were much larger and established a new trend.  Employment conditions are not likely to improve for quite a few months, particularly as employment picks up only after an increase in overall demand.