Good Evening: Capital markets participants spent most of today positioning themselves for possible policy changes once the two day FOMC meeting breaks up tomorrow. Some expect Bernanke & Co. will decide to buy Treasurys and/or agency MBS, and equity investors seemed content with nibbling a bit ahead of any such announcement. Garnering almost as much attention during this slow-motion day were AIG and Wall Street bonuses. The amount of rationalizing and whining about these payments will only increase the desire of the American public to tell both AIG and Wall Street to pound sand.
After stocks in Japan and Australia were both up smartly, the bourses in Europe and our stock index futures spent most of this morning meandering around levels not too far from unchanged. The major averages survived the earnings reports and another weak Case-Shiller home price index reading to post gains approaching 1% soon after the bell rang. After consumer confidence hit a new all-time low, however, equities sank back to the unchanged mark (see below). From there the major averages drifted unevenly higher in slow trading to post gains of between 0.72% (Dow) and 1.8% (Dow Transports). Treasury securities saw a decent bid in both the long end and for TIPS, perhaps in the hope the FOMC will decide that tomorrow is the time to announce a plan to buy these securities in the open market (see below). The dollar edged lower, and it would be an understatement to say that commodities didn’t benefit from the greenback’s small decline. Crude oil was down 9%, ag futures declined and even gold dropped 1%. Adding it all up, the CRB index lost almost 4% of its value today.
Whether the Fed decides to start buying securities in the open market tomorrow (or ever) is unknowable, but I certainly hope Mr. Bernanke and team decide to support the mortgage market instead of the Treasury market. Those who would directly benefit from Treasury purchases are mostly of the carry-trading variety (banks and hedge funds), but home buyers would be helped if the Fed decided to sit on mortgage rates. I’m not advocating Fed intervention; I’m just stating the case that to do so in the mortgage market would have a bigger impact on a central problem in the credit crisis — the implosion of home prices. It could even hasten the arrival of the “equilibrium” in the housing market foreseen later this year by Karl Case (creator of the Case-Shiller index — see below). The ultimate low in Treasury yields during the 2003 feeding frenzy in government bonds came in anticipation of Fed purchases that never materialized. What happens to yields in public and private markets alike in the wake of whatever the FOMC announces tomorrow will be interesting.
What is also of interest to me, and what represents a source of growing anger among taxpayers, is the level of bonus compensation at AIG and other financial institutions. Many on Wall Street are unhappy that the decimal point on their 2008 checks seems to have moved to the left a notch (see below). After emptying their pockets to fund the TARP, most Americans have zero sympathy for these complaints. Given the choice, I’m sure many taxpayers would join me in support of requiring any financial institution in receipt of government aid set aside at least half of their employee bonus pool in order to purchase troubled assets from their parent company. Round 2 of the TARP could then make matching purchases of the same assets, thus finally aligning the interests of Wall Street employees and the taxpayers who’ve bailed them out.
As for AIG, the “retention bonuses” promised to the derivatives group that ultimately sunk the firm is a pure and simple outrage. I understand the logic behind the payments — AIG does indeed need to retain key employees if it hopes to someday leave Federal protection — but there had better be some pretty serious strings attached (or, better yet, ropes). First and foremost should be a requirement that none of these payments be made in cash. They should all be set aside in a fund that vests after these “key employees” have stuck around for a few years. Second, and just as important, this fund should invest in the very garbage this group foisted upon AIG. 100% of it. Whether the TARP matches or whether the employees get upset and want to leave is of no concern to me or almost anyone else. I would further stipulate that if a “retention bonus-eligible” employee does indeed decide to leave prior to the 3 year time limit, then he or she receives no payment at all. Zip, nada, zilch. If retention bonuses are indeed necessary to keep this crew from bolting, then they should have no problem waiting for it. And, if the drek their bonus pool invests in turns out to be worthless, then tough luck. As far as most of us are concerned, the AIG derivatives group can get a taste of the damage they’ve helped to cause.
— Jack McHugh