Fall of the High and Mighty

The New York Times (NYT), in its Sunday issue (September 21), came up with a piece that showed the effects the recent bloodbath in Wall Street has had on the shareholdings of a number of Wall Street CEOs, both former and current. To illustrate such effect, the NYT article showed the values of the CEOs' shareholdings at the beginning of January 2007 and compared it to the value of their shareholdings after the financial markets closed last Friday, September 19.

In the interest of full disclosure, the figures represent the stocks owned by the individuals listed and does not include the value of their stock options. Anyway, here are some of the names that were listed: (Each line shows the CEO Name, the Firm he either heads or used to head, the Value of his Shareholdings as of 1/1/2007, and the Value of his Shareholdings after the markets closed on 9/19/08.)

Maurice R. Greenberg, Former CEO (AIG), $1.25 billion, $49.6 million
James E. Cayne, Former CEO (Bear Stearns), $1.06 billion, $61.2 million
Sanford I. Weill, Former CEO (Citigroup), $914.9 million, $342 million
Richard S. Fuld Jr., CEO (Lehman Brothers), $827.1 million, $2.3 million
E. Stanley O' Neal, Former CEO (Merrill Lynch), $127.7 million, $40.2 million
John Mack, CEO (Morgan Stanley), $224.6 million, $80.4 million
Martin J. Sullivan, Former CEO (AIG), $3.2 million, $173,000
Daniel H. Mudd, Former CEO (Fannie Mae), $26.5 million, $476,000
Richard F. Syron, Former CEO (Freddie Mac), $10.6 million, $130,000

The above individuals I chose to list here are the ones whose shareholdings took the biggest hits as the crisis in Wall Street worsened. For a complete list of the CEOs, you can find the New York Times chart here.

According to some government estimates, US taxpayers will be on the hook for $1.5 trillion to bail these financial institutions out. The bill that US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke submitted to the Congress seeks $700 billion to be made available to help financial institutions rid themselves of failed or illiquid securities. Those illiquid securities were based on subprime mortgages whose debtors failed to pay.

Thus, millions of American taxpayers will now end up footing the bill for these guys' avarice and greed. I don't mean to sound insensitive or mean but I do not feel sorry for any of the guys above. A majority of them still have millions of dollars of wealth available. Except for a black mark on their reputations and maybe some social ostracism that they will suffer, these guys won't have any problems finding money for their next meal.

I don't even feel sorry for their direct reports and the senior managers of their firms. Those groups of officers earned millions of dollars in bonuses ANNUALLY. Living in the New York metro area, I always read about how the bonuses these guys make every year average about two to three times their annual salary.

But what's more worrisome for me are the ripple effects from the crisis in Wall Street.

First, a lot of establishments and businesses, small and medium-sized, depend on Wall Street firms and employees for a good portion of their business. Revenues of tailors, barbershops, hair salons, spas, restaurants, laundromats, and theaters, to name a few, will certainly suffer as a result of the job losses. In fact, some of these smaller businesses may even end up letting go of some of their employees too.

Second, the crisis will definitely lead to tighter credit. A humbled and tightly regulated Wall Street means a more conservative Wall Street. Tighter credit will definitely lead to higher quality loans extended to higher quality debtors. However, tighter credit could lead to reduced economic activity. People and businesses could buy and invest less. And once the American consumer tightens his/her belt, the whole world will certainly feel it. As of this writing, a number of US banks have started reducing the credit limits of thousands of those credit cardholders with less than stellar credit histories.

Some economic experts say that the worst isn't over yet. To a person, all of the economists are worried about the ripple effects through the rest of the economy. So far, we've only read about the big players in the banking industry. Apart from those, there are also big regional banks that have not yet revealed the extent of their losses on subprime mortgages.

To be honest though, people also share part of the blame here. And by "people", I'm referring to those who bought homes at prices that were clearly way beyond their means. Banks can be blamed for tempting these people with "exotic" types of mortgages such as "interest only" mortgages and "adjustable rate" mortgages. However, at the end of the day, the transaction would not have pushed through if upon due assessment of his/her financial position, the buyer had wisely decided not to proceed with the purchase.

Both banks and the buyers can delude themselves all they want through such creative schemes but the bottomline remains the same: there is still a debt that needs to be paid and that a buyer still doesn't acquire full title to a property until such time he/she has paid both principal and interest on a debt. Financing has always operated on this principle for centuries and will always do.

As I end this post, word just came out that the last two large investment banks. Goldman Sachs and Morgan Stanley, in an effort to gain Federal protection from the crisis, have obtained the approval of the Federal Reserve to change their status from investment banks to bank holding companies. As such, both institutions can now operate commercial banks and take deposits. The change in status subjects both institutions to tighter government regulation. However, tighter regulation is a rather small price to pay when in exchange, they can avail themselves of the government's bailout program.