Expert Perspective by Grahall’s OmniMedia Editorial Board

In his October 20, 2009 article for Bloomberg, (Wall Street 40% Bonus Rise Feeds Spending on $43 Steak, Co-ops) Martin Z. Braun says: “A 40 percent jump in Wall Street bonuses this year may bring relief to New York City and Albany as the state and its biggest metropolis struggle with a combined $14 billion in budget deficits this fiscal year and next.”  Couple that with another point from the article that “Delmonico’s, the landmark steakhouse a few blocks from the New York Stock Exchange, has seen traffic pick up and its catering business improve as firms start to take clients out in bigger groups”, the article goes on to say.  It looks like New York City is primed to recover some tax revenue and increase its conspicuous consumption of excellent Angus.

But the protestors in Chicago this week might have a better perspective on what the rest of America feels about Wall Street and Bankers’ bonuses.  As Lauren Etter wrote in the October 27, 2009 Wall Street Journal (Protesters in Chicago March on Offices of Goldman, Wells Fargo) “Hundreds of union members and organizers descended on the streets of downtown Chicago on Monday morning to picket the offices of Goldman Sachs Inc. and Wells Fargo & Co…The protests… pick up on popular sentiment that big banks are partly to blame for the financial crisis.”

There are other angles on this topic that get submerged in the face of the magnitude of bonuses and how they are received by “the pitchfork crowd”.  Two different perspectives are provided by Grahall’s own Garry Rogers and Robert Cirkiel.

According to Garry, “the real problem right now is that despite the extraordinary steps taken by the Federal Reserve, liquidity issues have not been resolved.  What executives are getting paid is, frankly, secondary to the fact that banks need to begin to do their jobs and manage risk properly – lending to no one doesn’t make any more sense than did lending to everyone.”  Garry shared a point from a recent conversation he had with a mortgage broker, who said that he hasn’t gotten a home loan approved for over $375,000 in the past 2 months.  Also many other home loan applicants lose their rate locks because the underwriting process has become so onerous.  In fact, the banks have become so stringent in their requirements that less than half of the mortgage applications are being granted.  Garry asks: “How can the economy recover when over 50% of loan applicants are deemed unworthy of credit?”

Robert’s take in the situation is that “until financial services firms are actually valued realistically, i.e., mark-to-market, how can anyone say that anybody is entitled to anything, or for that matter that the banks are even in the black?  Robert continues: “For example, let’s take a bank with a $1 billion portfolio of loans, all due in 10 years.  Interest rates are currently low and the loans were made at higher rates. That is good news for the bank, right? Well, yes, if the loans are all repaid, but given current foreclosure rates you can’t bet on it.  So the ‘real’ value of those assets may be much, much lower and in fact the bank may be a financial time bomb ticking away.  One must question if these big bonus payouts are justified, and whether these banks will be back again for another bailout?  On the other hand if their future is a continual supply of bailout money, the bailouts ARE their profits whose present value becomes their market value so let them eat steak.”

Robert concludes: “Seriously, if they’re going to continually get bailed out, then their stocks are a great buy.”

You can reach Garry Rogers at garry.rogers@grahall.com and you can reach Robert Cirkiel at robert.cirkiel@grahall.com