Wall Street

A recent letter from Representative Henry Waxman to the CEOs of nine major banks asked why they were using taxpayer dollars for employee compensation instead of increasing lending in the banking system. Waxman, Chairman of the House Committee on Oversight and Government Reform, accused the banks of using $108bn of the $125bn provided by the Troubled Asset Relief Program (TARP) to maintain inflated bonuses and salaries while failing to ease tight credit conditions. Last week, Waxman grilled former Fed Chairman Alan Greenspan about his tenure as chairman and commitment to deregulation.

Snapshot asks, if the economy falls into a recession or even depression, will Wall Street face a popular backlash led by Representative Waxman?

FT - Goldman Partners' Reduced Rewards
Bloomberg - Wall Street Won't Surrender Bonuses Amid Outcry, Veterans Say
Henry Waxman - October 28, 2008
Bloomberg - Citigroup, Goldman Asked by Waxman to Justify Bonuses

A proposal by Gordon Brown's government to up the taxes paid by resident foreigners and demand greater transparency in their offshore dealings has many fearing an exodus of London's international financiers. This comes at a time when increasing numbers of businesses in London are also moving their headquarters to countries with lower taxes. Layoffs by banks in the wake of the subprime crisis are further damaging the City's reputation as a vibrant financial center. A loss of foreign residents and international business would be devastating for a city that has emerged as New York's greatest rival for global preeminence.

Snapshot asks, could New York reclaim the top spot if London falls?

In each formulation of American grand strategy since World War II -- until we inexplicably stopped such planning in 1992 -- the President and Congress relied on the power of the American economy to do the strategic heavy lifting. Sixteen years, however, is far too long for even the American economic engine to coast without a strategic re-alignment, and the stimulus, bailouts, subsidies and even military operations that naturally ensued have forced even Martin Wolf of the FT to declare the "dream of global free market capitalism" dead. Writing in the upcoming issue of The Nation, Sherle Schwenninger, looks to the architects of the New Deal and finds three lessons essential for re-tooling the American economic engine and bring market capitalism back home to America's shores.

The upswing in market sentiment after the rescue of Bear Stearns may soon come to an end. Highly leveraged financial institutions, which use large amounts of borrowed money, may still face unexpected losses as the housing market and consumer confidence continue to fall. Institutions have taken more losses on underlying assets, causing them to be even more highly leveraged than before. As underlying assets fall in value, many derivative products will also be written down.

Market volatility has sky rocketed to the highest level in 70 years according to Standard & Poor's. At the same time, Merrill Lynch's monthly survey indicates that many fund managers believe equities are undervalued in absolute terms. Yet falling house prices, new credit concerns, and rising inflation may pull markets down further.

Snapshot asks, is recent volatility a sign that markets are bottoming out or that they are waiting for more bad news to take another plunge?

Chicago Board Options Exchange - Volatility Index
Bloomberg - U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Merrill Lynch - Fund Manager Survey Finds Cash Hitting New High as Stagflation Fears Take Hold
Financial Times - Overview: Turmoil follows Fed's Bear rescue

Over the weekend, the government provided liquid assets to Bear Stearns and held $30bn of Bear's most questionable assets - mortgaged backed securities. In addition, the Fed opened the discount window to include investment banks and dropped interest rates by another 75bp. These signs indicate that the Fed has pulled out all the stops to provide stability to financial markets. To date, the Fed has made $650bn available. But, there is also an implicit guarantee that the Fed will provide more money to other struggling financial institutions. Had these measures not been taken, the financial system may have become completely crippled and had disastrous effects on the "real economy."

Snapshot asks, should tax payers, who will ultimately pay for these losses, support this rescue?