Bailout Report

RECESSIONWIRE May 14, 2009: “So… how big is your package?”

It’s a question that used to be taboo, something only discussed between intimates. But these days, virtually no one is too shy to ask about the dimensions of someone else’s severance deal. In fact many people can’t help but compare what they received against the packages of their friends, enemies and former coworkers.

It’s natural to want to know how you measure up. And information sharing in this regard can be valuable because as you’ve no doubt realized by now, severance packages come in all shapes and sizes—some generous, many decent, some completely non-existent. So what’s fair and what’s your legal due… and technically what is severance anyway?

Severance, as defined by the American Heritage Dictionary is: “The state or condition of being severed or separated, as in the ending of a relationship.” But you already suspected it was a parting gift for being dumped, didn’t you? Legally speaking, severance pay is what an employer gives an employee at the time of termination. It is sometimes given in lieu of notice (as in, “So sorry to let you go. But here’s two weeks of pay. Don’t let the door kick you in the ass on the way out.”) Sometimes a company provides severance based on how long you’ve been in your job; for example, one week of severance for every year of service. But depending on how poor the financials of the company at the time, sometimes the employer will offer a flat two weeks of pay regardless of your length of service. And sometimes, you’ll get bupkes—Yiddish for diddley squat.

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In August 2007, Bear Stearns CEO Jimmy Cayne wrote to Bear investors.  Cayne’s mission that August was critically important, and he knew it.  In the wake of the shocking failure of two huge Bear Stearns hedge funds with heavy ties to the subprime mortgage market, the CEO needed to convey his confidence in the future of his company. Cayne cooly reassured investors that Bear’s conservative tradition, strong risk management culture, and plan to pare its mortgage backed securities portfolio would assure Bear Stearns a speedy and full recovery from the summer’s disastrous fund collapses.

In Cayne’s words, “You can count on us.”  Less than seven months later, Bear was purchased by JP Morgan for $10 per share.

A year later, Cayne sang a completely different tune in an interview with Fortune Magazine titled “The Rise and Fall of Jimmy Cayne.” The ex-Bear Stearns CEO revealed that the strength he projected in the summer of 2007 was in fact false strength. Fortune reported that Cayne “did not know how to deal with the devaluation of the firm’s mortgage-backed securities and other illiquid assets.  Nor did he know what to do… when two hedge funds that contained those same toxic assets collapsed and further poisoned the company’s balance sheet.”

The truth according to Jimmy Cayne himself is that Bear’s all-powerful dictator was paralyzed by indecision in the wake of Bear’s hedge fund troubles. Cayne had absolutely no idea how to cope with the company’s financial troubles.

In the CEO’s own words: “It was not knowing what to do. It’s not being able to make a definitive decision one way or the other, because I just couldn’t tell you what was going to happen.”

“I didn’t stop it. I didn’t reign in the leverage,” Cayne also admitted to Fortune.  Clearly, Mr. Cayne understood that Bear was overleveraged and blames himself for  doing  nothing about it.

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If you think the $700 Million Emergency Economic Stabilization Act’s TARP bill is high, former US Comptroller General, David Walker warns we haven’t seen anything yet. For years Walker has been talking of the impending bankruptcy of Social Security, Medicaid, and Medicare to anyone that would listen. He is now describing this impending doom as a “Super Subprime Crisis”.

In an editorial publisehd by Fortune magazine, Walker points out eery similiarities between the unfunded federal entitlement programs and the securitized mortgage vehicles that blew up the financial markets:

First [these] programs were launched without adequately thinking through who would bear the ultimate cost and related risk. Just as originators of mortgages let themselves off the hook by unloading packages of dubious loans onto others, lawmakers have increased spending, expanded entitlement programs, and cut taxes while expecting future generations to pay the bill.

Second, just as a lack of transparency associated with mortgage-backed securities resulted in big surprises and large losses for investors, our nation’s huge off-balance-sheet obligations for Social Security and Medicare present a threat wrapped in camouflage. After all, the government’s “trust funds” don’t really provide much security since they don’t hold anything but more government debt.

Third, in the same way that private sector “risk management” executives failed to prevent the subprime mortgage crisis, overseers in Congress and the executive branch have turned a blind eye to costs associated with entitlement programs and tax cuts. While lax regulation of banks fed the current subprime crisis.

TARP and other bailout measures have already run up a $1.8 Trillion tab. The size of the potential entitlement bailout if the federal government keeps acting like a homeowner who borrws against the value of their home in the belief property values would increase for eternity? $41 trillion! $352,000 per U.S. household. This figure represents the present-value shortfall between the cost of the government’s obligations to the entitlement programs and the payroll tax revenues intended to pay for them.

Walker believes the two votes needed to get the Emergency Economic Stabilization Act passed was horse play compared to the political difficulty of achieving the bipartisan consensus necessary to forestall a Super Subprime Crisis. It’s time for Congress to appreciate the limits of GDP growth and refrain from making promises under the assumption the economy will always grow fast enough to fund them.

Read what Walker was saying last year in If we are Rome, Wall Street is our Coliseum.

With the passage of the “Emergency Economic Stabilization Act of 2008″, the government led bailout is currently on track to cost over $1.8 Trillion, more than $17,000 per US household.

With an assist from Reuters.