By William Patalon III
Money Morning/The Money Map Report
Is Washington replacing New York – and more specifically, Wall Street – as the city that drives America?
The question, raised in a new Reuters piece, is certainly a good one – and a fair one.
As the United States suffers through perhaps its worst financial crisis ever – a crisis caused by the combination of rampant greed and some ill-conceived financial engineering – Wall Street’s reputation has been badly tarnished, perhaps forever.
Moving forward, two results will be a tightening of financial regulation and an increase in government control of the financial markets. We’ll also end up with a federal government that more closely controls – and in some cases owns stakes in – banks and other financial institutions, a move that some regard as de facto nationalization.
Like a super hero arriving to save the day, in steps Washington, “home to a popular president and a Congress whose mood matches that of a public angry at Wall Street for losing people's retirement savings while doling out executive bonuses and raking in billions from taxpayer-funded bailouts,” Reuters writer Daniel Trotta wrote.
“I was in London with Mayor (Michael) Bloomberg in October and we were complaining to them about the action shifting to Washington and the executives in London said they were just as worried about it shifting to Brussels," Kathryn Wylde, president of the pro-business non-profit Partnership for New York City, told the journalist. "Private financial markets have collapsed and the government is absolutely in charge."
Thanks to the ongoing financial crisis, an off shift has been taking place. Wall Street, was once revered as a creator of profits that was ruled over by the so-called “Masters of the Universe.” But no more.
In December, the jobless rate moved to its highest level in 16 years – and that’s certain to get worse, if last week’s “Monday Massacre” of corporate layoffs is any indication. Correct or not, most Americans directly link those troubles on Main Street to the missteps made on Wall Street. And it certainly can’t help that we’re all reading stories of big bonuses still being paid out, even in the face of this downturn.
While these displays of greed continue to escalate even as the pain workaday Americans continue to feel, Washington has been working on a two-pronged fix-it strategy for the U.S. economy:
- Prong One is focused on bailouts, spending billions in an effort to stop the financial leaks that are threatening to sink the country into Great Depression II.
- Prong Two has the government focused on efforts to then jump-start the economy with a series of stimulus plans, whose price tags continue to escalate.
Initially, the general public was highly critical of these efforts, viewing them as wasteful.
But an interesting shift has subsequently taken place: Americans began to view the federal government as a kind of “savior of the last resort,” and became thankful for the efforts the lawmakers were making.
Americans even grew irritable when news organizations criticized those bailout and stimulus efforts. There was clearly a feeling that, while the bailout and stimulus maybe weren’t perfectly designed, at least Washington was trying to do something.
"There is a shifting of power and influence at the moment from Manhattan to Washington. The same thing happened during other financial crises in our history but most especially in the 1930s," Kenneth T. Jackson, a Columbia University historian, told Reuters.
What recession? While much of the world has been pointing fingers at Wall Street for the global financial crisis, the major investment firms took a break from begging for distribution of that next round of Troubled Assets Relief Program (TARP) money in time to dole out $18.4 billion dollars in employee bonuses in 2008. President Barack Obama called the move “outrageous,” although Wall Streeters pointed out that the pay represents a 44% reduction from last year’s level (though it still stands as the sixth-highest bonus pool on record).
Meanwhile, while energy companies cried “doom and gloom” over plunging oil prices, Exxon-Mobil Corp. (XOM) announced a record annual profit of $45.2 billion – despite a 33% decline in 4th quarter earnings). Not to be outdone, while poor retailers panicked over the lack of consumer activity, Amazon.com Inc. (AMZN) called its holiday season “the best ever” and surpassed most analysts’ earnings estimates.
An oversight panel deemed the TARP plan a failure, thus far, as many of the major recipients of government funds actually reduced their lending activities during the prior three months.
Newly confirmed U.S. Treasury Secretary Timothy Geithner claimed that TARP (Part 2) will be overhauled to ensure enhanced lending and even hinted at the creation of a “bad bank” that would purchase toxic assets from financial institutions. An $819 billion economic stimulus package passed the House without any Republican support and Obama turned to the U.S. Senate where certain provisions on lower taxes and family planning may prove more acceptable to the opposition.
However,. President Obama is hoping to have a bill he can sign on his desk by the middle of next month.
Earnings season moved into high gear and Thomson Reuters Corp. (TRI) projected that Standard & Poor’s 500 Index companies suffered a 34% drop in profits (losses), the 6th straight quarterly decline. In addition to Exxon-Mobil and Amazon.com, a few other companies reminded investors that not everyone is losing money: Verizon Communications Inc. (VZ), United States Steel Corp. (X), Procter & Gamble Corp. (PG), and Colgate-Palmolive Co. (CL).
Wells Fargo & Co. (WFC), Starbucks, Corp. (SBUX) and Ford Motor Co. (F) were among those posting dismal reports, though the No. 2 U.S. automaker says it has no plans to tap into government bailout funds.
Pfizer Inc. (PFE) set out to prove that deals can still get done in this environment and announced its intent to purchase rival U.S. drugmaker Wyeth (WYE) for $68 billion [For two related stories in today’s issue of Money Morning, check out this analysis of the Pfizer/Wyeth deal itself; or click here to read our evaluation on the outlook for the overall U.S. market for mergers and acquisitions].
Crude oil fell again last week and was hovering around the $42-a-barrel level as weak economic data (see below) and higher inventory reports revealed that demand was continuing to wane. Despite a recent four-day winning streak for the S&P 500 Index – its first since November – the major indexes ended January with losses again.
According to the so-called January Barometer, when the market tumbles in the first month, it typically slides for the remainder of the year. Investors took their cues from the weak economic and earnings reports and offered a collective yawn to the House’s partisan passage of the stimulus package. The “bad bank” idea seemed to generate a bit of optimism, though no real details about how such a plan would work have been announced.
Year Close (2008)
Qtr Close (12/31/08)
Dow Jones Industrial
10 yr Treasury (Yield)
Companies across virtually every sector of the economy continued to play “follow the leader” as additional layoffs were announced daily. Last Monday alone, more than 75,000 hit the unemployment line as Pfizer (8,000), Sprint Nextel Corp. (S) (8,000), Home Depot Inc. (HD) (7,000), General Motors Corp. (GM) (2,000), and Caterpillar Inc. (CAT) (7,500) were among those issuing pink slips.
The weekly initial jobless claims data confirmed that more people than ever (or at least since 1967, when the statistics first started being kept) are receiving unemployment benefits. Meanwhile, the housing sector showed few real signs of rebounding as new home sales fell for the fifth consecutive month and dropped to their lowest level since 1982. While existing home sales actually climbed in December by 6.5%, the median sales price plummeted more than 15% and now stands at its lowest level since 1968.
Still, the optimists point out that the mere fact some homeowners have emerged to buy houses at these distressed levels is a positive sign that a recovery is inching closer. Unfortunately, investors weren’t buying it.
The domestic economy contracted at its fastest pace in almost 27 years as U.S. gross domestic product (GDP) plunged by 3.8% in the fourth quarter. Again, the eternal optimists claim that most analysts were expecting a decline in excess of 5%, and said that the negative results should actually be perceived as positive for the economy. (Unfortunately, investors weren’t buying that, either).
U.S. Federal Reserve Chief Ben S. Bernanke and his policymaking brethren repeated their pledge to keep rates at record low levels and hinted that they stand prepared to begin buying Treasuries and other fixed-income securities to spur lending activity. According to the central bank policymaking statement issued at the close of Thursday’s Federal Open Market Committee (FOMC) policymaking meeting, "conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight."
Weekly Economic Calendar
Existing Homes Sales (12/08)
Surprising increase offset by drop in median sales price
Leading Eco Indicators (12/08)
Increase exaggerated by jump in money supply
Consumer Confidence (01/09)
All-time record low confidence level
Fed Policy Meeting Statement
Continued deterioration means more Fed measures
Initial Jobless Claims (01/24/09)
Record number of benefit recipients
Durable Goods Orders (12/08)
Larger than expected drop in new orders for big items
New Home Sales (12/08)
Worst year for home sales since 1982
GDP – 4th Quarter
Worst level of economic contraction in 27 years
The Week Ahead
Personal Income/Spending (12/08)
Construction Spending (12/08)
ISM – Manu (01/09)
ISM – Services (01/09)
Initial Jobless Claims (01/31/09)
Factory Orders (12/08)
Unemployment Rate (01/09)
Nonfarm Payroll (01/09)
Consumer Credit (12/08)
News and Related Story Links:
- Money Morning News Analysis:
Exxon Records Biggest Profits in U.S. History.
- Money Morning News Analysis:
Treasury Secretary Geithner Confirmed, Begins Difficult Journey.
- Money Morning News Analysis:
Cost of Obama Stimulus Could Reach $1 Trillion Now That Newly Passed House Bill is Subject to Senate Compromise.
- Money Morning News Analysis:
Ford Says “No Bailout Funds” Despite Worst Loss Ever.
- Money Morning News:
FDIC May Run “Bad Bank,” Although Nationalization Concerns Remain.
- Money Morning Global Investment News Briefs:
FOMC Meeting Offers No Solutions.
As Wall Street Falters, Washington’s Star Rises.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.