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The Other Plot to Wreck America

THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists.

But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much.

What we don’t know will hurt us, and quite possibly on a more devastating scale than any Al Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin.

Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed.

Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses.

Banks Prepare to Pay Record Bonuses to Employees

The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry has ever seen.

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JPMorgan Chase stand to collect about $463,000 on average.

Even some industry veterans warn that such paydays could further tarnish the financial industry’s sullied reputation. John S. Reed, a founder of Citigroup, said Wall Street would not fully regain the public’s trust until banks scaled back bonuses for good — something that, to many, seems a distant prospect.

“There is nothing I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis,” Mr. Reed said. “They just don’t get it. They are off in a different world.”

Big Banks Still Playing the Game

After staging one of the most remarkable comebacks in business history — because of taxpayer lifelines and other support from Washington — the giants of the banking industry are entering a new phase of the post bailout period.

While, for many Americans, the dark fears of the crisis have given way to indignation over the Lazarus-like recovery at big banks, few on Wall Street expect 2010 to be as profitable as 2009.

All told, the half dozen biggest banks have already made more than $50 billion in the first three quarters, and are on track to deliver a year of hefty profits — and bonuses — that could rival those of the boom years.

But at this pivotal moment, big questions loom: Will the economy stage a robust recovery or just muddle along? Will the stunning rally in the stock market last?

As the debate rages over how to prevent future crises, will Washington impose tough new rules on banks? More important, will banks fundamentally change the way they do business, or simply carry on as before?

Wall Streets Biggest Con Game

Why is Wall St. at war to keep financial innovation secret, hidden, and without public transparency? Why is Wall Street spending millions on lobbyists to kill financial-regulation reforms?

Because Wall Street rakes in tens of billions of dollars annually from their financial innovations, gambling in the shadowy $670 trillion global derivatives market. And Wall Street does not want government, investors or competitors digging into their “financial weapons of mass destruction,” as Buffett calls them.

Remember, financial innovation is just a Wall Street code word. Translated it simply means derivatives and other proprietary secrets like the high-frequency trading algorithms used by their quants.

Yes, Wall Street wants you to believe that financial innovations also help Main Street, but that’s just Wall Street lobbyist propaganda to mislead the public, regulators and legislators. Remember when Washington proposed standardized mortgages as a way to help consumers? Wall Street attacked, spending millions to kill it.

Wall Street has no interest in helping Main Street. Time magazine’s Justin Fox, author of “The Myth of the Rational Market,” said it best in his “Curious Capitalist” column.

Most so-called financial innovations are “just new ways to fleece customers or hide risk, and all major financial crises have been associated with some financial innovation.” Even credit-card innovations are used against customers as marketing tools to increase fees. The truth is: Wall Street’s greed-driven financial innovations fuel our bubble/meltdown cycles in many ways.

Time to Drain Wall Street Bonus Pool

NEW YORK (Fortune) — Is the Fed about to hit the brakes on the Wall Street gravy train?

A year after they survived the financial meltdown with considerable taxpayer help, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) stand to spend $35 billion combined this year on employee compensation.

The average Goldman worker is on track to take down more than $600,000 in pay and perks — in line with levels from 2007, before the economy cracked. Former Federal Reserve chief Paul Volcker said last month that Wall Street pay has gotten “grotesquely large.”

But the bonus bubble could be peaking. After years of lassitude, the Federal Reserve is preparing to force big banks to abide by longstanding rules banning excessive or inappropriate banker pay.

What’s more, regulators appear to be paying special attention to the risks posed by the lucrative trading that has sent profits at firms like Goldman and JPMorgan Chase soaring just months after last fall’s brush with disaster.

Given the bruising the Fed has taken for its failure to act during the credit bubble, some commentators believe officials will flex their muscles.

Crude Awakening

NEW YORK (MarketWatch) — Most of us can’t stockpile barrels of crude oil in the backyard, nor would we want to. Yet with oil prices soaring, many investors are eager to fill their portfolios with this precious fuel.

Accordingly, a specialized group of exchange-traded funds taps into oil rallies. But investors should be aware that while these funds have been posting solid gains, they are complex, risky instruments which don’t fully capture oil-price moves.

At best, these oil-linked ETFs, which trade on an exchange like stocks, are an indirect pipeline to oil. That’s because unlike some gold and precious metals funds, oil ETFs don’t hold the physical commodity. Instead, they trade oil futures contracts, and that can impact investment returns in ways unsophisticated buyers never expected.

“There is no way to directly invest in oil,” said Bradley Kay, an ETF analyst at Morningstar. “Indirect investments such as oil company stocks, futures, and oil ETFs tend to have a lot of complicated moving parts.”

Wall Street on the Lam

Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn’t be. It’s like arresting jaywalkers while ignoring the bank robbery that’s happening in broad daylight down the block.

Don’t get me wrong. The Obama administration’s “pay czar,” Kenneth Feinberg, is right to put a lid on compensation at the Not-So-Magnificent Seven: Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and the unforgettable AIG.

Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half, and most of that will come as restricted company stock, not cash. This means that what they ultimately reap, when they are eventually allowed to sell the stock, will depend on how well the company performs — which will depend on how well the executives do their jobs.

Tying pay to performance: What a concept.

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year. But Lewis will still have an estimated $70 million retirement package to keep him warm at night, so hold your tears.

It’s nice to know that there must be some pooh-bah at B of A, Citigroup or AIG who will have to live without the new $90,000 Porsche Panamera he was planning to buy. But Feinberg’s writ of imperial decree doesn’t extend beyond those seven companies, and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation.

Goldman Sachs, for example, has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion.

But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown — and, if unaddressed, will lead inexorably to the next crisis.

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy — by allocating capital most efficiently to the companies that could put it to best use — into an institution whose primary mission was to serve itself.

The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn’t have a fraction of the money it would need to make good on all its promises.

All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year.

Everything’s fine, until there’s some disruption in the real economy — a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.

Capping salaries and bonuses is fine. But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders. They’re about to jump into the getaway car.