Monday I am taking a break from the coverage of the bailout, stimulus plan, TARP, TALF and all the other acronyms to do something very cool and very different.

It involves two of my favorite topics: history and the high seas.   You have to tune in Monday to find out what it’s all about.

Have a great weekend everyone, and thanks again for taking the time to write into my blog.   Even though most of the comments think I’m all wet, I’m glad America is engaged and interested.   There is too much going on to not pay attention and get upset once in a while.

But let’s have some fun on Monday.

Hypothetical…

A salesman for Company X - which makes widgets - has a quota of $1 million in sales per year.   His compensation is $50,000 per year base salary plus 10% of everything he makes over quota.   The salesman busts his rear all year, working the phones and hopping on airplanes.   He does well, bringing in $2 million in sales, doubling his quota.   His compensation is $150,000 that year.   Additionally, those on his work support team - back office, administration, etc - would also likely share in that success.  I suspect few in America would have a problem with that scenario.

But what if Company X lost money that year because top management decided to get into the business of selling “whatsits.”   The whatsits didn’t sell, and in fact did damage to the company overall.   Now let’s add that Company X was not only suffering massively but whose overall business is seen important to the American economy and it received Federal assistance to keep operating.   Should the salesman who did his job selling widgets and beat his quota not be paid his bonus?   If you say he shouldn’t, you probably want to stop reading.

Now let’s turn that to Wall Street.   This will be one of the least popular stories I have written but it needs to be said: the President is wrong on the issue of Wall Street bonus payments and when he says Wall Street should have “know better.”  Just as we should not lump any group of disparate individuals together to make a political point, neither should the President and his cabinet lump “Wall Street” into one, singular group of financial evildoers.

The President is wrong on the bonus issue for the following reasons:

• Most of that $20 billion dollar bonus figure thrown around Washington goes to the rank and file and not the top executives
• Many banks factored into this bonus pool did not take TARP money
• Most of the bonuses are paid as a percentage of sales and profits, and there are many on the Street who had nothing to do with the economic collapse and made money for their firm
• Most CEOs have canceled their bonuses (or been fired)
• Bonus payments have already fallen by nearly half
• As equity shareholders in many of the big banks, Americans now have an economic incentive to keep the best workers at the firms they now partially own

Thursday the President once again attacked Wall Street, calling bonuses “shameful” and making other strong remarks (video) about financial industry pay.  While no one can or will defend money-losing CEOs giving themselves multimillion dollar payouts, it is important to differentiate between the C-suite top executives and the majority of those working in finance.   Let’s put aside the rhetoric and examine the reality.

First, Despite the big headline numbers Washington likes to throw around, bonuses are already way down.   From the office of New York State Comptroller Thomas DiNapoli:

Cash bonuses paid by Wall Street firms to their New York City employees declined by 44 percent in 2008 in response to record losses suffered by the securities industry.   DiNapoli noted that the federal Troubled Asset Relief Program (TARP), which infused billions of dollars into the financial system, helped prevent more institutions from failing. TARP placed restrictions on bonuses for top executives and many have voluntarily forgone bonuses, but it did not impose limitations for lower-level employees.

Next, what many in Washington (and across America) forget is that most people on Wall Street are, at the core, salespeople.   Additionally, the majority of “Wall Street” - despite politicians who like to lump the hundreds of thousands of financial industry workers into a single group of “them” - had nothing to do with what is happening right now with the economy or credit crisis.  They are a diverse group who do thousands of different jobs across a variety of industries.   Stock brokers, commodities traders, investment bankers, and the hundreds of other specialized careers in finance have little to do with each other, much less be able to be harvested into some “group” to be singled out for misdeeds.   The President likes to use phrases such as “Wall Street folks” when making critical comments about the state of the economy.   That is no better than saying something to the effect of “those folks in California” should’ve “known better” than to buy homes when the market was clearly in a bubble.

What is also misunderstood is that many on the Street make a majority of their pay through a bonus.   This is not just the highest paid investment bankers and traders.  It is also the secretaries, administrative staff, and hundreds of other positions that support the company.    Guaranteed salaries among much of this group can actually be relatively low, and there are many positions where more than half of compensation comes in the form of a once a year payout.

Outside the upper echelon of management most highly paid financial professionals merely have a product, sell it, and make a percentage of the revenue and profit.   If an oil trader makes $10 million dollars for his firm, he expects a percentage of that profit to come back as his pay.   If he loses money he won’t get anything but his base salary and probably a pink slip.   Bankers are the same way.   They help companies buy and sell each other.   If they do deals, they get paid.  If not, they don’t.   Despite the mystery surrounding much of finance, most Wall Street workers are not that different than other sales driven industries.   Those who peddle software, cars, toothpaste or the thousands of other products sold around America each day face the same reality: sell, make money for the company or face getting the boot.   Most lawyers by the way, the previous occupation of most on Capitol Hill, operate the same way.

Right now you are no doubt saying I am wrong (if you are still reading at all).  After all, you say, Wall Street helped create the crisis and are now asking for taxpayer money and using some of that to pay their workers.  That’s wrong, you say, and so we should penalize the lot of them by getting rid of their “shameful” bonuses.  Let’s say then for arguments sake that you are right and I am wrong.   Let’s use that same logic to another end.

If the idea is that industries who 1) helped promote the economic collapse through 2) over zealous and some say greedy behavior and 3) who are now getting Federal help should not be able to receive the pay they earned that may have been related to the economic crisis, shouldn’t it also hold true then that others, and not just Wall Street, face the same penalty?

If you answered yes, then should we ask all the others related to and involved in the housing boom and economic malaise to “know better” and give up all future commissions on what they sell?  Should realtors not receive their sales commission because home prices are down 30% in some areas, the market was clearly in a bubble that should have been obvious to many, and now their industry is receiving Federal assistance through the Treasurys buying of mortgage related assets?   What of the auto industry?  GM and Chrysler accepted Federal money to keep themselves in business.  Does this mean that the car dealer who sells a GM or Chrysler product should “know better” and refuse to accept a commission on the sale because the car companies got themselves into trouble and needed rescue?

The answer on both of the above examples is “of course not.”  The majority of realtors, mortgage brokers, car salesmen and others associated with at-risk industries had nothing to do with the global crisis we now face.   Wall Street, despite what many want to believe right now, is much the same.   As with most companies, the big decisions - like begging for TARP money - are made at the top, by a small group.   Many of the people I know on the Street also believe many of their top management needs to be fired.

I am not a Wall Street apologist.  There are those on Wall Street who deserve to be stripped of their jobs and their headline-making compensation.   Those are the people at the top making the macro calls on company strategy, as well as the small group of those directly involved in selling the most toxic of assets.   But despite the desire in Washington to find a convenient scapegoat for the downturn we cannot punish the many for the mistakes of the few.  The majority of those working in finance do not receive million dollar bonuses.   Demonizing profit-based packages for those who earned it strikes at the very heart of capitalism.

Two other points:

Tax filings show that the President’s 2007 income was $4.2 million dollars, based primarily on sales of his book.   He was a Senator in 2007, a year when the U.S. government ran up huge deficits and failed to anticipate the economic collapse.  Should he give some of that money back because the government needs to bail itself out?

Additionally, before the government throws stones, it should look at its own home.  This excellent Bloomberg story outlines how the government isn’t exactly managing its own “bonus home” very well either.

Reaction to the stimulus plan (hereafter which should instead be called the “spending” plan based on the lack of stimulus and heavy dose of spending) has nearly universally been negative this morning.

The problem is that there seems to be very little “stimulus” in the stimulus plan, at least in the way of promoting new spending by companies and individuals.   Much of the plan is instead devoted to spending on entitlement programs, schools and other social projects.

Analysis from the New York Times indicates the following about the plan:

• An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way to help states close their budget gap
• The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year
• The greatest prospect of delay in spending is on infrastructure. The bill provides $30 billion for highway construction and tens of billions more for other transportation projects, water projects, park renovation, military construction, local housing projects and more
• A look at more than $140 billion in the bill’s spending on education finds some that can move quickly — for instance, $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act
• Unemployment benefit checks due to stop will keep coming, along with an extra $25 a week
• At the grocery store, a family of four on food stamps could find up to $79 more a month on their government-issued debit card

Remember the President says his impetus for the plan was to create or save 4 million jobs.   In his weekly address two weeks ago the President said “the jobs we create will be in businesses large and small across a wide range of industries.    And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long-term.”  How exactly do the tiny tax breaks, big entitlement spending and handing billions to states to “fill budget gaps” accomplish this goal?

The Democrats are using the cover of bashing the morals of those against the plan as a way to silence the critics.   Because much of the plan has to do with educational, medical and entitlement plans it is easy to accuse those against the plan of trying to damage “children and the ill.”   Good try.   No one is suggesting that we as a nation do not have a responsibility to help those in need, let’s not confuse that with “stimulus.”    This is instead about comparing the stated goals - the selling points - of the plan to what it is now trying to do.   And that is to create jobs and “stimulate” the economy.   Nearly $100 billion to health care/medicaid, $140 billion to education and a few hundred bucks back in many taxpayers’ pockets will do nearly nothing to create or save jobs as the President has said.

Moreover, the one thing that may create new jobs and help the country’s future energy needs - building thousands of windmills, solar farms new roads, telecommunications and other types of infrastructure - has mysteriously been put on the back burner.  As the Times reports, only $30 billion will go to these types of projects initially and even with the possibility of “tens of billions more” we are still looking at just 15-20% of the plan being put toward projects that can actually create jobs and provide longer term benefits to the economy.

As former Fed Governor Larry Lindsey writes in today’s Wall Street Journal the plan as it is will not work, and he says we need to give more money directly back to the people:

And what of the plan being put forward now? As crafted, it is unlikely to produce the desired results. For a similar amount of money, the government could essentially cut the payroll tax in half, taking three points off the rate for both the employer and the employee. This would put $1,500 into the pocket of a typical worker making $50,000, with a similar amount going to his or her employer. It would provide a powerful stimulus to the spending stream, as well as a significant, six percentage point reduction in the tax burden of employment for people making less than $100,000. The effects would be immediate.

Here is a note sent to me today written by the smart folks over at Bianco Research.

Now that we know some of the details of the economic rescue legislation we know why the Democrats have kept it so private. To help put the items in the bill into perspective we suggest that you use a simple litmus test and judge for yourself how each part of the legislation will help boost the U.S. Economy. That test is simple. Does the subject item have a multiplier effect. If the item does not have a multiplier effect, it’s not a valid stimulus and it doesn’t belong in this bill. We may not all agree on the exact amount of the multipliers, but we should be able to determine if a multiplier exists.

Let me explain. Building a highway from one point of commerce to another should over the life of the highway produce an economic benefit greater than the cost of the construction. Some say the multiplier for new highway construction is from 3 to 5 times the initial cost. The important thing is not that we agree on the exact degree of the multiplier, but that we agree that the expense will stimulate the economy and bring some return in excess of the cost.

Remember, this is an economic stimulus bill. It is not intended (we’re told) to tackle social problems, feed the poor, house the homeless, improve the landscaping in Washington D.C., etc. The President has gone to great lengths to assure citizens that the sole purpose of this unprecedented legislation is to stimulate and jump start the U.S. economy. He promised us that the bill would be free of pork, social programs and pet projects. He went so far as to guarantee the public that he would not sign a bill if it had any pork in it.

So then what’s the multiplier for the $50 million for the National Endowment of Arts? How about the $400 million for global warming research, the $335 million for STD prevention, the $650 million for digital conversion coupons, the $81 billion for Medicaid, the $20 billion for food stamps, the $30 billion for Cobra insurance extensions, the $4.1 billion for neighborhood activist groups like ACORN, the $83 billion for the earned income credit to give tax refunds to people who don’t pay income tax, and the $6 billion to subsidize university building projects just to name a few.

The Wall Street Journal estimates that only 12 cents of every dollar in this bill could be called a growth stimulus. Apply your own judgment and the multiplier test to each of the items contained in the bill and come up with your own estimate. I think that the 12 cent estimate is quite generous.

It was telling that not only did no Republicans vote in favor of the bill, but a few Democrats (notably some of the fiscally conservative “Blue Dog” breakaway group) also rejected this plan.   They know that it is unlikely to create jobs and likely more of a gift to the Democratic states that help vote the party into full power.

Now it goes to the Senate, and though some tweaks are expected, expect it to pass.    This plan adds another $900-plus billion to the long term obligations of the country and our children.   This in addition to the trillions already lent and spent by the government and Federal Reserve.    Worse, this spending package comes with little benefit to the kind of real job creation or real technological breakthroughs that America urgently needs.   The kind that create real change in our transportation and energy usage.   And that’s real depressing.

Stories I’m watching this Thursday.

Most have to do with the stimulus plan passed by the House.    The bill passed easily but neatly split down party lines.  Not one member of the GOP voted for the plan.   It now moves to the Senate and unless the Republicans can somehow muster a filibuster it will pass easily.

Even with changes to the House version it is very clear as to one thing: what started as a “jobs” plan to get people working again has turned more into a spending plan on entitlement programs, existing projects and to patch the holes in states’ budgets.    As the analysis by the New York Times points out this morning, the component once seen as being the job creator - infrastructure - has been scaled back massively.   Much is going to be given in the form of a small tax cut for those making even up to $150,000 (the rich in many parts of the country) and to rebuild “failing” schools.   While Americans try to figure out how to spend that extra $500 bucks per year, Congress and the President should revisit some history: the first stimulus check last summer didn’t stimulate, and throwing more money at schools doesn’t make our kids smarter or more successful in life.

• The Democrats get their stimulus plan as Republicans all vote against
• The plan’s detail: where exactly are the new jobs?
• British paper: Zero Republican votes a “slap in the face” of Obama
• Cato Institute’s full page ad with 250 economists saying we don’t need stimulus
• Russia and China use their bully pulpits to bash America
• We’re getting closer to the “bad bank”
• A 40 year wish list
• The hard(er) life of a debt collector
• Not the kind of list the New York/New Jersey area wants to make

Reuters report via the Treasury on exactly where your TARP money has gone so far…

The U.S. Treasury confirmed on Tuesday that 23 banks received $386 million from the government’s $700 billion financial rescue fund on Friday, Jan. 23.

The Treasury has already disbursed $293.7 billion from the Troubled Asset Relief Program, or TARP, to shore up the banking system and faltering U.S. automakers. Billions more have been pledged for particular uses. Following is an outline of TARP funds spent or pledged so far:

• $250 billion pledged for purchases of senior preferred shares and warrants in banks and thrifts. In a report on transactions through Jan. 23, the Treasury said it completed equity purchases totaling $194.2 billion in 317 institutions under this portion of the program
• $20 billion pledged for Bank of America, in addition to $25 billion for the bank already disbursed under the $250 billion plan to shore up bank capital.
• $40 billion investment in troubled insurer American International Group
  
• $20 billion investment in Citigroup
• $5 billion pledged to cover potential losses on a $306 billion portfolio of Citigroup mortgage-related assets.
• $19.4 billion to prop up the U.S. auto industry. The amount includes $10.4 billion in loans to General Motors, including $1 billion for GM to help its financing affiliate GMAC reorganize as a bank holding company; a $4 billion loan for Chrysler LLC; a $5 billion direct investment in GMAC; and a $1.5 billion loan for Chrysler Financial. GM could qualify for a further loan of $4 billion in March.
• $20 billion pledged to cover potential losses for a Federal Reserve program aimed at improving consumer access to credit.

Wednesday stories I’m watching:

• Buy homes in Washington because D.C. is getting bigger with fat government jobs
• Warren Buffett’s long bet on the S&P 500
• Unless everyone gets their home loan modified then the system is ripe to be gamed
• Ex Lehman CEO sells mansion to wife for $100 bucks
• Why there seems to be so many ponzi schemes right now
• A chance for the stimulus to do some good
• Seeking Alpha: Has Russian oil production peaked?
• Hypocrisy, in graphic form
• I could use some global warming

Tuesday stories I’m watching:

• Detailing Monday’s job losses
• Beck: Obama’s stimulus plan is meant to reshape - not rebuild - the economy
• Fannie and Freddie need more money
• American Express results are a negative sign for spending by the well-off and companies
• A bit of good news: the cost of your groceries is going down
• The bad news is that Americans are buying less toilet paper
• The debate over whether trickle-down economics is dead, is dead
• Japan knows what Pelosi doesn’t: countries need more people to fund future obligations
• The smart guys at Freakonomics remind us that only 2 of the main 6 political jobs in New York were actually filled by election

The UAW must be feeling betrayed.   At nearly the exact time the President announced he will push for tougher fuel economy standards, General Motors announced it will idle more plants and fire more workers.    The timing of that GM announcement is likely not accidental.

The President began speaking about his push for higher fuel economy standards at 10:45am ET this morning.   Here is the Dow Jones story that crossed at 10:57am:

U.S. President Barack Obama told the Environmental Protection Agency on Monday to reconsider California’s request to regulate greenhouse gas emissions from cars, reversing the climate policies of former President George W. Bush. California’s request, which was denied by the Bush administration, would allow it to impose stricter limits on vehicle carbon dioxide emissions, blamed for contributing to the global warming. If approved, more than 12 states could follow suit in imposing limits that are tougher than federal requirements. The president also directed the Department of Transportation to move forward with setting vehicle fuel efficiency standards for 2011 by March, giving automakers an 18 month period to impose them. He also instructed the U.S. government in general to become more energy efficient. “The days of Washington dragging its heels are over. My administration will not deny facts. We will be guided by them,” he said.

Meantime, the General Motors headlines about layoffs and plant closings began crossing at 10:37am, and the Dow Jones story below crossed at exactly 10:50am ET:

General Motors Corp. (GM) on Monday said it will lay off 2,000 more workers this spring and schedule down time at most of its assembly plants in the face of declining sales. The downsizing is needed even though GM virtually halted production this month and slashed output by 20% in 2008. GM this spring plans to cut shift at a small-car factory in Ohio and a plant in Michigan that makes crossovers including the GMC Acadia and Buick Enclave, a company spokeswoman said. About 800 workers will be laid off in Ohio and 1,200 in Michigan. Additionally, GM is planning to idle 14 of its 24 North American assembly plans for a week or more in the second and third quarter.

So let’s get this straight: in the same economic environment that forces GM and Chrysler to borrow taxpayer money merely to stay alive, they will also be forced to spend huge sums to develop new engine technology?

There is also the possible outcome that the carmakers will have to develop multiple engine technologies to meet various states’ fuel economy standards (which may occur as a result of the revisitation of California’s rules).   That would also add significantly to costs.

As a nation we need to push for greater fuel economy and the reduction in the dependence on foreign oil.   But we need to time this move correctly, and do it when the car companies have enough free cash flow to cover the development costs.  GM’s announcement 5 minutes before the President spoke is sending a very clear message.    The UAW - which gave a huge push to the Obama camp - cannot be pleased.

By the way, one of the plants that GM is cutting a shift at is Lordstown, Ohio.   That is the plant that makes GM’s highest fuel economy car, the Cobalt.

Stories I’m watching this Monday:

• Many banks who received TARP money still aren’t lending - is loan demand the real problem?
• Businesses know the only way to create jobs is to lower their own costs and are asking for tax breaks
• Pelosi says some people shouldn’t have more kids and wants to put them on the pill
• Note to the President: small, individual tax refunds don’t help the economy especially when many people say they will use it to pay down debt or save
• Companies know those $500 tax credits won’t help the economy.   It’s why they continue to lay people off
• Hotel industry enters “tailspin.”   Watch for more empty hotels and half-finished buildings
• Scariest currency in the world right now is the British Pound
• Will it hit parity with the U.S. dollar?
• The pension pain continues as values fall

There is nothing intelligent to say about a massacre

- Kurt Vonnegut writing in Slaughterhouse Five

• Vonnegut must have heard of the Taliban because what’s going on with the resurgent group is nothing more than hellish
• Big week for corporate earnings ahead
• Big week for likely very ugly economic data ahead
• The U.S. is not the only country suffering in the economic downturn as the rest of the world feels pain too
• Must read: Jeremy Grantham’s quarterly letter to clients (available through a link on GMO’s website)
• Barrons: Buy big oil stocks (subscription required)
• Zsa Zsa becomes the latest to lose money with Madoff
• It’s not just cars getting smaller as home sizes also shrink
• Gold did well in 2008.  Will 2009 be as good?
• Being around for 120 years (and being suitmaker to Barack Obama) may not save Hartmax
• Even successful lawyers fall for ridiculous email scams sometimes