A solution to the toxic asset problem: Give them as bonuses!

"Why not say that all bank compensation above a baseline amount - say, $150,000 in annual salary - has to be paid in toxic assets off the bank’s balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. A federal regulator can decide which assets to pay compensation in; if they were all fairly valued, then it wouldn’t matter which ones the regulator chose. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth. Of course, the average employee does not get to set the balance sheet value of the assets, and may not have been involved in creating or buying those particular assets. But think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations. (Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.)"

It could work! I got this brilliant quote from here.

Saturday Rock Blog: Sure Shot or Can't/Won't/Don't Stop the Bailouts

Bear Stearns bailed out by JPM bailed out by feds
FNM and FRE bailed out by feds
GS bailed out by BRKA
MS bailed out by MUFG
AIG $130B in bridge loan bailouts
Emergency Economic Stabilization Act of 2008
Citigroup gets $45B then splits up
GM $13B warm-up bailout
Crystler gets $5.5B in warm-up bailouts
CFC & MER bailed out by BAC bailed out by feds

What am I forgetting?

Update:
Throw BofA and Citi out of the Dow!

Lehman Brothers (RIP)

Source for the image

Feds' Lehman Plan Doesn't Sit Well With Wall Street Execs
Sale of Lehman Remains Dependent on Taxpayer Support
Barclays Abandons Talks to Buy Lehman
Bank of America Said to Walk Away From Lehman Talks
Wall Street Prepares for Lehman Bankruptcy
Lehman Files for Chapter 11 Protection
Greenspan: Crisis May Be Once in Century Event, More Firms to Fail

The rise and fall of LEH:


It looks like Lehman is going to be the test case where we see what happens when one of these gigantic financial institutions really goes bankrupt. Is Lehman "too big to fail," well I guess we'll find out. Up until now the mammoth firms that went under were bailed out by the gov (FNM, FRE), a bigger fish (BAC/CFC) or both (JPM/BSC). I'm excluding IMB in this because they were small compared to these others ($40B in assets).

I heard a trader use an interesting metaphor for the situation last week. When a pack of lions has a herd of buffalo surrounded, the one with the fewest connections at the edge of the herd is the one the lions will eat. Right now the buffalo at the edge of the pack are WM, LEH and MER while the lions are GS, JPM, BAC and WFC.

And now the lawsuits start

You knew this was only a matter of time...

Merrill hit with shareholder lawsuit over subprime

I'm sure this won't be the only one.

In the News This Week

• Subprime Delinquencies Accelerating
• U.S. Initial Jobless Claims Rose 16,000 to 317,000 (higher than expected)
• Analysts Predict Even Larger Losses for Countrywide Financial (up to 4B$ in write downs)
• Washington Mutual Sees Profit Down 75%
• Merrill Lynch to Post 3Q Loss Up to 50 Cents Per Share After Taking $5 Billion in Writedowns
• August Factory Orders in U.S. Fall More Than Forecast
• China Enjoys Ben-Carry Trade Thanks to Bernanke
• Oh, and to be fair The Dow Made a Record High Monday
• Then, The S&P Hit an All-Time High of 1,561.91 Friday

Pay no attention to the economy behind the curtains, helicopter Ben will save us!

More from the Alien: Consumer borrowing up sharply in August

and that quite frankly is so freaking nutso, that we aliens are thinking to leave this particular Solar System.