In late 2007, after losing almost $10 billion, Merrill Lynch paid its employees bonuses totaling $14 billion. Said its CEO John Thain: "I want to reiterate how strong most of the businesses have done this year, and we are very optimistic as we look out to 2008." Just a few weeks later, Merrill announced additional losses, totaling $16 billion. The combined writeoff for losses taken on investments made between 2004 and 2008 equaled more money than Merrill Lynch had ever earned – in total.
On top of all these losses in 2007 and 2008 and after telling investors half a dozen times that it sold all of its toxic assets, today... incredibly... Merrill announced yet another enormous loss – $15 billion – an amount beyond what Bank of America could afford after acquiring the company for $50 billion.
The Merrill deal should cost Bank of America CEO Ken Lewis his job. But you have to wonder what Merrill told Ken Lewis and Bank of America's board about its finances. The company repeatedly lied to the public about the quality of its assets and the size of its losses since at least the beginning of 2007. And that begs a larger and more important question...
At the end of 2007, the five largest U.S. securities firms paid their employees $66 billion in bonuses. All of it came from "profits" that we've since learned were horrendous losses. With the writeoffs from just these five firms now totaling much more than $100 billion, at what point do you begin to judge what these people did as not merely reckless and negligent, but calculating and criminal? They had to have known by at least the end of 2007 that most of their mortgage securities were cooked. And yet, they took the biggest bonuses in the history of Wall Street, leaving taxpayers to pick up the mess.
If it makes you feel any better, Wall Street's losses are nothing, on a relative basis, compared to the Middle East's sovereign wealth funds. According to a report from the Council on Foreign Relations, the six members of the Gulf Cooperation Council lost $82 billion in 2008 alone, leaving them with "just" $1.2 trillion. And these losses came despite some $300 billion in oil profits when crude neared $150 a barrel. It will get worse – much worse. Dubai is going to be the largest financial disaster in history.
This isn't the first time we warned you about sovereign wealth funds. From the October 13, 2008, S&A Digest:
Governments are the world's worst investors. State-owned Dubai World last year paid $5.1 billion for almost 10% of Kirk Kerkorian's casino resort operator, MGM Mirage. Since then, the price has tumbled to $16.80 from $84. Another Dubai government firm, DP World, bought port and shipping giant Peninsular and Oriental Steam Navigation Co. in 2006 for $6.8 billion. Its shares have slumped 55%. The U.S. wouldn't allow DP World to buy the Port of Long Beach. Too bad. We could have bought it back for pennies on the dollar today...
More layoffs... Health insurer WellPoint will cut about 1,500 jobs, 3.5% of its staff. Rising unemployment is hurting WellPoint because its employer-customers have fewer employees to insure. Luxury retailer Saks Inc., owner of Saks Fifth Avenue department stores, will cut 1,100 in-store and corporate support jobs, or about 9% of its staff. And competitor Neiman Marcus, owner of Bergdorf Goodman and its namesake department stores, will cut 375 jobs, or 2.3% of its workforce. The luxury retail sector, which was thought to be impervious to recession, actually performed worse than the retail sector as a whole, falling 27.6% in December.
Finally, electronics retailer Circuit City, which filed for Chapter 11 last November, announced it will close its 567 U.S. stores and liquidate its inventory. The company employs about 30,000 people.
No inflation yet... Consumer prices rose only 0.1% in 2008 – the slowest pace in 50 years. Consumer prices have fallen for three straight months.
New highs: none.
In the mailbag... anxiety about the economic collapse. What have you stocked in your bomb shelter? feedback@stansberryresearch.com.
"You're a stud, a flat out stud... Your calls (GM and on and on) have been spot on. I agree 100% with you on where the economy is headed... while continuing to be amazed at the bullishness of some of your analysts. That said, I'm heavily invested in gold... but wondering why, given the armageddon we witnessed in 2008, it's trading essentially at the same level it was a year ago. Yes, it has acted as a store of value, but why given what's hit the fan is gold not trading at twice what it is now??" – Paid-up subscriber Colin Beach
Porter comment: I don't have an answer. But I'd still much, much rather own a gold coin than a U.S. government bond. Wouldn't you? As long as this is the case, I expect the price of gold to go up. And if I'm right about my End of America thesis – the idea that we will lose control of the world's monetary system – the price of gold will go higher than anyone, even Doug Casey, imagines.
"Porter, Do any of your analysts have an exit strategy for leaving the country?" – Paid-up subscriber J.S.
Porter comment:< /strong> I wouldn't call it an exit strategy – because I have no plans to leave permanently or give up my citizenship. But I'm building a nice house directly on the beach in Nicaragua (for about one tenth of what it would cost in the U.S.). I'm also probably going to acquire at least a share of a residence at Doug Casey's development in Cafayate – Argentina's wine country. Again, my total costs will be about a tenth of what a similar property would cost in Sonoma or Napa. Not to mention the fact that in both Nicaragua and Cafayate I can live like a king – a driver, a cook, a maid, a gardener, etc. – for maybe $500 per week. So financially, it's a good deal to live overseas, even if you don't give up your citizenship.
Meanwhile, I'm establishing assets and savings out of the reach of my government. I think that's simply prudent, given the madness taking place in Washington and the high likelihood that it will get much, much worse. Most Americans simply have no idea how well you can live outside the U.S.
"Porter, I fully understand your economic reasoning for recessions being 'good for the economy' and, yes, it does clear out the 'dead wood' as you put it. But it most certainly affects a large section of us who ARE conscientious, hard working, and honest. I worked at my job for 40 years before a series of heart attacks cancelled that out, but as best I could, I kept busy with less physical part time work... school bus driver, H & R Block tax preparer, wheel-chair van driver, and am still (at age 75) working part time as a data-collector. The last new car I purchased was a 1986 Chevrolet, and it still runs, the last suit I bought was in 1988, and it's the only one I have. My property taxes demolish 70 percent of my social security check. Now a veteran of knee replacement surgery, as well as a 5-way heart bypass, I am still at work to make ends meet, only now... my hours are no longer 25 per week but 8. I can no longer afford to buy fuel oil, (it's snowing outside again), so I scrounge firewood to use in my wood stove. But hey, I deserve all this because I am (as you group me), just another piece of 'low I.Q. dead wood.' My last vacation? Glad you asked. Twelve years ago. God Bless You." – Paid-up subscriber Bud Behr
Porter comment: I've certainly never said anything negative about your IQ (we've never met) or any other subscriber's IQ. If you're reading our newsletters, it's safe to assume you're on the right side of the bell curve in that category. It sounds like you're stuck in a miserable situation. I have sympathy for you... but I certainly don't accept responsibility for your problems. And whether you realize it or not, a recession could be great for you personally. It's unlikely your Social Security income will decrease – but the cost of your heating oil certainly will... and by a large amount. Likewise, what you pay for other necessities is likely to fall. And if you decide to buy a new car or a new suit, you'll find both cost much less than they did 12 months ago, possibly making a few luxuries affordable for you.
Whether you understand it or not, recessions do a tremendous amount of good for our economy by pushing aside failed endeavors and by liquidating assets of failed investors so they can be put toward more efficient uses. If you want to have a strong and vibrant economy, filled with opportunity, you should look forward to recessions.
Regards,
Porter Stansberry
Baltimore, Maryland
January 16, 2009