If size is your thing, just flip through the proxy statements of publicly traded companies that will be arriving in mailboxes over the next month or so. The releases provide shareholders with a fleeting glimpse into the surreal world of executive compensation — where company boards never let tanking stock prices, paltry earnings or massive worker layoffs get in the way of hefty raises and bonuses. CEO paychecks are swelling like never before.
And this year’s Oscar for the most undeserved Titanic-size raise goes to Hugh McColl, the 64-year-old chief executive of Bank of America. According to the company’s just released proxy, McColl pulled down a compensation package worth nearly $50 million for his 1999 performance, which reached its nadir with the layoff of nearly 20,000 employees.
The Charlotte, N.C., company was quick to point out that the bulk of the package consists of stock options, which aren’t worth much in the short term, since Bank of America’s stock price has fallen by a third in the past year. Why? Despite wholesale layoffs, profits from the merger between San Francisco’s Bank of America and NationsBank have fallen below expectations.
But don’t weep for Hugh. Presuming the stock posts even modest returns over the next 10 years, he will eventually reap the bulk of his reward.
McColl isn’t alone in his ability to turn a disappointing year into a winning pay proposition. As the Wall Street Journal opined in its 1999 review of executive compensation, “Pay for performance? Forget it. These days, CEOs are assured of getting rich — however the company does.”
In Boston, last year’s merger of Fleet Bank and BankBoston was a financial bonanza for executives at both firms, if not for average employees and stockholders. A proxy filed last week showed CEO Terrence Murray of the combined FleetBoston Financial Corp. raked in $20.2 million last year in pay, bonus and stock options. President Charles Gifford got a cool $15.6 million, though he is reportedly giving most of that to an unnamed charity.
And there won’t be any shortage of charity cases in the Boston area seeking his largess: The day before filing the proxy, the company waved goodbye to 4,000 workers — about 7 percent of its workforce. Since the merger, FleetBoston’s stock has fallen over 20 percent.
Much like the current stock market, executive pay is no longer based on traditional benchmarks of value or equity. Historically, chief executive pay often reflected a reasonable ratio to that of average workers. In 1960, for instance, that ratio stood around 40 to 1; and by the end of the go-go 1960s, it had risen to about 80 to 1. Though the downbeat 1970s knocked the ratio back to 40 to 1, the chief executive pay ratio soared during the “Me” Decade of the 1980s, peaking at 85 to 1.
While Michael Milken’s $600 million one-time haul in 1986 is still an eyepopper, his 1980s peers were pikers compared with today’s corporate paymeisters. By 1998, according to Business Week, the average CEO compensation package, including bonuses and stock options, had multiplied to 419 times the average worker’s paycheck.
And if, when that information is disclosed this month, the 1999 increases are comparable to the 28.5 percent hike of 1998, that figure will reach 538 to 1 by the time this proxy season is over. To see today’s executive compensation packages, you would think the Dow was already trading at 36,000.
Disney CEO Michael Eisner’s salary history was typical of the bloating that occurred during the 1990s. In 1988, Eisner earned $40 million from the show-business giant and was the highest-paid executive in the land. By 1998, he was pulling down $576 million a year.
As Bob Dole once famously asked, “Where’s the outrage?” For the 50 percent of Americans who own stock, no matter how small their holdings, the gains of the late 1990s have been nothing to sneeze at, and there has been barely a murmur of complaint about exorbitant executive pay. And among the half that has no stock at all, wages for most have been rising faster than inflation. So, who’s left to complain?
Graef Crystal, for one. The one-time compensation consultant became so disgusted with executive greed that he now regularly hurls broadsides against his former clients. In a recent Bloomberg column, Crystal pointed out that even General Electric’s Jack Welch — who has arguably done as much for his stockholders since 1981 as any CEO in the land — had lifted his salary and bonus in the 1990s at a rate (45 percent a year) higher than the return on G.E.’s stock (32.2 percent). And that figure doesn’t even count the $800 million in stock options he received.
The problem, Crystal argues, is what you might call the “Welch effect.” Other Fortune 500 companies feel they must compensate their executives at the peer group average, which gets lifted to obscene heights by the likes of Welch. “That those other CEOs are running smaller and much less successful companies is conveniently overlooked,” he wrote.
Smaller and less successful is a good way of describing Raytheon, the defense contractor with plans, approval pending, to produce the Clinton administration’s scaled-down, and probably unworkable, Star Wars anti-missile defense system this summer. The company slashed 14,000 jobs in 1998 and an additional 3,800 last year. Raytheon’s stock plunged from a 52-week high of $72 to $22 last Friday.
But a stock that’s fallen like a failed test missile hasn’t done much damage to company chairman Dennis Picard’s paycheck. In 1998, Picard raked in a combined salary, bonus and stock option package worth $9.5 million, up from $7.7 million the previous year.
But the latest and, arguably most absurd, chapter in executive excess is now being written in the dot-com world. In its latest issue, Forbes hails the arrival of the $100 million CEO. Like No. 1 basketball draft choices who pull down multiyear, multimillion-dollar contracts, these are second- or third-ranking executives at established companies who are being lured in the hopes that they will parlay their management accomplishments at blue-chip brands into start-up success. According to Forbes, at least three dot-com executives have received $1 billion compensation packages: George Conrades of Akamai Technologies ($1.8 billion), Richard Braddock of Priceline.com ($1.1 billion) and Margaret Whitman of eBay ($1 billion).
Of course, the $100 million CEO is a paper phenomenon — built on stock options and equity stakes that may turn out to be worthless. But as the New Economy continues to grow, it’s certain that at least some of these pay packages will set a new standard for jackpots in the casino society of today’s business world.
Where will it stop? Each year, shareholder activist groups like United for a Fair Economy file resolutions seeking to cap executive pay. And bills currently under review in Congress would limit corporate deductions for bonuses and stock options — legislation that extends an existing law limiting salary deductions to $1 million.
But let’s get real. The bills and resolutions have no chance of passing — at least not as long as the most popular show in television remains “Who Wants to Be a Millionaire.”
Is the problem with capitalism that there are too few capitalists? Is the solution to encourage every American to get into the stock market? Before the tech bubble burst at the beginning of this century, I thought this was an interesting notion that deserved careful consideration. Mea culpa. Today, after two disastrous stock market crashes in less than a decade, I think that the idea of “the investor society” or “the ownership society” or “universal capitalism” (defined narrowly as encouraging wider individual ownership of stocks and bonds, as opposed to broadly, to include proposals for sharing profits from public resources or sovereign wealth funds) is a profoundly misguided idea. The proponents of universal shareholding in the 1990s were right that more Americans should share in the gains from economic growth, which have gone disproportionately to the owners of capital and overpaid CEOs. But the method of spreading the gains by encouraging individual working Americans to risk their money in the stock market was ill-conceived.
During periods of rapid asset inflation, whether the assets be stocks and bonds or houses, it is tempting to conclude that the middle class and poor, as well as the rich, should be able to enjoy the benefits of asset appreciation. In such an era, like the 1990s, the warnings of realists are drowned out by the claims of optimists that the rise in stock market or house values is a permanent trend, not an unsustainable bubble. The failure to recognize the stock market bubble for what it was encouraged schemes to increase the ownership of stocks and bonds by America’s high-school educated, working-class majority. The utopian dream was that, in addition to earning income by means of wages, every American could be a capitalist, supplementing wage income with income from capital gains. The fact that, during the bubble, stock market returns outpaced the virtual returns from “investment” in Social Security created converts for the libertarian scheme of partly or wholly replacing Social Security with tax-favored individual retirement accounts invested in the stock market.
That this was madness was argued by a lonely few at the time. By now its lunacy should be apparent to everyone but die-hard libertarians and stock market touts in the financial press. Appealing as it seems, “universal capitalism” — the idea that middle- and low-income Americans can or should rely for a substantial part of their incomes on investments in the stock market — is bad for ordinary Americans and the American and world economies as a whole.
Proponents of universal individual stock ownership often view it as a supplement or replacement for public income maintenance programs, of which the most important are Social Security and unemployment insurance. Likely Republican presidential nominee Mitt Romney recently praised the libertarian idea of private unemployment insurance accounts. Diverting Social Security payroll taxes into the stock market is another right-wing idea which, like Count Dracula, repeatedly rises from the dead.
But public income maintenance programs are far less volatile than stocks and bonds, particularly at the federal level. The federal government has a diverse, continental tax base. And it can borrow more easily than the states to meet its obligations during downturns like the Great Recession. Average Americans can count on Social Security and the federal contribution to unemployment insurance far more than they can expect the stock market to be up at the exact moment when they are fired or have to retire.
This is not liberal propaganda. It is common sense. Any rational person would prefer the security of government-funded retirement and unemployment insurance to the insecurity of private retirement accounts and unemployment accounts. The truth is that Social Security and government unemployment insurance are far better deals than the universal capitalist alternatives.
In addition to being a bad deal for ordinary people, the push to increase stock market participation by the majority of Americans has had bad effects on the economy as a whole. At the root of the volatility of the global economy in the decades leading up to the crash of 2008 was an excess of global savings and too little wage-enabled consumption by ordinary people in developed and developing nations alike. This problem had many causes, including the strategy of Asian mercantilist countries of suppressing the incomes of their workers and the diversion of the gains from economic growth in the U.S. into rewards for shareholders and CEOs rather than higher wages for workers.
One factor in macroeconomic instability was federal tax policies that encouraged employer-based pension funds, in the 1940s and 1950s, and then Roth IRAs and 401K’s, beginning in the 1970s. These tax incentives channeled enormous amounts of money from working Americans into mutual funds. This money—at least what was left, after the brokers had extracted their hidden fees — added to the oceans of money sloshing around in search of unrealistically high returns, producing a pattern of ever more severe booms and busts.
Among other harmful effects, Wall Street management of the retirement money of millions of Americans, whether in the form of employer or union or public pension funds or IRAs and 401K’s, contributed to the culture of short-termism in the American business community. Answerable to flighty investors demanding high short-term returns, CEOs neglected the long-term health of one American company after another, in order to goose quarterly earnings reports by dismantling and offshoring industrial capacity, slashing wages and benefits, or engaging in financial machinations (some of them criminal, as in the case of Enron).
Last but not least, the fantasy of the investor society has had a corrosive effect on the ethics of Americans. The unspoken premise is that it is not enough to work hard in order to get ahead. Average Americans as well as the rich few must gamble in the stock market as well. To their detriment, millions of Americans whose wages failed to keep up with economic growth bought into this Wall Street-peddled fantasy of a nation of day traders and house flippers. They and the rest of us are still paying the price for the corruption of American morals by the get-rich-quick mentality.
It is time to wake up from the daydream of the investor society and face reality. The bubbles were just bubbles. No serious economic expert expects the next few decades to be a golden age of rapid growth capable of enriching janitors with stock market accounts as well as tycoons.
The United States is not a nation of capitalists. It is a nation of wage earners with a minority of capitalists. The only genuine capitalists — individuals who can live entirely from their investments — are a minuscule minority in the U.S. and all other so-called capitalist countries. Having a modest amount of retirement money in a mutual fund does not make anyone a capitalist except in the Wall Street Journal’s Op-Ed pages. For the foreseeable future, few Americans will derive any significant income from capital gains during their working lives, just as few will derive more than a small portion of their retirement income from sources other than Social Security including 401K’s. Right-wing propaganda about an emerging “capitalist majority” to the contrary, America is and will remain a nation of wage earners dependent on pay-checks and public social insurance like Social Security and unemployment insurance.
In the name of dealing with the federal budget, there is a well-funded push in Washington for cutting Social Security and forcing Americans to rely more for retirement on 401K’s and other tax-favored accounts. This conventional wisdom manages to be stupid and crazy at the same time. Given the dangerous volatility of the stock market, the truly prudent course would be to expand risk-free Social Security payments to most Americans, while reducing or phasing out tax breaks for volatile, risky stock market accounts funded by employer pensions or private savings accounts.
Businesslike prudence counsels an effort to shrink the failed, volatile private retirement savings programs and expand the more secure public retirement system. The expansion of the low-risk Social Security program, proposed by Steven Hill among others, can be paid for with higher payroll taxes or a mix of payroll taxes and general revenues, including increases in income tax revenues that follow the capping or eliminating of IRAs, 401K’s and similar poorly performing, tax-favored private retirement programs.
Just as private investments are a poor substitute for Social Security, so the promise of capital gains is a poor substitute for wage increases. Low- and middle-income Americans need higher wages or greater, secure public benefits, or both, not the promise that they can supplement their low wages or inadequate benefits with day trading — a promise that in hindsight looks like a sick joke.
Libertarian ideologues will continue to lobby in favor of replacing public social insurance with private accounts in the stock market; that is what they are paid to do, by the Koch brothers and their other donors. And self-styled “budget hawks” — most of whom are ideological conservatives posing as pragmatic centrists — will continue to claim falsely that the U.S. cannot afford Social Security in its present form, much less in an expanded form that would increase American retirement security while reducing macroeconomic volatility. Finally, fund managers on Wall Street will continue to salivate at the prospect of replacing part or all of Social Security payroll taxes with voluntary or compulsory “individual mandates” pressuring Americans to buy the risky products they peddle and to pay the Wall Street middlemen their fees.
Do not be fooled by this well-funded propaganda. Americans need higher wages and more generous, secure public benefits, not schemes to encourage them to compensate for lousy pay and inadequate benefits by gambling in the risky stock market. Some ideas really do fail the test of history. After two catastrophic stock market crashes in less than 10 years, the once-fashionable idea of the investor society gets a failing grade.
The sense of panic and confusion in Europe seems to grow by the hour. Let’s review the last day or so of events.
- Germany’s economics minister warned that, to save the euro, Greece might have to go through some sort of “insolvency procedure.” Bloomberg News promptly reported that there is now a “98 percent” probability that Greece will default.
- An Italian bond sale went badly, forcing Italy’s borrowing costs sharply higher. Investors were heartened, however, by the news that Italy’s foreign minister was begging China to bail out the country with a significant investment. This was the same foreign minister who had previously warned against China’s “reverse colonialism.”
- The price of insuring against the default of bonds issued by Portugal, Italy and France jumped.
- Bank stocks in France tanked. French banks own about $57 billion in Greek debt — and much, much more in Spanish and Italian debt.
- German Chancellor Angela Merkel smacked down her own economics minister, and declared that she wouldn’t allow Greece to go into “uncontrolled insolvency.”
- “I think we will do Greece the biggest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made,” Ms. Merkel told RBB Inforadio, a public broadcaster in the Berlin region. “What we don’t need is unrest in the financial markets — the uncertainties are already big enough,” she said.
- Merkel’s promise calmed the waters — for the moment. French bank stocks — and the U.S. stock market — suddenly rebounded.
So what does this all mean? First guess: Anyone looking to Congress, the White House or the supercommittee for answers to U.S. economic problems — or for even a hint as to the future direction of the U.S. economy, is almost certainly looking in the wrong place. The biggest downside threat to the U.S. economy, right now, is Europe. Whether or not Merkel can steer a path toward resolution of the Greek crisis will likely exert far more influence on American livelihoods than whether or not the payroll tax cut gets extended, or even whether Republicans succeed in forcing more austerity down U.S. throats.
Just how exposed U.S. banks are to Europe is a hotly debated question — some banking analysts claims direct exposure is relatively minimal, while others note that we just have no idea how much credit default swap insurance U.S. banks have sold to European banks.
Who ends up holding the bag if Europe implodes? Astonishing as this is to contemplate, just three years after credit swaps played a major role in precipitating the financial crisis of 2008, we just don’t know. But even in the midst of our ignorance, formulating a disaster scenario is child’s play.
If Greece slips into default (controlled or uncontrolled) and Italy follows down the insolvency garden path, French banks are certainly in big trouble. If the French banking sector collapses, at the very least, Europe will be headed for recession, and at worst, the interconnectedness of the global banking system will transmit chaos straight across the Atlantic to New York in less time than you can say “systemic event.”
Another recession in Europe would be bad enough — add yet another grim headwind to the troubles limiting U.S. growth. But another global credit crunch? Is it any wonder that every new headline from Europe seems to spark an immediate zig or zag in the U.S. stock market?
Just when Wall Street seemed to have settled down, a barrage of bad economic reports collided with fresh worries about European banks Thursday and triggered a global sell-off in stocks.
The Dow Jones industrial average fell 419 points — a return to the wild swings that gripped the stock market last week.
Stocks were only part of a dramatic day across the financial markets. The price of oil fell $5, gold set another record, the 10-year Treasury hit its lowest yield, and the average mortgage rate fell to its lowest in at least 40 years.
The selling began in Asia, where Japanese exports fell for a fifth straight month, and continued in Europe, where bank stocks were hammered because of worries about debt problems there, which have proved hard to contain.
On Wall Street, the losses wiped out much of the roughly 700 points that the Dow had gained over five days. Some investors who bought in the middle of last week decided to sell after they were confronted with a raft of bad news about the economy:
– More people joined the unemployment line last week than at any time in the past month. The number of people filing claims for unemployment benefits for the first time rose to 408,000, or 9,000 more than the week before.
– Inflation at the consumer level in July was the highest since March. More expensive gas, food, clothes and other necessities are squeezing household budgets at a time when most people aren’t getting raises.
– Sales of previously occupied homes fell in July for the third time in four months — more trouble for a housing market that can’t seem to turn itself around. This year is on pace to be the worst since the late 1990s for home sales.
– Manufacturing has sharply weakened in the mid-Atlantic states, according to a report from the Federal Reserve. Manufacturing had been one of the economy’s strongest industries since the recession ended in 2009, but its growth has slowed this year.
The manufacturing news was especially bleak on an already bad day, said Dan Greenhaus, chief global strategist at brokerage BTIG. He called the Fed report “an atrocious set of numbers.”
“That really set the market on its head,” he said.
Wall Street and other financial markets have wrestled for several weeks with fears that a new recession might be in the offing. Morgan Stanley economists said in a report Thursday that the U.S. and Europe are “dangerously close to recession.”
“It won’t take much in the form of additional shocks to tip the balance,” they wrote.
Worries about European debt also hang over the market. A default by any country would hurt the European banks that hold those European government bonds, plus American banks that have lent to their European counterparts.
Renewing the fears, The Wall Street Journal reported Thursday that U.S. regulators are looking at the U.S. arms of big European banks to make sure they have enough money for day-to-day operations.
“I don’t want to pretend that the market knows what it’s thinking about too much,” said David Kelly, chief market strategist at JPMorgan Funds. “We live in an environment of sell now and ask questions later. The European market was off very heavily this morning before the markets opened. But honestly there wasn’t any news of any substance. We always collect whatever crumbs we can find and point to them.”
Asian markets started Thursday’s drop. Japan’s Nikkei 225 index fell 1.3 percent. The main stock indexes in South Korea and India each dropped a little more, then Europe more than that — 4.5 percent in Britain and 5.8 percent in Germany.
In the United the United States, the Dow fell 419.63 points, or 3.7 percent, to 10,990.58. The Standard & Poor’s 500 index fell 53.24, or 4.5 percent, to 1,140.65. The Nasdaq composite fell 131.05, or 5.2 percent, to 2,380.43.
The Dow is down 13.6 percent since stocks began falling July 21 — four weeks that have rattled Americans watching their retirement savings and other investment accounts shrivel.
Lee Applegate, a retired sales executive from Cincinnati, watched the latest market plunge uneasily but said he was planning to stay the course with his investments. He and his wife have several retirement accounts.
He remembers the mistake he made in pulling his money out of stocks in early 2009, just before the market started its two-year surge. Since March 9 of that year, the S&P 500 is up 68.6 percent.
“I think things are going to get worse before they get better,” Applegate said. “But I’m still going to ride it out.”
Last week was one of the wildest in Wall Street history. The Dow moved more than 400 points on four straight days for the first time. But stocks had been relatively stable this week because investors were calmed by strong earnings reports.
The Dow had fallen 76 points Tuesday and risen four points Wednesday — the first time in nearly three weeks that the average rose or fell by less than 100 points on two straight days.
That ended Thursday. And with stocks down big, money flooded into U.S. Treasurys and gold, both considered safer investments.
The yield on the 10-year Treasury note briefly fell below 2 percent for the first time, hitting 1.98 percent, before rising to 2.07 percent. Low yields show that investors are willing to accept a lower return on their money in exchange for safety.
The price of gold reached yet another high — almost $1,830 per ounce. Gold keeps setting records, with some investors looking for stability and others simply looking to cash in.
The price of oil fell $5.20 to $82.38 per barrel after the economic reports raised concern among traders that demand for gasoline would fall. One survey this week found Americans have already cut back on gas 21 weeks in a row.
And the average rate on a 30-year fixed mortgage fell to its lowest on record. The rate on the 30-year fixed, the most popular mortgage, hit 4.15 percent — the lowest in at least 40 years and barely beating the record from last November. The last time long-term rates were lower was in the 1950s, when 30-year loans weren’t even widely available.
Nicole Sherrod, a managing director at broker T.D. Ameritrade, said the market volatility has led more clients to put automatic protections in place to sell a stock or an investment fund once it falls below a certain value.
“Our clients are saying that this is not a buy and hold market,” she said. “This is a buy and protect market.”
In addition, computer systems that are programmed to analyze charts, capitalize on tiny changes in price and execute trades with no human intervention are making the market rougher.
High-frequency trading programs make up about half of the trading volume in a normal market day but 70 percent or more on a volatile one.
AP Business Writers Dave Carpenter in Chicago and Matthew Craft and David K. Randall in New York contributed to this report.
European bank stocks tanked Thursday as fears over the anemic pace of the global economic recovery and the institutions’ ability to get access to funding intensified.
Most bank stocks across Europe were underperforming in already fragile markets, with British bank Barclays and French bank Societe Generale leading the way down, ending the day with losses of 11.5 and 12 percent, respectively. Germany’s Commerzbank fell 10 percent.
Analysts said the plunge seemed to be, at least in part, a reaction to increasing signs that banks are struggling with liquidity — or access to the cash they need to run their day-to-day operations. Banks typically fund their activities with very short-term loans, and the seizing up of the credit markets where they get those loans was one of the hallmarks of the 2008 crisis. First banks refused to lend to one another, and eventually companies and consumers weren’t able to get loans.
A number of European banks are already dependent on last-resort credit from the European Central Bank because of a reluctance among financial institutions to lend to one another since many are heavily exposed to bad debt like that of Greece, Portugal, Italy and other foundering countries.
The European Central Bank said Thursday that one bank had borrowed $500 million a day earlier for seven days through the bank’s dollar lending program at 1.1 percent. The bank was not identified.
A request for dollars from the ECB suggests that at least one big bank is having trouble obtaining funds. Analysts said fears about one bank’s troubles are enough to spark concerns about the entire industry because traders are already worried about banks’ sovereign debt holdings.
“These are worrying signs,” said Neil MacKinnon, an economist at VTB Capital in London. “You could think of it as a mini-Lehman moment: There is the risk that a major eurozone bank might be a casualty.”
In 2008, the investment bank Lehman Bros. filed for bankruptcy, causing the global credit markets to freeze up almost overnight. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers were unable to get loans.
Last week the European Central Bank opened its credit window and let banks borrow as much as they wanted for six months, an unusually long time that gives them more certainty about their funding. The ECB allotted 114 banks euro49.75 billion, more than expected.
In a move that could compound liquidity fears, U.S. regulators said they were stepping up scrutiny of European banks’ U.S.-based subsidiaries, according to two people familiar with the situation. Banks are meeting more frequently than usual with supervisors from the Federal Reserve Bank of New York and the New York State Banking Department, said the people, who spoke on condition of anonymity to discuss confidential matters of bank supervision.
Analysts said that regulators are pressing the foreign-based banks to park more of their dollars in the U.S., in case their European parents falter and start draining them. Federal Reserve data show that foreign-based banks are storing more cash here — $127 billion near the beginning of August, up from $86.1 billion in June.
A similar spike occurred before the 2008 crisis, analysts with Keefe, Bruyette & Woods said in a research note Thursday.
Protecting foreign bank subsidiaries has been a priority for regulators since that crisis. Lehman’s bankruptcy filing fed the global panic in part because the legal and financial status of its European operations were not clear to other banks and investors.
Poor economic news in the U.S. also seemed to be driving the flight from banks, which was also seen on Wall Street. Shares of big U.S. banks plunged faster than the broader market indexes. Bank of America Corp. and Morgan Stanley dropped about 7 percent, while Citigroup Inc. skidded nearly 9 percent. The Dow Jones industrial average was down more than 4 percent.
“People are putting the pieces together,” said Will Hedden, a sales trader with IG Index.
Some of those pieces are an increase in claims for unemployment benefits in the U.S. and Morgan Stanley’s decision to cut its global growth forecasts for 2011 and 2012. Many European banks hold substantial amounts of Greek debt, and have begun to take writedowns on those holdings.
Banks have also been undermined by Tuesday’s revelation from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the two countries’ finance ministers would come up with a proposal to slap a tax on all trading transactions.
A transaction tax — a small percentage taken from foreign exchange and share transactions, for instance — has been proposed as a source of money to pay for bank bailouts but could hurt trading volumes — a key source of revenue for many of Europe’s banks.
If banks and investors had been holding their breath hoping for a panacea from Sarkozy and Merkel, they were disappointed, and Thursday’s dive could reflect the realization that there’s no easy way out of Europe’s problems.
“All we got was more taxes and more bureaucracy and more austerity,” said MacKinnon.
A Finnish deal to get collateral from Greece to secure its rescue loans to the debt-ridden country has also raised renewed concerns over Europe’s handling of its debt crisis.
Many of Europe’s banks, including Societe Generale and Commerzbank, have already taken big writedowns over their holdings of Greek debt and anything that makes Greece’s second financial bailout less likely has been viewed with dismay. Commerzbank, Germany’s largest commercial holder of Greek debt, wrote off euro760 billion ($1.1 billion) in Greek bonds, all but wiping out its second-quarter earnings.
Last month’s decision by eurozone countries to grant Greece a second financial bailout, worth a total of euro109 billion ($157 billion), called for banks, pension funds and other private institutions that hold Greek debt to take their share of the pain.
Daniel Wagner reported from Washington. Pan Pylas in London and David McHugh in Frankfurt contributed to this story.
A trader on the floor of the New York Stock Exchange. (Credit: Reuters/Brendan McDermid) 
Pine and Broadway 
One of the worlds heaviest waves breaks in Tahiti 
A trader strides across the floor of the New York Stock Exchange at the closing bell, Tuesday, Aug. 9, 2011. The Dow Jones industrial average closed up 429.92 points. (AP Photo/Richard Drew)(Credit: AP) 
Specialist Michael O'Mara, center, works with traders at the closing bell, on the floor of the New York Stock Exchange Friday, Aug. 12, 2011. A wild week ended relatively calmly on Wall Street Friday as the Dow today gained 126 points to 11,269 and the S&P was up 6 points, while the Nasdaq composite added 15 points. The key averages were down 1 percent or more for the week. (AP Photo/Richard Drew)(Credit: AP) 
