Santa's Financial Naughty List For 2010

By Stephen D. Simpson, CFA | November 28, 2010 AAA

It looks like it is time once again for St. Nick to tally up the good and bad for the year. While there are some financial folks who belong on the "nice" list (maybe the billionaires who publicly pledged to make sizable bequests?), there is no doubt that the "naughty" list on Wall Street is always quite a bit longer. (For more holiday related reading, check out Top Holiday Budget Busters.)

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Then again, maybe the naughty boys and girls on this list should take some cheer from their inclusion - because of their own actions, commodities like lumps of coal are worth more than they have been in a while!

PIGS
While the European sovereign debt crisis undoubtedly stretches back to 2008 (if not earlier), it really heated up early in 2010. Greece was already something of a basket case, but the news kept getting worse, culminating in an international bailout in early May. Amidst all the worries about whether Greece would single-handedly sink a major bank or two, worries began to bubble up that Spain and Portugal would soon be in similar straits. Although Spain and Portugal seem relatively stable for now, Ireland brings the year to a close with its own prolonged financial difficulties and bailout.

There is no shortage of names that can go down on Santa's black list for this one. National governments lied to each other and their citizens about the state of their economies, and then gorged on cheap external debt to fund public largess. Of course, the banks who bought the debt also bought the lie(s) or assumed that they could pass the buck on to the public in the form of bailouts if things went south. Last and not least, some of the citizens of these countries themselves should earn a spot on the list for protesting and demonstrating against their governments for daring to actually try to put themselves on a paying, solvent basis and cutting some of these debt-fueled freebies. (For more, check out How Countries Deal With Debt.)

U.S. Government
It seems like the U.S. government and/or the Federal Reserve is looking to have a permanent spot on the list. This year brought two notable actions that bookended the year. Early in the year, the administration succeeded in passing its health care reform bill, but at great cost. While the bill itself does not necessarily earn a spot on the naughty list (though others will certainly disagree), it earns a spot here because of its opportunity cost. The administration spent an enormous amount of time, energy and political capital running this bill through; leaving almost nothing in reserve to use to push through any really meaningful economic reform.

Speaking of reform, the government's efforts to reform Wall Street and banking ultimately proved to be a lot more about sound and fury than substance, perhaps missing yet another chance to really fix the system.

The Fed's second major foray into quantitative easing, called QE2 for short, also may earn the government a spot on the naughty list. Though QE2 might have the amusing side-effect of exporting inflation to China - a nice gift exchange for a country that keeps its currency artificially low - it is a major risk to the U.S. economy in the long-term and may not serve to stimulate demand as much as the government hopes. (Learn more about QE2 in What is Quantitative Easing?)

Wall Street
Wall Street must love coal in its stockings, because it too is a semi-permanent fixture on these naughty lists. Not only did Wall Street go kicking and screaming into new reforms, but allegations are bubbling that some firms were even more naughty than normal. Rumors are spreading that more than one major firm may be (or have been) involved in manipulating the silver market. If that was not bad enough, and it is, now there are stories of a wide-ranging government probe of insider trading that could involve several big-name sell-side firms, as well as hedge funds, mutual funds and corporations.

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Commercial Banks
Mortgage lenders made a late push to get themselves on the naughty list on a retroactive basis. As banks like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) have moved borrowers through the foreclosure process, details started coming to light that all was not well in that process. Banks foreclosed on houses that had no mortgages as well as foreclosing on the wrong houses. Making matters worse, banks have apparently provided fraudulent documents to courts in these foreclosure proceedings (though it is still an open question as to whether the banks knew the documents were fraudulent). While there is nothing wrong with a bank foreclosing on a borrower who will not or cannot pay, it is naughty indeed to take shortcuts simply to speed up the process. (For more on the foreclosure mess, take a look at The Story Behind The Foreclosure Crisis.)

Corporate America
Last and not least, the management of many of America's largest companies may well find themselves on the wrong side of Santa this year. Largely in response to record-low interest rates, corporate America has gorged on debt this year. Instead of putting that debt to use to build factories or expand businesses, much of that cash has either sat on balance sheets or gone straight out the door to investors in the form of dividends and buybacks.

All the while, more than 100 CEOs make more than $15 million a year in compensation and executive pay is up nearly 6% from last year. Keep in mind, though, that official unemployment is still nearly 10% and overall wage growth is under 2% for the year to date. It seems, then, that the question of whether the recession is over or not has a little something to do with whether the person in question works in a spacious private office, a small cube or can find work at all.

Still Reasons for Cheer
Even though this year, like every year, has its well-deserving membership on the rolls of the naughty, that is no reason to lose the holiday spirit. Overall, things are better than they were a year ago and there are plenty of reasons to think that 2011 will be better still. Moreover, the naughty still stand out in part because they are the exceptions - there are plenty of good companies, run by good people, out there and their continuing success and improvement is what everybody should focus on going into the New Year. (Discover some of the generous souls in finance. Check out The Christmas Saints Of Wall Street.)

Find out what happened in financial news this week. Read Water Cooler Finance: Insiders, Door Busters And Debt Contagion.

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