4:33 pm Central Time

It's no secret the culture of entitlement is alive and well on Wall Street. Expectations for financial backstops are rampant in banks. No matter what sort of bad derivatives, bad loans and just plain bad decisions were made in these institutions, these financial companies still expect a bailout. The thinking goes: If the proletariat gets the doll, then why can't the bourgeoisie get the same attention? Such is the mindset on the Street.

But I Earned My Bonus!

Banks are not just giant skyscrapers with neon logos. They're real businesses run by real people with an agenda. C-Suite executives in Lower Manhattan are indoctrinated with the entitlement-mindset at an early point in their careers. These bankers graduated from top-tier business schools. They slaved their way through phone books at the wirehouses. They schmoozed better than any of their peers, and finally rose to the top of their firms. They earned their paneled offices and corresponding exorbitant bonuses -- or so goes the feeling. 

According to the Washington Post, in 2007 Wall Street firms paid out $33.2 billion in bonuses down only 2% from 2006. This is on top of nearly $90 billion dollars in other compensation. Bear in mind, these bonuses were paid when net revenue fell by 6% for the top 7 firms. Total compensation accounted for 47% of the total revenue.

Despite crumbling foundations in the market, broken derivatives they helped create, and diminished shareholder value, firms still shelled out billions to compensate their workforce. Never mind that Mr. and Mrs. Jones just lost 10% of their net worth -- those guys need the 08 Maserati.  After all, they run banks not charities.

Forgone Bonus: A Hopeful Sign?

As perplexing (and depressing) as this situation is, I found a hopeful sign today. A shimmering counterexample in the culture of entitlement happens to be in Europe. Leave it to German bankers to show more humility than their American counterparts.

According to Bloomberg, Deutsche Bank CEO Josef Ackerman declined his bonus this year in favor of more 'deserving colleagues'. Don't ask me where the bank was going manufacture bonus money. Wasn't it Deutsche Bank that just received a cash infusion from the European Central Bank 2 days ago?...but I digress.

Perhaps other executives will follow Ackerman's lead. Maybe firms will enforce a no-bonus policy until the current crisis has passed. After all, it's not like some of these companies would even be around without Uncle Sam's help. Couldn't they hold off on that Central Park apartment purchase and multi-million dollar bonus check until the credit storm is over?

Don't count on it.

3:06 pm Central Time

Financial super-blogger Mish Shedlock has been following the various bank rescue/bailout plans with a jaundiced eye.  On Monday he summarized it more succinctly than anyone else I have seen so far:

"To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed."

This is disturbingly accurate.  (Here is a similar illustration in cartoon form.)  The government is now engaged in a massive transfer of wealth, all in the name of saving the financial system.  Today the Treasury revealed it will be taking equity stakes in thousands of banks in an effort to give them more working capital.  The nationalization of American finance is proceeding quickly.

The better plan, in my view, is this: Let Them Fail.  Banks that cannot survive without help from the taxpayers should be allowed to collapse in an orderly way.  Give the money we are now spending on bailouts to FDIC so it can pay off the depositors of fallen banks, who will then move their money to stronger institutions.

What about shareholders and bondholders of the foolish banks?  They'll be wiped out.  Too bad, since this will hurt a lot of innocent people with unwitting exposure to banks through index funds and pension plans.  The sad truth is they are being hurt anyway by being forced to finance the bailouts.  Do it my way, and at least the guilty will be punished.  Executives who want their golden parachutes can line up in bankruptcy court with everyone else.

Capitalism has been compared to Darwinism -- survival of the fittest.  When push comes to shove, however, it seems the bold and the brave are actually neither.  They are getting off far easier than they deserve.

4:39 pm Central Time

It was a big day for the market. The Dow had the biggest one day point gain in history, jumping over 936 points. The S&P 500 was up over a 1000 again and the Nasdaq had the biggest percentage gain by rising +11.8%. If you watch CNBC, you knew something was different by all the smiling hosts.

It started this morning across the pond when the British government gave three banks £37 billion ($64 billion) according to Bloomberg. In addition, EU nations plan to provide over €1.3 trillion ($1.8 trillion) in loan guarantees and capital to European banks. It's sometimes hard to see what changes the investor sentiment, but it looks like this was the reason for buying today.

Earnings May Affect Gains

Not to throw cold water on the day's events, but here's a few facts to consider. Earnings season is upon us. Many companies are on tap over the next few weeks including 3M (MMM), American Express (AXP), Apple (AAPL), and Yahoo (YHO). Third quarter earnings and guidance for the next quarter is sure to send shockwaves throughout the market. VIX levels remain high with volatility being the rule rather than the exception. Ironically, if anything can be counted on, it's more uncertainty.

Bill Gates and Jeff Immelt Do Not Call 'All Clear'

There are other signs for concern as well. Microsoft co-founder, Bill Gates, is bearish on the economy, if not the whole market. In remarks to Harvard Business School, he said he foresees a "fairly significant recession". Moreover, he sees unemployment peaking at more than 9%. Not a very rosy picture.

Jeff Immelt, CEO of General Electric (GE), had similar feelings. He's now confident the U.S. economy will see two quarters of negative growth commenting that the latest market action has been "unspeakable, undreamed-of, and really, really tough."

If Immelt is right, and the U.S. economy sees 6 months of recession, that's not too bad. The market typically looks ahead two quarters and prices future economic realities today. But if Immelt is wrong and recession lasts longer than he expects, we are in for more pain. At this point, even the most optimistic observers have been wrong -- it's not hard to imagine more "undreamed-of" realities occurring in the next few weeks.

Cash is still attractive. We may look back at this day as a great chance to jump out. Then again, it could be the start of another rally -- doubtful, but possible. Unfortunately, none of us have the benefit of a time machine.