Saturday, January 16, 2010
Via Ezra Klein (of all bloggers), the WaPo's Steve Pearlstein argues that it is time to stop whining about big Wall Street bonuses. There are many reasons (read it), not the least of which is that it has become incredibly tedious.
Pearlstein misses one of the better arguments, though, which is that bashing, taxing, or complaining about banks is unfair($), at least insofar as it relates to TARP. The government's TARP "investment" in banks as a group is projected to earn $15 billion. Compare that to the auto industry, which is expected to lose $30 billion of TARP money, a large proportion of which is now effectively in the hands of the United Auto Workers. The banks paid the taxpayers back with a profit, while General Motors and Chrysler suck government cash down a bottomless black hole. Who deserves a bonus?
Indeed, if one were a cynic one would assume that President Obama's new proposal for a special tax on banks to pay for health care "reform" combined with his rifle-shot giveaway to unions over the "cadillac plan" tax is just a naked transfer from bank stockholders to the UAW.
It would be more appropriate - in the hopes of preventing a next crisis - to have higher capital requirements and/or more insurance premia than existed during the recent fiasco (along with fewer ways of avoiding restraints on leverage) for banks' riskier business activities, than to levy a special tax. The government made the TARP deal, for better or for worse, it should stick with it. How can we trust "them" otherwise? No need to answer that one.
If we could "trust" the federal government (or the state governments) there would be less problem with a health care bill. The rob the rich to support the lazy gig will slow down after Tuesday's MA election results come in. It will take time but by year end the die will clearly be cast. Hope and Change you betcha.
TARP money went to our big banks to improve their capital ratios, and thus to signal that the US would backstop these banks, thus damping down fears that might have led to a self-fulfilling liquidity crisis. Through the FDIC, the US was already on the hook if these banks had failed -- so in concept this was a sensible investment at the time. Even back in late 2008, you could have expected that in all but worst-case scenarios, the US would get paid back and even book a profit on most of these investments.
TARP got perverted when it was extended to GM and Chrysler. These have already proven financial sinkholes -- should we be surprised? -- so Obama is now looking for a way to cover their losses before they gather MSM attention. His bright idea is to put a special tax on our biggest 50 banks, even though less than 20 got TARP and many of that 20 didn't want it. Obama will then try to bury GM's losses in TARP profits and special taxes. Harping on Wall Street bonuses in this context is right out of the Alinsky playbook.
But GM is small beer compared to what the USA will lose on Fannie and Freddie.
Before the TARP bailout, Goldman and Morgan Stanley weren't "banks" and so -- like Lehman Brothers -- were ineligible for this kind of rescue until they became Fed-regulated bank holding companies. Goldman was a week away from "going Lehman" ... don't kid yourself. Lloyd Blankfein and Goldman aren't clear yet though. If half of what I suspect is true and is revealed, Americans will want Lloyd to be hung, drawn and quartered. I hope his NYPD gun permit has come through. He'll need it.
You left out the $400 billion (and growing fast) that will never be recovered from Barney Frank's favorite black holes, Fannie Mae and Freddie Mac.
You also left out the $160 billion lost forever at AIG on its way to Goldman Sachs.
There are no "good guys" in this. Watching the pols bash the banks could be referred to as "The War Between the Pots and the Kettles". Do you prefer the Gambinos or the Patriarchas?
"You left out ... Fannie and Freddie .... and AIG"
Pasadena Phil, are you talking to me? says "Mad as Hell ..." Because I certainly didn't mean to. I've ranted here before about Fannie and Freddie and Goldman and AIG ... the Four Horsemen of our Financial Apocalypse.
I do disagree with you on the following: Not all of the big banks are culpable. Some have no Wall Street business and are actually just big payment processors. From what I know, JP Morgan is relatively innocent. Bank of America mostly bought into it with Merrill and Countrywide. Those responsible at Citibank are mostly long gone.
The public process will have difficulty sorting this out, certainly in the short run. But lumping them all together, and making CEO pay the #1 issue doesn't help. My paranoid side says that's Lloyd's plan.
Mad as Hell: Nope. I wasn't addressing you. I have no problem with anything you said. I just wanted to make sure that we don't fall into the trap of defending these crooked bankers only because they are being singled out by Dems for punishment.
The entire problem of bonuses (bonii?) would take care of itself were Congress to re-instate the Glass-Steagall Act. I have yet to hear a single reason why American banks have to be as big and corrupt as foreign banks to be globally competitive.
If you want to see jobs created in this country, return the lending capital that used to be available when commercial banks managed their own reserves as a basis for lending to small business owners, home owners and other local interests, and insurance companies managed theirs according to the risks defined by the actuarial sciences. Having investment bankers hoard 80+% of ALL the capital while incentivized to take the most risk possible protected by tax-payer money should they fail is obscene. It creates too big a pool of money from which to steal from shareholders.
They need to be broken up regardless of the disruption they will gleefully cause in the process. They are too big to succeed.
Mad as hell: Actually, I do have a problem with one comment you made about JP Morgan being relatively innocent. They are sitting on a powder keg of debt which is why their positive earnings surprise yesterday tanked the market. They are lending less and less while making profits from "alternative investments" and and being the biggest processor of food stamps (did you know that?).
Everybody lokes Jaime Diamond. He is the only major bank CEO who appears to have honored the "Chinese walls" promise that these bankers made to Congress in 1998 about managing the glaring (fatal it turns out) conflicts of interest created by allowing commercial banks, investment banks, and insurance companies to once again combine. There is no reason to expect that this will be permanent at JP Morgan or anywhere else. It was a stupid move to repeal the Glass-Steagall Act and JP Morgan is going to have a very bad year because of it.
"Having investment bankers hoard 80+% of ALL the capital while incentivized to take the most risk possible protected by tax-payer money should they fail is obscene. It creates too big a pool of money from which to steal from shareholders. They need to be broken up regardless of the disruption they will gleefully cause in the process. They are too big to succeed."
I heartily agree.
Credit default swaps haven't gotten sufficient attention. Warren Buffett called them "weapons of financial mass destruction" years ago. He was right then, and is still right today.