Wednesday, October 28, 2009

The United States of Goldman

Maybe I’m being unfair to one of America’s premier financial institutions by suggesting that the United States government appears to be run for the primary benefit of these esteemed financial gurus at the expense of American taxpayers. Maybe I should add JP Morgan to that list and few other super-players on this list.

I’m all for private enterprise, folks making millions – even billions – for creating values that enhance this nation’s economy, but enough is enough already. It’s not the pay of the few executives at the top that riles me – big financial institutions don’t just over-compensate their top 25 executives – they overpay all their traders, investment bankers, etc., often thousands of them. They tell you that they cannot attract “the best and the brightest” if they do not. You know what? If we stop rewarding taking risks (which the government seems willing to “bail out,” so it really isn’t that risky!), maybe there can be some sense in all of this.

But with mega-checks being paid out, $3.03 billion in the latest Goldman Sachs earnings report (highly compensated employees also tend to be shareholders, big time, and then there’s the $5.35 billion in July-September compensation that Goldman paid out as well), and the government as the backstop of those too big to fail… it’s time to stop this madness and put an end to a one way street of government support for this tiny group of mega-millionaires.

NY Times writer Joe Nocera, writing on October 23rd , is well summarized in Sara Behunek’s piece in the October 26th

How has the government helped Goldman Sachs Group Inc. (NYSE:GS)? Joe Nocera at The New York Times counts the ways.

1. That $10 billion in TARP money, which Goldman CEO Llyod Blankfein said he regretted accepting because of the resulting focus on the bank's bonuses (the impetus for Nocera's article), allowed Goldman to put capital to work rather than use its reserves to shore up current positions. Unlike its rivals, Goldman at the time was operating with much more cash on hand, thanks to the government.

2. Early in the crisis, Goldman availed itself of a Federal Deposit Insurance Corp. program, which guaranteed commercial paper loans. The bank borrowed $28 billion -- though, as Nocera points out, it has since reduced that amount to $21 billion -- and as a result was likely to save around $754 million over the life of the guarantee program, according to a Wall Street Journal analysis.

3. The government encouraged Goldman (as well as Morgan Stanley) to convert to holding companies, which, Nocera maintains, was not that big of a deal, but it did provide a psychological benefit by showing the bank that the Federal Reserve was on its side at a crucial moment in the crisis.

4. The government's decision to save American International Group (NYSE:AIG) lead to Goldman being made whole, at 100 cents to the dollar, for its exposure to the firm, amounting to a sweet $12.9 billion.

5. The Fed's Term Asset-Backed Securities Loan Facility allowed firms to buy up distressed securities and sell them for a very healthy profit to someone who was part of the TALF program. "You don't think Goldman Sachs did plenty of that?" Nocera asks. "Traders I know say Goldman traders were all over those assets -- and made millions trading the securities."

6. "Finally," says Nocera, "there is the biggest benefit of all, a benefit that seems blazingly obvious to just about anybody who doesn't work at Goldman Sachs. The government will never, ever let it fail. That's what the events of last fall proved."

On October 27th, Treasury Secretary Tim Geithner, tried to articulate the “why” of the recent bailouts of financial institutions: “Reforming the system requires giving the government better tools to allow institutions to fail. You want to build a system where neither investors nor institutions believe that government will come in and insulate them from their bad decisions. In order to do that, you need a system strong enough to survive the shock and give the government the tools to manage the dissolution of a firm without it delivering a major shock to the system if a firm manages itself to the edge of the abyss… You have to design a system where the failure of an institution doesn't completely undermine other viable institutions.” Yeah, well, the system made some of the richest people in America even richer – benefitting from structures specifically designed for them at taxpayer expense – while most Americans faced harsh economic contractions in their lives, many of them permanent.

As the Administration and Congress take up the questions of regulating financial institutions that are “too big to fail,” which might entail the ability of government officials to take over large failing institutions long before bankruptcy and fire management, there are other key issues that should be addressed. I would think the seemingly unfettered flaunting of financial success at taxpayer expense should be at the very top of the government’s agenda. The October 26th New York Times: “Some regulators and economists in recent weeks have suggested that the administration’s plan does not go far enough. They say that the government should consider breaking up the biggest banks and investment firms long before they fail, or at least impose strict limits on their trading activities — steps that the administration continues to reject.

“Mr. [Barney] Frank, Democrat of Massachusetts, said his [House Financial Services Committee] would now take up more aggressive legislation on the topic, even as lawmakers and regulators continue working on other problems highlighted by the financial crisis, including overseeing executive pay, protecting consumers and regulating the trading of derivatives.” Might I suggest an obvious place to start?

What do the new regulatory proposals look like? According to the October 28th New York Times: “The legislation, drafted jointly by Treasury officials and Representative Barney Frank… would [1] create a special fund, paid by assessments on financial companies with more than $10 billion in assets, to bear the costs of big firms that fail [, 2.] impose new restraints on industrial loan companies — financial institutions owned by commercial enterprises like retailers or manufacturers [, 3.] in the future, would not permit any more commercial companies to own banks [, 4.] would permit the government to impose tough new capital requirements on the largest companies as well as take them over, making their shares virtually worthless, and remove management when they fail [and 5] would provide new authority for the Federal Deposit Insurance Corporation, which seizes weak commercial banks, to take over other large failing financial institutions like insurance companies or hedge funds. Let the financial special interest lobbying begin!

I’m Peter Dekom, and I approve this message.

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