Monday, March 23, 2009

The Most Profitable Banking Practice

While reading Eliot Spitzer's continuing effort to excoriate Goldman Sachs over their involvement in the AIG bailout, I came across a sentence that precisely sums up my feelings towards these bailouts that started with Henry Paulson and George W. Bush and is continuing with Tim Geithner and Barack Obama.

What continues to be fundamentally disappointing is that the "too big to fail" institutions continue to absorb enormous sums of taxpayer support without either demonstrating the genuine need for such support or altering their behavior after receiving it.

As I say every time I post something about this subject, I can't stand bailouts. But I understand the desire by the federal government to save the economy because it saves peoples jobs and keeps smaller businesses from being turned into debris from any potential financial supernova caused by the explosion of a big bank. This continues to be the rationale given for saving big corporate institutions that claim to be doing poorly.

But even after trillions now in federal help to giant private industries, credit is still tight, and unemployment continues to grow. Why have their business practices not changed? Because they don't have to. The bailout money has been one no-strings-attached handout after another, because our government still trusts the experience and decision-making ability of existing CEO's to deliver the most efficient outcome. But it's not in the interest of the powerful executive to create a better economy for everyone; it's only in his interest to make money for his company. And about the most efficient way to generate skrill is not to spur innovation or streamline production but rather to stick your hand out in Washington D.C. and beg. Goldman Sachs just made $10 billion in just one day, October 3, 2008, when the Troubled Asset Relief Program was signed into law. The only work put into that was done by whoever was in charge of financial reporting. Screw investment banking. The real money's in bailouts.


A note on honest math:

Wednesday, March 18, 2009


I really hope this dies in the current news cycle, but there has been a lot of fury by members of Congress, UAW members and the general population over the bonuses paid out to top executives at AIG, which was bailed out by the Bush administration (which I only mention to set the timeline of the bailout; Obama would have done the same thing). AIG's defense: they had to honor contracts made in the previous year to these employees. Honoring contracts regarding employee pay? How is this not a good thing?

I definitely don't want the federal government in the business of forcing any employee of any private industry to give back part of their salary beyond what they would owe in taxes. That would be a terrible precident to set, and while I'm not usually a big fan of the "slippery slope" cliche, I think it would be appropriate to use it in this case.

Many would and have argued that the rules for these salary contracts shouldn't apply because the company was bailed out. This may have been a worthy argument had the bailout bill stipulated any sort of regulation of AIG, through the firing of executives, the explicit elimination of bonuses, the elimination of dividends, etc. But there was no such language in the bailout bill for AIG. It was basically a free, no-strings-attached cash infusion to a business thought at the time to be too big to fail and apparently too big to regulate as well.

So it's the government's own fault that their hands are now tied by contract law. Maybe they should have just let AIG fail in the first place. Then the executives wouldn't have gotten bonuses and the government wouldn't have taken an $80 billion hit to the treasury. Or barring that, the government should have taken over the company so that they could actually enforce rules for the company, like China would have done. But because of the no-strings-attached cash AIG received, they are under no obligation to do anything about executive pay. Suck it, USA!