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.

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A note on honest math: http://xkcd.com/558/

Let's Bailout Capitalism!

Over the weekend the treasury department put forth a bill now winding its way through the U.S. Congress that would allow the U.S. government to buy bad debt from several Wall Street firms in order to allow those Wall Street firms to continue to function. The number put out by the treasury department is "$700 billion". This is a huge sum the magnitude of which probably eludes most people.

$700 billion. That's $2,295 if every single American contributed. If $700 billion of debt was a GDP, it would be ranked 17th in the world behind the Netherlands and ahead of Turkey. We would need at least 12 Bill Gates's selling off their entire holdings to make it up. $700 billion is equivalent to 1,750 bridges to nowhere. If you laid 700 billion dollar bills end to end, the chain would stretch from the earth to the sun. On the plus side, it only adds 7% to our astronomically high national debt.

And this goliath of a sum of money is going from the taxpayers' pockets directly to the vaults of huge banks who are now seeing the downside of risky lending. In other words, not to the people who defaulted on mortgages and were foreclosed upon, but to banks which transfer more money every hour than you and I make in a lifetime and which practically define capitalism. I'm all for socialism of some things, but socialism of capitalism is a little too red for me. Our constitution guarantees lots of things to lots of individuals, but the right not to go bankrupt is not one of them. I mean, these banks took on these bad mortgage-backed securities knowing that they would be worthless unless enough homeowners were able to make payments: in other words, they took on risk, an essential part of capitalism.

Which brings up two good points from the NY Times:

"How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation’s health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system?"

Yeah! About health care: banks made poor decisions that could have been avoided. Lots (not all) of medical bills stem from conditions that cannot be avoided (breast cancer, lupus, fractured arm, sinus infections, autism, etc.). But we're supposed to pony up for banks and not for patients? And the other quote:

“Treasury’s 840-word legislative bailout proposal comes to more than $830 million per word,” Stephen Ellis, the vice president of Taxpayers for Common Sense, a fiscal watchdog group, said in a statement on Monday, adding that “when they come up with a title, that will drive the average dollar per word down.”