"For Goldman, A Swift Return to Lofty Profits"
NYT July 13
I'm starting to wonder about the mental health of our nation when I read stuff like, "Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions." (Update from Reuters: "That puts the average Goldman employee on pace to earn more than $900,000 this year. Chief Executive Lloyd Blankfein, senior officers and star traders will likely receive tens of millions of dollars."
Are we out of our minds? How can we sit by and let this happen?
Let's go over what I thought was reality. For the last decade or so, firms like Goldman Sachs created new fantasy finance products that eventually crashed the entire world economy. These products turned out to be a complicated series of bets, based on air. To cover their bets and their butts, many of the largest firms took out insurance policies from AIG. (They called them credit default swaps instead of insurance because insurance is regulated by law and the swaps are not.) By September 2008, just 10 months ago, AIG realized it could not pay off its bets. It was about to go under and pull down with it just about every major bank and investment house in the world, including Goldman Sachs which was owed nearly $13 billion by AIG. (See The Looting of America for more of the gruesome details.)
To prevent the world from sliding into Great Depression II, we bailed out AIG and virtually all of Wall Street. Nomi Prins, the expert author and a former Goldman Sachs managing director, estimates that the tax payer has provided Wall Street with approximately $13.1 trillion dollars in TARP funds, cheap loans and toxic asset guarantees. (Go here.)
As I see reality, Wall Street -- all of it -- is on the dole. Without our largess, every major firm would have gone into bankruptcy before Obama had taken office.
But didn't Goldman Sachs pay back its TARP money? Big deal. Prins also gives us a very clear accounting of all the money and guarantees the firm has devoured, and TARP is just the tip of the iceberg. (Don't read on unless you have your blood pressure under control.)
On October 28, 2008, Goldman Sachs took $10 billion in TARP funds which it paid back on June 17, 2009. Meanwhile, it also is the beneficiary of $29.7 billion from the FDIC "Temporary Liquidity Guarantee Program," which guarantees certain accounts and assets in order to decrease costs and encourage more investment in participating banks. On March 9, 2009, it walked off with $12.9 billion from AIG, getting 100 percent of their bets covered. AIG was (and still is) under federal government receivership, basically bankruptcy under another name. AIG was no longer legally obligated to pay off its debts -- like those to Goldman Sachs (that's what bankruptcy is all about after all). Yet the Obama administration and Congress authorized AIG to use taxpayer money to pay off those debts in full. If taxpayer money hadn't been made into Wall Street's golden egg, Goldman Sachs' golden goose would have been cooked; they would have received pennies on the dollar.
Finally, it received another $11 billion of backing from the Federal Reserve's Commercial Paper Funding Facility which guarantees short term money markets against collapse, which was starting to happen after Lehman Brothers went down.
In sum, after paying off TARP, Goldman Sachs is still in hock to us for $52.6 billion. No wonder they can pay $18 billion in compensation. Correct that: We're actually paying the $18 billion.
Which brings us back to the problem of holding on to reality. When we bail out an entire sector to the tune of trillions of dollars, eliminate many of the competitors, make money available at near-zero percent interest rates, change accounting rules to make toxic assets appear less toxic for profit and loss purposes, and guarantee everyone's remaining assets -- after we've done all that, what does it mean to book a profit? What did Goldman Sachs actually do that was useful for society, after having helped to drive our economy off a cliff? And why aren't our elected leaders doing something about it?
Maybe they just don't know what to do. So here's a list:
1. No one at any firm that receives any federal support during the crisis can earn more than the President of the United States -- $400,000 per year.
2. Until all the federal support programs are repaid in full and with interest, profits at corporations receiving support will be taxed at 91 percent (in honor of the top individual tax rate that existed during the Eisenhower Administration.)
3. Institute anti-trust proceedings against the remaining large banks, so that they no longer are too big or too interconnected to fail.
4. And just for the heck of it, nationalize Goldman Sachs, both because it poses systemic risk to our system and because doing so would definitely get Wall Street's attention.
Ronald Reagan made a living slamming fictitious welfare mothers who supposedly took our money and drove Cadillacs. Now we've got Goldman Sachs, JP Morgan, Morgan Stanley and the rest of the Street living high on the hog with our money. I'm sure we'll hear some stern language from the Administration and Congress as the politicians clamor to paint themselves in populist colors, but what we need is action.
The danger is that if our elected leaders fail to use the Constitutional powers available to them to confront a rogue financial industry that is harming the national interest, a right-wing populist movement may arise that takes advantage of Americans' legitimate anger. Historically, such movements have had a nasty tendency to turn very ugly, very fast.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.