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Last fall, it probably made sense to flood the financial system with money, to prevent a panic that could easily have compounded a nasty recession. But that was then. As the bailouts have proliferated, so have the unintended consequences, and the financial system is starting to look like a fun-house version of American capitalism.
As the Obama administration enters a new phase in the financial bailout, here are some of the perverse developments that ought to be reexamined:
Bailing out profitable firms. In normal times, nobody would think of giving taxpayer funds to companies able to survive on their own. Yet that’s exactly what we’re doing. Goldman Sachs (GS), Exhibit A, is sitting on $10 billion in government loans even though it earned $1.8 billion in the first quarter. Wells Fargo (WFC), which has gotten $25 billion, expects its first-quarter profits to come in at about $3 billion. Several other major bailout recipients, including JP Morgan Chase (JPM), will probably be profitable for much or all of 2009.
[See how bailouts can butcher capitalism.]
What gives? The original idea was to boost capital throughout the banking system, to make more money available for loans. The feds also hoped that funding all the banks would eliminate any stigma associated with a bank accepting federal money, forestalling the risk of a run on banks deemed sick. It was also quite possible last fall that all the bailout recipients would actually need the money – especially if the economy completely seized up, as some economists feared.
We seem to have dodged that bullet. Credit has slowly started to flow again, and it’s starting to look like lending is down not because the money’s scarce, but because consumers and businesses don’t want to spend money or ask for loans. Meanwhile, banks that have received federal money are chafing under government scrutiny of pay, perks, and business practices. And taxpayers are simply sick of bailouts. Federal funding for companies that can fund themselves is an idea whose time has come, and gone.
[See why more companies are likely to fail this year.]
Loans that the borrowers aren’t allowed to repay. The government wants all of its bailout money back – just not yet. The Feds are worried that banks seeking a PR boost will pay back their bailout funds before they’re ready – then suffer more losses down the road and end up back at the government teat. The plan now is to first complete the bank “stress tests” to determine how healthy the biggest bailout recipients are, and only then consider payback plans. Even then, the government may refuse to allow early paybacks, because the banks that don’t step forward will look weak by dissociation.
Goldman Sachs is challenging this federal paternalism and pushing hard to end its arrangement with the federal government. Wells Fargo has complained about the whole bailout regime and may even be burnishing its first-quarter numbers as a pretext to pay back its loan and get the government out of its business. Let them. It’s time to recoup taxpayer money from those able to pay it back, and if that exposes competitors as weak – well, that’s how capitalism works.
[See why Goldman Sachs should repay its TARP money.]
Everybody wins. So far, the financial bailout has played out like a soccer game for six-year-olds: Everybody wins and nobody’s feelings get hurt. Enough of that. It’s time for leaders to emerge, and if weaker competitors falter or fail as a result, the good news is that the nation’s financial safety net is a lot stronger than it was last fall. Besides, at some point, the risks of propping up weak companies exceed the risks of letting them fail.
The Obama administration seemed to acknowledge that in its recent response to GM (GM) and Chrysler, giving the foundering auto companies a tough set of conditions to meet in order to get any more federal money. If they come up short, they’re welcome to try their luck with a bankruptcy judge. Banks are a bit different, since they supply the capital that the rest of the economy needs in order to grow. But still, they deserve tougher love than they’ve been getting.
[See why the auto bailout is a good model for other bailout-seekers.]
Congress, Inc. Those Merrill Lynch and AIG (AIG) bonuses may have been disconcerting, but Congress’s reaction was even more alarming. Provisions to enact tax laws aimed at a single corporation – AIG – reveal the dangers of angry legislating. Other proposals to limit pay, select managers, and set interest rates at banks receiving bailout money threaten to establish a two-tier banking system in which privately run banks respond to market forces, while government-controlled banks respond to political forces. That’s hopeless. The market produces excesses, but so does Congress. And the market has better self-correcting mechanisms.
[See 5 lessons from the AIG and Merrill bonuses.]
The $1 CEO. Ed Liddy, an outsider who took over as the chief executive of AIG last fall, has one of the hardest jobs in America. He has to dismantle a dying giant of a company, preserving the vital organs while excising an entanglement of financial malignancies that could still threaten the global economy. For this, he’s getting paid $1, while also being treated to perks like a Congressional whipping every now and then. The CEOs of Fannie Mae (FNM) and Citigroup (C) agreed to similar salaries, as if sacrificing a paycheck atones for the sins of their predecessors.
[See 7 surprises buried beneath the AIG bonuses.]
Are Americans suddenly averse to fair pay for hard work? Let’s hope not. Obviously there’s a lot of justified sensitivity about overpaid bankers who earn millions with no accountability for disastrous decisions. But paying a pittance to people who are actually solving big problems and restoring value is no solution, even if they’re willing to do it. We need to outgrow phony symbolism and pay people what they’re worth. Otherwise, we devalue the whole notion of honest work, and risk making bailouts a way of life.
Disclosure: No positions in any stocks mentioned.
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You are high.
We can't, or smartly won't, take their freely generated cash for 30% interest rates. The banks are charging usurious rates, even for those with decent credit, and a few smart people are waking up and not using the credit. OR the bank has raised your rates and forced you into insolvency.
And, the banks are STILL calling in loans from businesses that are PAYING.
The only credit flowing is minimal and expensive and the banks sit on billions of tax dollars and trillions of bad debts.
JB
Before they show off can they pay back AIG? What if C or UBS would have gone down three months ago? Would they still be here?
They can only show off because they and this industry was heavily supported by the government. One should not forget this.
Unpossible? Un-American you say? Check out what the great state of Illinois is doing regarding taking from casinos (profitable) to give to horse racing (not so much make-ah the money).
Heck, even George Will wrote about it!
All your profits are belong to us!
Perhaps we shall rid ourselves of Central Banking. The debate between James Madison and Alexander Hamilton is over. 400 years of history proves this lending model creates far more harm and misery then good. It simply allows a government political cover to spend money on foolish things and prohibits or defers difficult yet solvable problems.
On Apr 14 10:15 PM Al-USA wrote:
> Crony capitalism is incompatible with liberty and democracy; the
> solution is to let the failed capitalists get purged out of the system,
> period.
>
Goldman Sachs, for one, benefitted mightily from TARP, especially through the AIG conduit. They also got quick approval to switch to bank holding company status, which essentially allowed them to pile losses into December, a month they conveniently ignored. Is it really in the best interests of the entire financial system to loosen the reins now that they managed to report a dressed-up profitable quarter? Do we trust that the reported profits from GS or any other bank are accurate?
Seems to me the entire financial sector survived only with extraordinary measures from federal intervention. That intervention came with strings, and until the sector is truly stable, it's premature to withdraw the support.
1) Robert Rubin - was co-chairman of Goldman Sachs, then became Treasury Secretary under Clinton, then afterwards became chairman of Citigroup's executive committee
2) Henry Paulson - was CEO of Goldman Sachs, then became Treasury secretary under George W. Bush.
3) John Snow - was Treasury secretary, but now chairman of Cerberus Capital Management
4) Alan Greenspan - Fed chairman, now consultant to Pimco, the biggest player in international bond markets
So which interests do you think these people really represent? Ever wonder why the policies of the past quarter century have always catered to the benefit of the financial sector? The list is big: deregulation, cheap money, promotion of homeownership, expansion of derivatives and structured products without increased regulatory scrutiny, the cold shoulder on attempts to regulate credit default swaps in 1998 (banned by Congress), the repeal of Depression era regulation that separated commercial and investment banking, promotion of financial innovation..... All of these examples have one common goal: increase profits for finanicial institutions.
And when the likes of Geithner and Bernanke retire, where do you think they will be? Best not to bite too hard on the hand that will feed you in the future.
Crony capitalism at its best....
On Apr 14 07:50 PM drbob66 wrote:
> This sounds like a nonsensical rant to me.