I find it somewhat laughable in a sardonic way, but mostly pathetic, that Timothy Geithner and other Obama Administration officials, including the President himself, are squawking over the compensation packages at Goldman Sachs (GS) and other "too-big-to-fail" banks (Big Banks) that survived the financial crisis only through the munificence of the American taxpayer.
Of course, the projected $16.7 billion bonus pool for only the first nine months of this year, is outrageous, but is Goldman to blame or did it simply take advantage of a poorly thought-out and negotiated arrangement by and on behalf of the U.S. Government? Sadly to say, but I believe the latter is mostly correct and that the howls from the same officials who enabled Goldman et al. to make a mockery of the TARP and easy money from the Fed, should be directly at themselves for incompetence.
The case of Goldman is probably the most egregious situation involving a Big Bank because it actually takes no consumer deposits and makes no commercial loans in contrast to almost all of the other Big Banks (hence its ability to directly assist an economy recovery). It (i) received $10 billion of direct TARP funds; (ii) benefited by another $12 billion of TARP funds provided to AIG. It thereby avoided a complete loss, let alone ANY financial loss, for its AIG investment exposure. Or, at a minimum, a loss of liquidity for a substantial period of time until AIG's fate is ultimately resolved. And after receiving unprecedented immediate approval of its request to theoretically transform itself from an "investment bank" to a "commercial bank", what did Goldman do? It used its newly-acquired "commercial bank" status to borrow boatloads of easy Fed money, not to make loans to help restart the American economy (the supposed purpose). Rather, it used the near zero-percent loans to either buy U.S Treasuries and other government obligations generating a guaranteed significantly higher rate of return (or spread) or to enhance its proprietary trading operations.
An equally reasonable theory is that Geithner and his cadre (including then-Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke) were aware that there was a statutory limit to TARP funds and that the public would not countenance further direct bailouts of Wall Street. To circumvent this limitation of the TARP and to plausibly argue that Fed lending to the Big Banks was not TARP-like but a necessary evil for the overall benefit of the U.S. economy (e.g., businesses requiring loans to continue or expand operations, and the creation of jobs as a result thereof), they set up a system with the Fed as lender where it would be virtually impossible for the Big Banks not to make significant returns on their Fed borrowings, again, though intentional government manipulation to enhance their capital positions. Hence, with somewhat straight faces, Geithner and the rest could state that the U.S. Government had stayed within the TARP limitations while simultaneously pumping up government support for the Big Banks via the Fed.
One problem was and remains that Geithner did not require the Big Banks to loan money for commercial loans as a prerequisite for additional borrowings from the Fed. This should have been an obvious prerequisite as the supposed purpose of the Fed lending was to provide liquidity to the Big Banks to be able to make business loans to stimulate the economy and job growth. Second, as a corollary, the Big Banks should have been prohibited from using Fed borrowings for the purchase of government securities or for proprietary trading.
Because these requirements were never adopted, little to no additional commercial lending occurred, and as a consequence, the Fed lending did not stimulate the economy. And more abhorrently, the Big Banks were able to use the Fed borrowing for their own profiteering on behalf of their undeserved executives (many of whom effectively bankrupted their companies) and other employees and shareholders which should have suffered a complete loss of investment before government dollar number one. Again, this sorry outcome was due in large part to Geithner's actions as he was both President of the New York Federal Reserve Bank in the Bush Administration and Treasury Secretary in the Obama Administration.
So, now that he fouled up the TARP plan arrangements and requirements, coupled with the easy Fed money policy, Geithner is outraged by a foreseeable result of the very plan he put into action. Whether he failed and continues to fail miserably may arguably be due, possibly initially, to much-touted "exigencies" of the circumstances" (to which I do not subscribe) or poor negotiations. Not fully understanding what financial monster he was unleashing on the American public at their expense (particularly retirees and other savers who saw their returns on savings fall to nearly nothing), ignorance or gross negligence doesn't really matter at this point. He blew it and his outrage at the Goldman bonuses should be directed, sorry to say, more appropriately at himself than Goldman.
Disclosure: No positions in GS, AIG
