Geithner to Blame for Outrageous Goldman Bonuses

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

Comments

[jimboy:]

I wholeheartedly agree with this piece. The UK news broadcasts yesterday were all over the Goldmans bonuses and along with the outrage, there was an air of disbelief: how could GS be making so much money? How could they be so crass as to pay it out in mammoth bonuses to their staff? Why is the government not doing anything about it?

I think people outside of finance don't have the slightest inkling that it was government policy that created the monstrously profitable financial sector in the first place and that, more importantly, the post - crash policy has been all about propping up and if possible reviving the beast. GS and the rest are thriving because the government needs them to. They are not being reformed, restricted or cut down to size because the government can't afford to upset them in its bid to reflate the economy. Expect a lot more public outrage and confusion.

Oct 21 05:54 AM

[WMBANZAI7:]

The Goldman Sting Part I

www.youtube.com/watch?...

Oct 21 06:38 AM

[prairiedog555:]

You know I knew the Obama administration was far left leaning, but at least I figured that they would come down on a Socialist's arch enemy, Wall Street. (as well as the drug companies)
But I guess what they really are is crooked Chicago politicians who will lie down with anybody that they need.

Oct 21 08:22 AM

[Amby:]

Obama administration has fooled the nation....

GS is going to tank to 40$

Oct 21 08:50 AM

[athena:]

good morning!


On Oct 21 08:22 AM prairiedog555 wrote:

> You know I knew the Obama administration was far left leaning, but
> at least I figured that they would come down on a Socialist's arch
> enemy, Wall Street. (as well as the drug companies)
> But I guess what they really are is crooked Chicago politicians who
> will lie down with anybody that they need.

Oct 21 09:27 AM

[Tony Petroski:]

An enjoyable article. As the author pointed out, Goldman became a "bank," and therefore was able to tap into the federal treasure, but in what sense are they a bank, and in what sense do we need them? I'm not proposing a pitchfork-wielding spree on their assets, but explain again why they needed to be saved?

Oct 21 09:31 AM

[Randy Miller:]

I cannot say it enough times. GS profited greatly from the AIG bailout, in that they did not take a loss on their AIG exposures. And if somebody says to you, "but GS had their AIG exposure hedged", turn to them and say "would GS have gotten 100 cents on the dollar if AIG had defaulted, because if you believe they would have, you are a fool or a liar."

The taxpayer paid GS 100 cents on the dollar on their AIG exposure, an amount they would not have gotten if AIG had gone under. Why do I say that? Because whoever GS's counterparties were with the AIG hedge, those same entities were probably also counterparties to everybody else who was exposed to AIG. There was no combination of counterparties who could come up with the $85 billion the government paid to AIG. Therefore GS, and a lot of other Big Financials, would have gotten pennies on the dollar.

And why is AIG stock in the forties?

Oct 21 09:49 AM

[Angry Banker:]

People should quit whining about Goldman's bonuses. GS is profitable, meaning its shareholders have made money, so GS is just doing its job as a corporation. And 35% of those huge bonuses will end up in the U.S. Treasury's coffers as tax receipts.

Oct 21 10:02 AM

[Warm_Paw:]

Goldman claiming they're a bank when they're not a bank, isn't that fraud?

Oct 21 11:07 AM

[HBWOW:]

Who is to blame? Simple, there's Goldman, the company and then
there is ex Goldman, the government. Can we see a detailed report
on GS employees' retirement plans?

Oct 21 11:11 AM

[Graham and ...:]

The main problem with the Goldman bonuses is because they don't reflect what REALLY happened (Goldman was "bailed out," meaning that it was showing almost infinite profit gains off a zero base), rather than Goldman is making healthy gains off a "normal" base.

Oct 21 11:16 AM

[Graham and ...:]

Mayor (Richard J. Sr.) Dailey would have been proud of them.


On Oct 21 09:27 AM athena wrote:

> good morning!

Oct 21 11:17 AM

[Chancer:]

Inspector General's report also blamed Geitner for AIG bonuses. Geitner said he did not know, but his staff did.

The failures and incompetence of government officials, including Obama's best and brightest, demonstrate that greater bureaucratic regulation will not protect us from systemic failure and too big to fail.

Break 'em up, if too big to fail.

Oct 21 05:29 PM