Goldman Bonuses Based on Socialist Policies, Not Capitalism

Why all the anger over the Goldman Sachs (GS) record bonuses? Is it envy or justifiable outrage? Clearly the latter for the majority of people who believe in capitalism. How do I reach such a unequivocal and categorical conclusion?

Because the Goldman bonuses were substantially based on revenues only achievable through socialist policies of massive government intervention with virtually no downside risk to Goldman, where the government bore most of the risk and potential losses and where the vast majority of potential profits were privatized.

A little more than a year ago, Goldman and its "too-big-to-fail" investment banking, commercial banking and other financial institutional cohorts (Big Banks) were almost all on the verge of either insolvency or illiquidity or both. This is a statement of fact. And that is vitally important to understanding why a year later Goldman has achieved record profits. For if Goldman and its ilk were not in such a dire condition, there would have been no need for government involvement via the TARP and other credit enhancements and virtually zero-interest loans from the Federal Reserve.

A troika of then-Treasury Secretary Hank Paulson, FED Chairman Ben Bernanke and Timothy Geithner (TARP Proponents), in his prior role as President of the New York Federal Reserve Bank determined, without any hearings and minimal debate, that the U.S. and world banking systems were about to collapse unless the U.S. immediately backstopped or "bailed-out" the Big Banks. The TARP Proponents essentially held a gun to the head of President Bush and Congress by prognostications of financial armageddon. Against that backdrop, it is understandable that they caved-in to the pressure, however distasteful that may have been for those who believed in free markets and capitalism and who also abhorred the moral hazard created by publicizing private risk and related losses, if any.

But exigent circumstances, particularly after the collapse of Bear Stearns and Lehman Brothers, and the implosion of AIG among other financial stalwarts, had sucked the air out of the room for those fundamentally against government intervention into the markets regardless of the potentially disastrous consequences and those who preferred a more rational approach (although Paulson's originally three-page Napoleonic outline for action was replaced by thousands of pages of impenetrable legislation).

In the end, we ended up with a prescription for the most massive government intervention into the economy and our financial system since The Great Depression. A governmental decision was made that, regardless of the cost, the U.S. couldn't allow other Big Banks to fail. Consequently, the governmental became the investor, lender and guarantor of last resort to the Big Banks (said circumstances a/k/a TARP on steroids).

Following enactment of the TARP, the Big Banks all received TARP monies, even those who claimed they didn't need nor want it, even though it is almost certain in retrospect that none of them could have survived without it and the other governmental perquisites "foisted" on them. As for Goldman, it received a TARP investment of $10 billion to enhance their capital position; payment of $12 billion from AIG via a TARP infusion therein; the unprecedented immediate approval to change its legal status from and investment bank to a commercial bank, thereby enabling it to borrow from the FED; billions of dollars of virtually interest-free loans from the FED which continue unabated through today; and governmental credit enhancements.

As a result of these socialist-like policies, the U.S. government has claimed that an irreparable debilitation of the world banking system was avoided. History will be the judge on that score, but what is know is that our government picked who would survive and who would fail or be forced to merge with other institutions. Which is another way of saying that the government used the full faith and credit of the United State of America (i.e., American taxpayers) to decide which shareholders would be wiped out and which would be the beneficiaries of significant and undeserved windfalls.

As I have discussed in a prior article, Geithner to Blame for Outrageous Goldman Bonuses, Goldman Sachs in return for being chosen as a survivor and receiving billions of dollars of direct or indirect government assistance didn't make a single commercial loan to any business and otherwise took virtually no financial risk in furtherance of stimulating the economy or job creation. Instead it took advantage of the governmental assistance for its own benefit and that of its shareholders. It borrowed billions of dollars from the FED to either procure government securities with a significantly greater rate of return than the pittance of interest payable or for proprietary trading.

And here's the rub: Goldman Sachs, having been ensconced in a position of virtually no economic downside, "earned" outsized profits having almost nothing to do with risk-taking and the inherent risks of capitalism. In other words, Goldman couldn't not make money on the FED loans and other government assistance. And it never had to absorb potentially billions of dollars of losses, or at least temporarily or permanently lost liquidity relating to its pre-TARP investment decision (in the main, AIG).

As a matter of fact, a group of reasonably competent financial planners or MBA students probably could have generated a significant portion of the return manifested by Goldman Sachs. For example, how difficult is it to borrow money from the FED at miniscule interest rates and then buy government securities generating a substantially higher yield? How difficult is it to implement certain trading strategies when three of your biggest competitors -- Bear Stearns, Lehman Brothers and a no longer independent Merrill Lynch -- no longer exist or, in the case of Merrill, exists a shadow of its former self. This is why the public is justifiably outraged: Goldman Sachs didn't earn their profits as capitalists but as quasi-wards of the state who benefited from socialistic policies.

It is within this context that Goldman and its shareholders were allowed to game the system to its own advantage without any benefit to anyone else (e.g., creditworthy businesses unable to obtain loans due to the credit freeze and job creation). In fact, the credit squeeze, which the TARP and all of the other government assistance was supposed to ease, never occurred because there was no requirement or incentive for the Big Banks to take any financial risk when they were guaranteed huge profits simply by borrowing cheap FED money and parking it in higher yielding government investments. Profits generated in this manner simply run counter to our imbued notions of American-style capitalism.

Disclosure: No position in GS or AIG; Long BAC.

Comments

[King of Spain:]

Geithner can see his payday a few years down the road. He'll be a $5 million/yr "consultant" to GS and others. Plus speaking fees. It's all a bogus game that all gov'ts, capitalist and socialist, play.

Oct 21 10:55 AM

[Graham and ...:]

Called a revolving door.


On Oct 21 10:55 AM King of Spain wrote:

> Geithner can see his payday a few years down the road. He'll be
> a $5 million/yr "consultant" to GS and others. Plus speaking fees.
> It's all a bogus game that all gov'ts, capitalist and socialist,
> play.

Oct 21 11:19 AM

[jimmy46:]

Before the election, Obaba said he'd raise taxes on the very rich.
So far, he's done nothing.
If these $33 million dollar bonuses were taxed at a higher rate,
the scoundrels wouldn't have such a rich haul.

At least social security taxes should be paid on all income,
only taxing the first $97,000 is a real give away.

Oct 21 04:04 PM

[Tony Petroski:]

Mr. Golde: Keep the firebrand going!

Oct 21 05:39 PM

[Michael J. ...:]

I intend to and thank for the support!


On Oct 21 05:39 PM Tony Petroski wrote:

> Mr. Golde: Keep the firebrand going!

Oct 21 10:21 PM

[LoveShorting:]

awesome writing. on the mark. only 28 followers? now 29

Oct 22 09:48 AM

[maryanne:]

Seeking Alpha writers like Mr Golde bring the real truth that mainstream media barely touch or wont touch being puppets of the government. here's number 30

Oct 27 06:57 PM