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I am editor at large for MoneyShow.com and a columnist for MarketWatch. Previously, I served as the editor of Barron's Online from its inception in 1996, through its successful spin-off as a separate subscription site in 2006. As a staff writer at Barron's, I started the magazine's popular... More
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  • No End to the War with the Banks 0 comments
    Jan 14, 2010 5:00 PM | about stocks: GS, JPM, MS, BAC

    The spotlight is on Wall Street again, but none of the bankers is saying, “It’s show time!”

    At hearings Wednesday, four of Wall Street’s “leading lights”—Goldman Sachs Group’s (NYSE: GS) chief executive officer Lloyd Blankfein, JPMorgan Chase’s (NYSE: JPM) CEO Jamie Dimon, Morgan Stanley’s (NYSE: MS) chairman John Mack, and Bank of America’s (NYSE: BAC) new boss, Brian Moynihan—answered tough questions from the new Financial Crisis Inquiry Commission, which will issue a report on the financial crisis and recommendations to prevent the next one.

    And on Thursday, President Obama proposed a new tax (which the White House dubbed the “financial crisis responsibility fee”) on about 50 of the biggest US banks to repay taxpayers for government assistance during the crisis’s darkest days.

    “My commitment is to recover every single dime the American people are owed,” the president said.

    Meanwhile, big banks are preparing to announce their earnings for 2009—and reveal the size of the bonuses they’re paying the legions of “top talent” crowded under their roofs.

    It looks like a firestorm of populist rage is building over these fat payouts, which of course are completely undeserved.

    But until Wall Street comes totally clean about its role in the crisis and sincerely apologizes to the American people, we’ll be stuck with bad, punitive solutions and constant battles between the bankers and their powerful lobbyists on the one hand and the government and furious Americans on the other.

    That battle was on display Wednesday when the four “titans” of finance appeared before the commission. In contrast to the farcical circus of Congressional hearings earlier this year, the Commission members were well prepared and asked some thoughtful questions.

    In the hot seat: Goldman’s Blankfein, who despite reportedly being prepped for hours, couldn’t satisfactorily explain to chairman Phil Angelides how Goldman could sell lousy mortgages on the one hand and short similar instruments on the other. The CEO’s response: Because that’s what the customers wanted.

    Good question, lame answer.

    The four present or former CEOs also were quick to showcase their new compensation plans, which they said included a greater percentage of stock (versus cash) than in the past, payouts over several years, and some risk-based awards or “clawback” provisions, in which bonus recipients would repay money if investments for which they earned bonuses later blew up in their faces.

    It sounded like a step in the right direction, but it’s still unclear how many people this new regime covers. Everyone? Just the bank’s top executives? And although Goldman now will pay out a lower percentage of its revenue in compensation (43% vs. 50% last year), that still strikes me as high, given the damage many of these people have inflicted on their institutions and the rest of us.

    Meanwhile, some Wall Streeters who escaped the crisis by only a cat’s whisker are now whining that they won’t be able to make ends meet. After all, illiquid stock they’ll receive two years from now won’t pay their mortgages or private school tuition or cover the other amenities to which they’ve become so richly entitled.

    The firms seem to believe that these people are unique talents, the equivalent in their field of, say, Michael Jordan in sports, the Beatles and Michael Jackson in music, JK Rowling in literature, and Oprah Winfrey in television. So, naturally they need to pay them kings’ ransoms to keep them from walking out the door.

    Now I’m sure some of them are excellent traders and investment bankers, but irreplaceable? Please.

    And here’s the key point: Even setting aside the money these banks got from the Troubled Asset Relief Program—which most of them have repaid—the US and other governments went to extraordinary lengths to save them from themselves.

    From the Federal Reserve’s zero interest rates and massive money printing; to the extension of deposit guarantees to money market funds; to the Fed’s liberal use of its emergency borrowing facilities, to the 100-cents-on-the-dollar bailout of counterparties to American International Group—I could go on and on—taxpayers completely underwrote the economic and financial recovery that allowed these firms to survive and become profitable enough to pay out big, fat bonuses to their unworthy employees again.

    Without those taxpayer-backed government efforts, there would have been no recovery, no stock or bond rally, and probable oblivion for these firms. I don’t care how many times Lloyd Blankfein says Goldman would have made it through the crisis on its own; without those measures, the remaining firms—including his—may well have joined Lehman Brothers and Bear Stearns in Wall Street Hell, and his Masters of the Universe might be selling apples on street corners.

    Now, I’m not crazy about the Obama Administration’s idea of slapping new levies on banks, especially when other regulators are pushing them to boost capital. And the UK’s recent passage of a 50% tax on bank bonuses has had many unintended consequences: Some banks have even decided to pay out bigger pretax bonuses, in effect robbing shareholders to reward their employees.

    Still, I understand and support the public’s desire to punish these banks for the damage they’ve done. And I can’t help but agree with the president’s statement Thursday that “If these companies are in good enough shape to afford massive bonuses, they surely are in good enough shape to afford paying back every penny to taxpayers”—although some of them claim they’ve done that already, of course.

    But here’s the bigger point: Until Wall Street bankers completely own up to what they did, fully apologize, thank American taxpayers for saving their butts, call off their lobbying dogs in Washington, DC, promise to work constructively with Congress to create sensible regulations for everyone, and stop overpaying these unworthy employees at the expense of shareholders and everyone else, this battle will continue.

    Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.



    Disclosure: "no positions"
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