Whining, Profits and the Mark to Market Rule

Includes: BAC, GS, JPM, KBE, KRE, XLF
by: Kimball Corson

Although Goldman Sachs (NYSE:GS) will soon report its highest yearly profits ever, it employees are really unhappy. According to the Wall Street Journal, employees are complaining that too much of their annual bonuses are going to be paid in stock. That is bad, they contend, because they cannot sell that stock right away. This difficulty means that their annual household budgets are being messed up. Main Street USA does not extend its sympathies.

While the total numbers add up very nicely for employees and make for near record paydays, the ratio of total compensation to net company revenues is at an all time low, a mere 42.8 percent. Goldman has been raking it in, but is apparently backing away from compensation packages that might induce faster and stronger regulatory reform out of Congress. Its profits, however, are another matter. They are high enough to make most other banks want to abandon banking and lending altogether and become unregulated investment houses. They want to be like Mike, er, Goldman.

Goldman takes a partial step in the right direction here, but does not go far enough. Banks need to get the message that they should be using much of their profits, salaries and bonuses to plug gaps in their balance sheets from bad debt write downs and write offs that they ought to be taking now instead, but are not because those problems are presently being masked over by the relaxed mark to market rules. Those rules need to be eased back toward where they were so banks will get on with the business of getting rid of, selling off or adjusting downward the large quantities of bad debt still on their balance sheets. As it is, we are more in a stall mode in that regard, with banks seeking higher profits instead, and paying out bigger salaries and bonuses.

While the relaxed mark to market rules were intended to give banks a breather and some time to work on their balance sheets as indicated, banks have abused the cosmetic relief and struggled for higher profits instead. As for their lending businesses, we all know what they are doing or not doing there.

The banking industry needs a major regulatory shake up. However, the banking industry lobby is working hard to make sure that does not happen and that the status quo prevails. Democrats and Republicans alike have been subverted. Congress has its hand out for the money and it head in the sand, ignoring the public’s interest here, so far.

Disclosure: none relevant

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