August 17, 2009
The Guardian Unlimited, August 17, 2009
Suppose that a company borrowed billions of dollars from the government at a below market interest rate. Suppose it borrowed tens of billions more using explicit guarantees from the government. Suppose further that it borrowed additional money based on the virtually explicit guarantee that the government would not let the company fail, that in a crisis it would lend the company whatever money it needed to pay off its creditors. Suppose this company then handed out $9 billion in bonuses, with its top “performers” getting paychecks in the tens of millions. This company is Goldman Sachs.
The public was rightly appalled at the spectacle of the $700 billion TARP program last fall, in which the government rushed to the rescue of the banks whose greed and incompetence put them on or over the edge of bankruptcy. Just to be clear, it was important for the economy to do something to save the financial system.
But the government could have placed serious conditions on the TARP money and other assistance going to the banks. We could have placed strict restrictions on executive compensation, on dividend payments, and the use of borrowed money. We could have also taken over basket cases like Citigroup and Bank of America, replaced its management with competent executives, and sold them in pieces back to the private sector. In other words, we could have treated the Wall Street millionaires like the welfare recipients they are, we didn’t just have to hand taxpayer dollars by the bucket.
The TARP proponents routinely misrepresent the issue when they tout the success of the program in keeping the financial system operating. This is not that much of a challenge. If you throw enough money at the banks, they will stay afloat. The question was whether we could do the bailout in a way that was fair to the tens of millions of people who are suffering because of the banks’ recklessness and that would also discourage further recklessness in the future.
Goldman Sachs has taken out a huge neon sign shining over the whole country that says “no way suckers.” Goldman CEO Lloyd Blankfein has publicly said that Goldman has not changed its ways and in fact has no intention of changing its ways. By one measure, it is actually is taking on more risky investments this year than it did at the same time last year.
From the standpoint of maximizing shareholder value or bonuses for executives there is no reason that Goldman should not take on more risk – after all, they are betting with the taxpayers’ money, not their own. If the taxpayers are prepared to front Goldman the money for its gambling, why wouldn’t smart bankers like Mr. Blankfein take as much money as possible and take the biggest risks possible? Wouldn’t any gambler make big bets at the casino table if he’s playing with the house’s money?
Of course it is remarkable that the Federal Reserve Board and the Treasury are allowing Goldman to continue to operate just as it did in the pre-crash era. While nothing may have changed for Mr. Blankfein and the other Goldman honchos, Goldman’s legal status has changed. It, along with Morgan Stanley, converted from being an investment bank to being a bank holding company last October at the high point of the financial crisis.
Goldman wanted access to loans guaranteed by the FDIC. It also wanted the benefit of the security blanket that the Fed and FDIC provide to bank holding companies. However, it wanted these benefits without the tighter regulation to which bank holding companies are supposed to be subjected.
When Glass Steagall was repealed in 1999, ending the prohibition of mergers between investment banks and commercial banks, the proponents of repeal insisted they wanted to keep an operational separation between investment banking and commercial banking, even if they both could be done under one roof. The point is that investment banking is inherently more speculative than commercial banking, which usually involves relatively mundane items like mortgages, credit card debt, and small business loans. It would be very difficult to point to any operational separation when Goldman Sachs can borrow money insured by the FDIC and effectively use it to speculate on oil futures or anything else that seems like a good bet to Goldman’s traders.
But the really great thing about Goldman is that it makes no effort to disguise the fact that it is taking big risks with the taxpayers’ money and handing out the winnings to its top traders. Everything is entirely out in the open. (Actually, not everything is open. We don’t know how much Goldman has borrowed through the Fed’s special lending facilities.)
Goldman admits that it is taking big trading risks; it announced that it is putting aside $9 billion in bonuses. There is no need for any conspiracies in this picture. Goldman has said that it’s ripping off the taxpayers and getting rich in the process. And there is nothing anyone can do about it because they own the people in power.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.