Goldman Sachs TARP payback

http://www.npr.org/templates/story/story.php?storyId=103122382
http://en.wikipedia.org/wiki/Goldman_Sachs
http://www.marketwatch.com/news/story/story.aspx?guid=%7B18220CBF%2D2FAB%2D4943%2D9693%2D0336B2D16A01%7D&siteid=rss

"Clearly we have created banks that are too big to fail; should we be asking if they are also too big to exist?" - Simon Johnson

There was an interesting interview on Fresh Air yesterday with Simon Johnson, the chief economist at the International Monetary Fund during 2007 and 2008. He is a professor at MIT's Sloan School of Management. He raised some interesting points about the bank bailout and the concerns over the Goldman TARP payback news. He also wrote a piece in The Atlantic describing the ways that the financial sector asserts its dominance over Washington, often at our expense.

http://www.theatlantic.com/doc/200905/imf-advice

Goldman (stock was near 200 before the crash, hit a low of 45 in Dec., and now is back to 120) claims that it took $10B in TARP money last year because the gov't twisted its arm - Treasury wanted to give aid to healthy banks as well, so that it wasn't obvious to the public which banks were the most troubled, in order to head off bank runs. Goldman claims it didn't really need a rescue, and now like Wells Fargo they are doing fine, so they want to repay their TARP loan. They want to do this to unfetter themselves from all the TARP-associated restrictions, namely compensation limits. With their competitors struggling, Goldman thinks it will be able to attract the top talent during this recession, so that they will be better poised to clean house once the economy rebounds. Basically they want to stack the deck, even if it puts the overall bank recovery and TARP program at risk. With the entire system still near the precipice, old habits die hard for greedsters like Goldman.

But TARP rules state that it is the GOVERNMENT, not the banks, that makes the final call about how and when institutions pay back their TARP loans. So this may become a showdown between the "bank oligarchy" and the Federal Government about who calls the shots during this precarious process. But in Goldman's case, it's more complex. Some think that the Feds would love to get Goldman's $10B returned, because it validates their bailout efforts and demonstrates that the financial industry may be on the mend. Also Geithner will have a fresh $10B to dole out to others. Seems good, right? Well, $10B is a drop in the bucket compared to the trillion dollars Bush/Obama have already injected into economic recovery efforts. More critically, if Goldman returns its loan to show that it is doing well, what does that say about other banks that don't? Will the public assume the worst about them? Even relatively healthy banks may not plan to repay TARP loans in the next 12 months, but now they may feel pressured to accelerate their plans, which may not be beneficial to their institution, clients, and shareholders. But to be fair, Goldman is not the first to try to repay its federal loans; 6 others banks have already done so, and others are considering it, though they're small regional banks and not household names with global influence like Goldman.

This pre-emptive strike is a big middle finger from Goldman to its competition... and to the gov't/taxpayers too. Many critics think that the Feds have already bent over backwards to help Wall Street. You'd think the least the banks could do is hold up their end of the bargain and play straight with us. Nope. Obama had to practically beg them to even accept conditional bailouts (with pay limits), and throw in huge incentives/guarantees for them to offer up their "troubled assets" to investors through the Geithner plan (many banks are still mulling it over). Trying to cover their own asses, the banks have fought us every step of the way, which has only worsened the financial crisis and delayed recovery. And now they have the hubris to think that beggars can be choosers. If the Feds let Goldman have its way now, it will show the public (and other banks) who's boss, as well as cast doubt on the gov'ts ability to better reform and regulate the financial sector in the future.

But we really shouldn't be surprised. Goldman is an investment bank, but during last fall's crash, it applied to become a bank holding company (like Citi and BofA), just so they could be eligible for Federal Reserve assistance. Morgan Stanley did the same, so now actually none of Wall Street's historic i-banks exist anymore. But Goldman is not a bank, it's a risk-taking brokerage house. Just because it bought a few struggling boondocks community banks, doesn't mean it should enjoy savings and loan status. Also, it's hard to argue that Goldman was healthy all along and just took TARP to be a team player. $13B of the initial $80B that went to help AIG meet its debt underwriting obligations went to Goldman.

We have discussed the "revolving door" between Congress and lobbyists, but what about the r-door between Wall Street executives and financial regulators? Clinton's Treasury Sec. Robert Rubin, W's Treasury Sec. Hank Paulson, Geithner's chief of staff, the current head of the CFTC, and others in government are ex-Goldman employees. There is no way they aren't getting preferential treatment from Washington. Oh, and did I forget to mention that Goldman was Obama's #2 campaign donor?

The American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

-Simon Johnson

Generosity only in good times?

http://www.philly.com/inquirer/world_us/20081017_Annan__Nations_not_paying_hunger_aid.html
http://www.alertnet.org/thenews/fromthefield/219724/122417271741.htm

World Food Day was last week, and with the rising costs of basic staples and fuel, the number of malnourished humans on the planet has almost reached a billion. 10,000 children will die of hunger today. The global financial crisis will only make matters worse. Reduced economic activity from recession pushes down sales and prices for exports like coffee that poor nations rely on to survive. Regardless of what losses we took to our 401(k)'s and home values, the poor in the Third World (and their struggling governments) will be hurt much more. Those making less than $1/day are much more vulnerable to the global fallout from an economic downturn, so we should stop feeling sorry for ourselves and recognize the other innocent victims of our greed. We might have to cut back on our summer vacations; they might have to cut back half their caloric intake. When compared to that reality, even people in danger of foreclosure can't really complain.

It's easy to give when our cups are overfilled, and yet America was stingier than Japan or most of the EU per capita during the economic booms of the 1990's and mid-2000's. But now, when the Third World will unjustly suffer from the mistakes of the industrialized world, is when we really need to step up and show our humanity. Is it more important to keep bank deposits insured, to cut economic stimulus checks, or to keep children alive? So far the industrialized world has injected over $3T in loans and other aid into their banking systems, but renowned economist Jeffrey Sachs estimates that we could virtually wipe out hunger with an investment of just $3B a year (1/1,000 of what was given to banks). Over half a billion more people (mostly in Africa) would be able to live to see 2009 and maybe improve their situations. All they need is literally some high-yield seeds, fertilizer, agriculture education/equipment, and maybe some medicine. No more than what the Amish have; it's really that simple. Loosening some protectionist trade policies would help a lot too, though as our wallets are squeezed, I suspect that the opposite will happen.

G8 nations already have a reputation for promising way more than they actually deliver in terms of poverty aid, including the Tony Blair-promoted UN Millennium Project ($50B for Africa by 2010). Recently, big names like Kofi Annnan and Sachs came out with scathing criticisms of rich states. In response to the price hikes and food riots in June (gotta love ethanol), the G8 et al. pledged an additional $12B to stabilize world food markets/supplies, but so far have only ponied up 0.4% of that ($50M from AUS). Unfortunately, sometimes the money that rich nations "pledge" is money that they already promised in the past (but haven't yet delivered on), or pre-existing aid money that they just re-allocated for this purpose. That's like your boss giving you a raise, but the money comes from next month's salary (or your friend's salary).