Goldman, Obama, and Rose-Colored Glasses

Say, have you heard the good news?
* unemployment is down
* housing sales are up
* the DOW is was at 10,000.
All of this good news sent a thrill up my leg as I started to uncork the champagne. A thrill, that is, until I looked into the details and discovered what is not being reported:
* continuing unemployment claims are only down because these folks have been jobless for so long their benefits have run out.* new unemployment claims filed last month were significantly higher than expected.* housing sales are up because the government is subsidizing home purchases in the form of a massive $8k tax credit (and oh, the ensuing fraud!).
* housing prices dropped almost 9% from last year (and 2008 was a really bad year, you may recall). So, let's return to the whirling dervish of bonuses for a moment and sort through the press reports. You've surely seen the latest: "Obama Pay Czar Reduces Top Salaries by 90%!" and other misleading headlines.
The headlines are misleading because it's not across-the-board regulation. Instead, Obama's unconfirmed, unelected, unilaterally appointed "Pay Czar" put only seven companies in his cross-hairs: AIG, Bank of America, Citi, General Motors, GMAC, Chrysler, and Chrysler Financial.
Of course, Czar Feingberg is getting tough on the seven brothers just in the political nick of time. After all, what would those of us in the lawn-mowing, wall-papering, coffee-making classes say if Obama didn't come down like a sledge hammer on taxpayer-subsidized banks posting record profits and bonuses?
But Obama's pay czar tasering is nothing more than a sleight of hand.
Let's take a step back. Yes, Feingberg indeed imposed up to a 90% pay cut, eliminated corporate jets (for personal travel) in excess of $25k, and announced all sorts of other draconian-sounding measures. Even a new "we won't pay your country-club dues" rule. Gasp. But only for seven companies.
Still, Feinberg is a tough son of-a-gun who doesn't mind kicking a dog when he's down. He forced the savaged, ravaged Ken Lewis at B of A to cough up his entire 2009 compensation, every last penny of it. (Lewis may be heading to the gallows for failing to disclose Merrill Lynch's mounting losses to BofA shareholders, a disclosure he didn't make because Godfathers Paulson and Bernanke threatened him with near death if he dared.)
Oof. Pow. Punch! Wow.
Is your populist bloodlust satisfied yet? If not, I'm sure Obama will be happy to set up a bread-and-circuses tent in your neighborhood, to tamp down your rage and keep you entertained. You know, if you're losing interest in his pedestrian presidential "I-hate-Fox" and "Doctors-insurers-and-bankers-are-evil" wars.
Okay, so back to Feinberg's salary caps. What about Goldman Sachs and JP Morgan, two of the biggest beneficiaries of your taxpayer largesse? What's happening with their executive pay?
Umm, nothing. Both banks are recording astronomical profits for 2009 and they're set to pay bonuses substantially higher than what they paid in pre-crash 2007.
So why did Pay Czar Feinberg leave them untouched, you might reasonably wonder. After all, we did bail them out.
"Umm, well," the sophisticated bankers would scoff in reply, "we were forced to take the money and we paid back the TARP money already. We have no more ties to the taxpayer. We're footloose and fancy free."
And they'd be right. But only a little bit. While it's true that Goldman and JP paid back the TARP funds, the story doesn't end there. Besides TARP, there's TALF, PPIP and the FDIC, just to name a few. On top of TARP, we gave these guys a whole lot more in government aid, and this taxpayer "assistance" is still on the table.
Indeed, Obama pledged billions of our taxpayer dollars to creditors of Goldman (and other banks), in the form of government guarantees on their bonds. And because the U.S. government explicitly backed Goldman's bonds, Goldman was, wonder of wonders, able to raise exorbitant sums in private capital.
In effect, you and I co-signed on loans for Goldman, and JP Morgan, and Morgan Stanley, and GM . . . and oh, who have I left out? As if it mattered. But now we're in a chokehold because we, as a country, guaranteed these debts.
And we're still on the hook. While there's been no default yet, our risk is floating around out there indefinitely, firmly attached to Goldman's (and so many others') bonds. We have trillions on the line with these government guarantees for Goldman, JP Morgan, and AIG.
Who knows how it will all shake out? (We've already lost a cool $20B on our GM bailout -- and that's not counting the losses imposed on the priority #1 crammed-down bondholders and the losses incurred by the FDIC, the FDIC that just closed its 106th bank and is indisputably broke.)
If Goldman and all of its cohorts were to pay off their bonds, then we will never be bothered. But given the astronomical bonuses they've decided to pay themselves, because they can (indeed the egalitarian Goldman says its higher salaries will help all Americans prosper), and assuming prudence and good judgment are our beacons, well, then, I wouldn't rest easy just yet.
No, I wouldn't be resting at all. Because another tsunami is rising. It's called commercial real estate. With the limited media attention given to this sector, it remains Wall Street's dirty secret, for the time being. But the Wall Street bankers are acutely aware of this looming disaster.
Many of these commercial loans will come due in 2010 and 2011 and the banks simply do not have the money to refinance them. Moreoever, even if the properties are cash-flowing, most of the owners are under water, owing more on their properties than what they are worth.
But even an imprudent person can see this is a fait accompli. The other shoe will drop. Those who are truly befuddled as to why banks aren't lending have only to look at the commercial real estate market to get their answer.
And let's not forget the whole derivatives market lurking in the shadows of these commercial mortgages. Credit default swaps and collateralized debt obligations -- the same things we saw in the subprime market -- were traded on these mortgages, too. We're talking some bloody losses here. I hate to say it, but the subprime debacle may end up a mere footnote when it's all over.
And here is where I'd drop a footnote of my own: if you want a big spike in your blog traffic right now, just mention Brooksley Born.
This brave, prescient woman predicted the problems inherent problems in these CDSs and CDOs years ago and she lobbied hard to get these transactions posted on a transparent exchange. But the Wall Street/Washington band of brothers shot her down. In unison.
But let there be no mistake: commercial foreclosures will abound. It's only a matter of time. There are no green shoots, my friends, only green chutes for JP Morgan and Goldman.
But I've digressed. In short, here's what our federal government is serving up to us, ala an unelected Feinberg: a papal blessing bestowed on Goldman and JP Morgan, giving these two a major leg up on their fellow bailed-out competitors.
The "too big to fail" banks have merged and transmogrified into the "Two Bigs to Fail" banks of Goldman and JP Morgan. They are not subject to the compensation caps their competitors will labor under, nor will their bonuses be constrained. They'll easily pick off the best employees from their government-regulated competitors. (Bye, bye, death-by-a-thousand-cuts B of A).
One last thing before I push my Tide box back into the closet: don't you find it curious that Goldman's and JP's profits are so staggering, so record-breaking in the midst of this Second Depression? It's because we infused them with a sh-tload of taxpayer dollars that they then gambled on risky investments. And in the first of many rounds, this one they won.
Phew. I'm relieved. Really I am. Just imagine how much more money we'd need to print if they had rolled the dice and lost. Except I still don't understand why Obama gave them our dice to play with in the first place. Or is it die?
That the government is yet again injecting itself into private sector compensation bothers me immensely. But that is a post for another day. Still, the argument that these government-funded banks should be regulated is awfully compelling.
But if you do accept that premise -- that if you run with dogs, you'll be taken over by fleas -- then it only stands to reason that all of the bailed-out banks should regulated, and equally so.
But that sort of fair play is not in Obama's plan. No, the White House has decided to play favorites instead, dictating that some banks must cap their compensation and other perks, while a select few are allowed to roam wild and free, unfettered in their hiring and betting practices.
This seems unfair. And over-reaching. Anti-trusty. And over-governmenty.
Nonetheless, were my company among the Obama-annointeds, his presidential blessing would send a cold chill down my spine. Because this fickle administration has turned into a fair-weathered friend many many times before.
UPDATED 10/30/09 to correct Pay Czar's last name: It's Fein BERG not GOLD. Sometimes, when I'm in a total snit, and I've got Goldman on my mind, I misspell names. Sorry for any confusion.

Labels: Bonuses, Feingold, Goldman Sachs, Jp Morgan, Pay Czar