Banks' profits owe a lot to referees
07/17/2009
As he often does, the satirist Andy Borowitz came painfully close to the truth in Thursday's edition of his online "The Borowitz Report." In a story headlined "Goldman Sachs in Talks to Acquire Treasury Department," Mr. Borowitz writes:
"In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury . . .[it's] 'a good fit' because 'they're in the business of printing money and so are we.'"
On Tuesday, Goldman Sachs reported that the quarter that ended June 30 had been its most profitable in history — and that's saying something. Net income was $3.44 billion, or $4.93 a share. Goldman earned more in the second quarter of this year, with the economy in deep recession, than it earned in all of 2008.
On Thursday, another big bank, JPMorgan Chase & Co., reported record second quarter profits, up 36 percent from a year ago to $2.7 billion. Similar, if not quite so stellar, results are expected from other banking giants. Bankers, with a lot of help from Washington, have turned the nation's financial crisis into an earnings generator.
Are these results "green shoots" in the financial garden, a sign that recovery is well underway? Or are they yet another sign that the big banks, in collusion with their enablers in Washington, have rigged the system?
Probably both.
David Viniar, Goldman's chief financial officer, said Tuesday that the record profits were a result of "basic blocking and tackling," a football metaphor for sound fundamental performance. That's true in that Goldman's equity trading unit led the earnings surge, and the buying and selling of stocks is a fundamental business.
On the other hand, it's easier to block and tackle when there are fewer players on the other team. Last year's financial collapse eliminated a lot of Goldman's competition: Lehman Brothers went bankrupt and Bear Stearns and Merrill Lynch were sold, with the government underwriting the cost, to JP Morgan Chase and Bank of America, respectively.
Blocking and tackling also is a lot easier when the referees are helping. Goldman got $10 billion in Troubled Asset Relief Program funds directly from the feds (which it has repaid). The government took Goldman off the hook by buying up $12.9 billion of credit default obligations held by AIG. And the government allowed investment banks to reclassify themselves as bank holding companies to qualify for Federal Deposit Insurance Corp. insurance, thus lowering interest costs.
Above all, the government's "too big to fail" mantra implicitly guarantees that Goldman and the other big banks can operate comfortably — chop blocking and head tackling, to overstress the metaphor.
Perhaps Goldman and the other big banks should share more of their good fortune with the taxpayers who made it possible. Not likely, at least until December, when Goldman and the others start handing year-end bonuses and out-of-work Americans are trying to pay for Christmas. So far Goldman has set aside $11.4 billion to compensate its employees; at that rate, each Goldman employee could look forward to $770,000 in bonuses.
But bonuses are not shared equally among executives and, say, mailroom clerks. Some Goldman executives can look forward to seven- or eight-figure bonuses. That's something to remember when the bankers start whining to Congress about how unfair proposed new regulations would be.
