Wednesday, February 11, 2009

Banks On Their Knees Asking for Money, How Could We Say No?

Today was the day many people have been waiting for: when the CEOs of the big banks who would have failed without emergency government handouts would have to answer to Congress. Now Congress has never had a fully developed vertebrae (see: Clarence Thomas), but with the popular mood seeming to be against the bankers who ruined their billion dollar companies, some in Congress asked some moderately hard questions. The banks represented included Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, Bank of New York Mellon and State Street.

One of the main sticking points with the public is executive compensation, namely bonuses. Now a sensible person would think that a bonus would only be given out when the company has a good year and there is extra money to be spread around, but not with the banks. No; for even when the executives helped run these companies straight into corporate ICU and the government ventilator was barely keeping them alive, bonuses were apparently merited. There was actually a pretty classic line in today's hearings from John J. Mack of Morgan Stanley who told Congress, "We love what we do. If you gave us no bonus, we would still be here." That's easy to say when you've made $55.91 million at Morgan Stanley (while being there only three years). Mack should be getting nothing, especially given his admitted propensity for risky investment. But it turns out that when he screwed up, he was really paying with house money because we the taxpayer were there to bail him out.

Another laugh comes from the sentiment, "Oh, we're not using TARP money for bonuses, that's money we already had." So wait, if you already had money why wasn't it being used to help the company as a whole and not some high-level executive who most likely contributed to the problem? It's like Larry David's friend Simon in Curb Your Enthusiasm who gets a $10,000 loan from Larry only to throw a party that costs $10,000. Sure, the money he used for the party was not the physical money Larry gave to him, but without it he would have had to use the party money to stay afloat.

Barney Frank asked a pointed question during his discussion of executive bonuses: "Why do you need to be bribed to have your interests aligned with the company?" Obviously it is a rhetorical question, but one worth answering. None of these CEOs have the company's best interest in mind. Why would they care how the company does if they know that they're too big to fail? They get to fly their private jets, make tens of millions of dollars, and live in ritzy suburbs. Sure, their companies are failing, but do you really think these guys are going to downsize their personal lives? The money will still come in, and they will still live in their McMansion and drive their luxury foreign cars (though to be fair, their companies might have to use NetJets instead of owning a private plane - how embarrassing!). They can afford not to care.

Another tactic used by the banks at the hearings: blame others. When pushed on why they were not lending a lot of money when that was what the TARP money was for, Jamie Dimon (CEO of JPMorgan Chase) said that it was from a scaling down of lenders like money market funds and hedge funds. The irony of the fact that his bank is partially responsible for the decimation of peoples' money market funds it completely lost on Mr. Dimon as he laments the fact that money market funds are not as active as they used to be.

Representative Paul E. Kanjorski said it best when he told the banks, "When you took taxpayer money, you moved into a fishbowl. Now, everyone is rightly watching your every move from every side." Obviously this is something the banks are not used to, for when they gave money out (by buying sub-prime mortgages) they did not keep tabs on who they were lending to or how they would pay them back; the money was coming from somewhere (though those who did their homework knew it would not last long). This boosted profits and lulled the shareholders and other regulators into complacency. Now when I was in school and I did not do my homework and got a bad grade on a test because of it, the teacher did not offer to give me free points to save my grade; I was responsible for myself. But these banks did not do their homework and they did not just fail the test, they failed the semester and brought everyone down with them, but it's ok because Professor Government is going to give them free points, because they're too important to fail. Peace.

Photos - The financial world brain trust (New York Times), John Mack (CNN Money), Jamie Dimon (CNN Money)

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