Colin Read: Everybody's Business
Here we go again. It is bonus season, and both Goldman Sachs and AIG executives have been making out like bandits.
And a year after bailing out a few very large banks, they are bigger than ever. And so are their bonuses.
We were duped. Companies like AIG, Goldman Sachs and Bank of America needed taxpayers' largess to bail them out. Despite concerns that sales would suffer if GM went bankrupt, common sense prevailed and the company went under. The prestructured bankruptcy allowed it to reorganize, including the renegotiation of contracts that was forcing it into oblivion.
The problem with GM is that it was not as well connected as Goldman Sachs, AIG, and Bank of America. It did not have a Tim Geithner, the president of the New York Fed, as its ally before the election, or a Tim Geithner, the secretary of the treasury, after the election.
By avoiding bankrupcty, Goldman Sachs was not forced to reform. With permission to return to its old ways, and with little hint of financial reform more than two years after the beginning of the greatest recession since the Great Depression, Goldman Sachs made enough to set aside $16.2 billion in bonuses. That works out to about half a million dollars of bonuses and salary per employee. Clearly, they have thrived in bringing us to the Great Recession, and then betting against us through the Great Recession.
Goldman Sachs is even implicated in the latest global financial crisis. This time, Greece is on the verge of bankrupcty. A major nation, part of the European Economic Union, and the 27th largest economy in the world, the possible bankruptcy of Greece is shaking financial markets around the world.
Goldman Sachs and other large U.S. banks used their great knowledge of obfuscating financial markets to devise a way for Greece to temporarily hide its financial plights. Just like an alcoholic or drug addict is enabled to hide his addiction through the "assistance" of so-called friends, the addiction only worsens. Goldman Sachs and others accomplished this by creating trades for Greece that could arguably be called foreign exchange transactions rather than the loans they really are. For instance, Goldman Sachs could strike a deal for a future price of the Greek currency at some time in the distant future that would net Greece significant revenue today. That way, Greece could book revenue to make it more solvent now.
In reality, these were loans but, by arguing they were foreign exchange transactions, the Greek economy was bolstered, stymieing those demanding financial reforms. And the situation was allowed to get worse.
Would you be surprised to hear that Goldman Sachs also took some side bets against Greece, especially given their insider knowledge of how Greece was pulling a rabbit out of a hat?
With all that insider information, it is no wonder that the big boys can profit when the rest of us are holding on for dear life. And those we trust to watch these guys are complicit at worst, or unwilling to pass meaningful financial reforms at best.
These outrages make the bonus plans of the big boys even more painful.
The special master who is overseeing Wall Street bonuses for those taxpayers bailed out is one Kenneth Feinberg, a man who has not been insensitive to the crocodile tears of the big guys. You may remember Mr. Feinberg as the special master charged with distributing payments to those who lost loved ones at the World Trade Centers on 9/11.
Mr. Feinberg tells us his hands are tied. After all, if these companies were placed in bankruptcy instead, they could have been forced to renegotiate contracts that specified bonuses in good times and indemnification in bad times. Instead, he must let the bonuses go through.
You see, the reason these companies so fiercely opposed bankruptcy is that the employment contracts, including bonus plans, could be respecified by courts or by a special master. If, instead, the companies borrowed money to remain solvent and avoid bankruptcy, their high-paid executives are able to walk away with millions of dollars each, and billions of dollars per company.
Many of the people from Wall Street who now work for the federal government are very smart and sophisticated players. I find it unfathomable that people like Tim Geithner, who negotiated on our behalf, did not realize that avoidance of bankruptcy would impose on taxpayers the greatest insult of all.
No, I am sure they knew. And I am sure that Wall Street will continue to "outsmart" us. The problem is, though, that we are not that stupid. It is not hard to see the end game in these ploys.
Instead, I am becoming increasingly sure that Wall Street, perhaps through K Street, has enamored Pennsylvania Avenue and Congress. Our political leaders either like these guys, hope to be one of these guys some day, or have been convinced what is good for Wall Street is good for Main Street.
Before we realized Wall Street was too clever for its own good, and ultimately for our own good, I might have once believed that novel financial instruments could help reduce risk and increase returns for all. Now, I am starting to believe these tools are shell games designed to favor the dealers and liberate our pockets of our cash.
Nor should I be surprised any longer when hubris and greed replace social and financial responsibility. After all, a multi-million-dollar bonus is a big incentive to rationalize poor behavior to oneself. The real question is — What is the motivation of those officials that let all this happen?
Perhaps we should instead invest in casino games. At least we know that the house take is limited in those games of chance.
Colin Read is the former dean and now teaches economics and finance in the School of Business and Economics at SUNY Plattsburgh. His fifth book, "The Rise and Fall of an Economic Empire," will be published by MacMillan Palgrave next fall. He also runs an economic and business consulting company and can be reached at economicinsights@gmail.com.
