United Liberty

In the State of the Union Address President Obama again attacked banks and proposed a special tax on those businesses because of the big bonuses they are giving out:

To recover the rest, I have proposed a fee on the biggest banks. I know Wall Street isn’t keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.

Attacking banks for giving out big bonuses is simply ridiculous, and here’s five reasons why:

1) Unless you have ownership in the company, it shouldn’t matter to you
Let’s say that a company like Home Depot decides to pay out big bonuses to their managers. The only people who should be upset are the stock owners. These owners could have received some of this money as dividends but instead it was used to pay big bonuses to the managers. This should be the same concept related to the banks: their bonuses really have nothing to do with you, unless of course you are owner of the company stock.

2) But the taxpayers own part of the banks!
Yes it is true that we “bailed out” the banks. Here’s the problem: Americans should be upset at the government for being irresponsible with their money. If the manager of your investments put a high percentage of your cash into a company that was likely going to fail sometime soon, wouldn’t you be upset? That’s what our government did: bailed out failing companies. If anything your anger should be directed at our government for even MAKING us owners of these failing institutions.

You have no doubt seen the news. Goldman Sachs and AIG are paying out bonuses bigger than even at the height of the boom. There is too much competition out there to pay any less, they say. This may be true or it may not, but what is certain is that just about every big Wall Street investment house should be busted right now, which would have thrown thousands of well-paid financial wizards out into the street. If things had gone the way things should have gone without government intervention, there would be so much competition for Wall Street jobs that the remaining employers could get away with one-tenth, maybe, of what they’re earning today thanks to us taxpayers. Heck, maybe they’d even have to pay to get a job.

So I can’t resist expressing my frustration.

Even if it’s too late, it’s good to know that the US Treasury, other Government agencies, and the Federal Reserve are able to do what they were supposed to do all along, i.e. monitor the health of the US banking system. This Federal Reserve white paper amply demonstrates their know-how by detailing the accounting verification procedures they applied in their infamous “stress test” of 19 major US banks, the results of which they now hesitate to divulge to the public for fear of instigating another wave of panic.

My list of examples of the unintended consequences of government intervention in the marketplace gets longer and longer. This time, I’m going to point out the latest irony: Investment banking’s profitable last quarter.

This would be wonderful news if it were genuine, but looking a little deeper reveals the truth. First, in one of Barron’s feature articles by Andrew Bary, we learn about a little-discussed fact: Goldman Sachs has only been able to issue low-cost debt due to the backing of the FDIC through a program called the TLGP, or Temporary Liquidity Guarantee Program.

These tense times need comic relief.

This week has featured a lot of discussion on AIG. There is widespread outrage over the payments of bonuses to employees. There is finger-pointing and flip-flopping regarding who knew what and when in regards to the bonuses. We have the House and the Senate proposing and passing legislation to address the bonus issue. AIG CEO Edward Liddy testified before the House Financial Services subcommittee on Capital Markets. Obama and team have been making statements which appear, at times, to be inconsistent… I’m pretty much spent on the issue, but will offer my thoughts.

As various tax-related mail begins to appear in the mailboxes of hardworking Americans across the country, it’s instructive for all of us to reflect on why we carry the burden of our government every April.

Take this morning, for instance. We can credit the “ingenuity of the markets”, and specifically the ingenuity of John Thain, for moving annual executive bonus payments by Merrill Lynch up by a month last November, thus disbursing $15 billion in executive bonuses just before closing Merrill’s acquisition by Bank of America. Fast forward a few months, and the United States taxpayer just gave Bank of America another $20 billion in newly-borrowed funds to put a band-aid on mortar wounds in Merrill Lynch’s balance sheet.

Most of us have seen the passionate speech given by George Baily in It’s a Wonderful Life to the evil bank-owner, Mr. Potter, begging for leniency towards Potter’s delinquent homeowners and espousing why owning a home makes the residents of Bedford Falls better citizens and more productive members of society.

Mr. Potter is simply interested in making sure his payments are received on time and that foreclosures are issued to those who fall behind.  He believes, and rightly so, that if a man has overextended himself and cannot pay his bills, the mortgage owner has the right to claim the house and boot the residents out.

George Baily, however, is more interested in promoting the “American Dream”- home ownership- and has built his life and Savings and Loan business around helping families buy homes… even if they’re not quite ready to take on that financial responsibility.