by Deb Cupples | Every dollar that a bank spends on executive pay or devotes to "profits" is one less dollar for that bank to spend on offsetting losses or otherwise making the bank stronger. Period. The Washington Post reports:
"The nation's largest banks, preserved from failure by federal aid and romping in markets revived by federal aid, are racking up vast profits even as the broader economy struggles to emerge from recession....
"Goldman Sachs and Citigroup reported third-quarter profits Thursday, joining J.P. Morgan Chase in outstripping the expectations of financial analysts and solidifying their places as among the banks that have benefited most from the government's massive rescue of the financial industry.
"Goldman said it earned $3.19 billion between July and September, nearly the most it has ever made in three months, a record it set earlier this year. Citigroup, burdened by massive losses on loans and investments, managed a profit of $101 million largely on the strength of its investment bank."
I wonder how much of the claimed profits stem from banks' questionably raising of interest rates on our credit cards.
I'm also concerned about whether the reported profits are even real. Might we wake up a few months down the road and learn that some of these banks have "restated" their earnings reports downward -- as so many public companies have done in the past?
Why, you might wonder, would the folks making a company's decision waste time reporting higher profits if they'll simply have to spend more time and money later editing the report to reflect lower (i.e., more accurate) profit figures?
Because the folks running public companies have great financial incentives to create the appearance of profits (if only temporarily) . The appearance of is the primary justification that executives and managers make for giving themselves gargantuan bonuses on top of not-too-shabby salaries.
In 2006, for example, the people running Merrill Lynch claimed that the company had $7.5 billion in profits -- and handed out $5 to $6 billion in bonuses. Later, it turned out that the profits were not real. That year, one Merrill manager who oversaw traders (some of the same folks who were making fake profits on toxic mortgages) had a salary of only $350,000: with bonuses and perks, his yearly haul was a whopping $35 million. (NY Times)
Some might call that the looting of a company. Others might call it a massive redistribution of wealth (and under false pretenses).
Back to the banks. According to the Washington Post --
"Critics also are inflamed by the companies' plans to pay large bonuses at the end of the year, arguing that employees should receive smaller rewards for results achieved with government help.
"Goldman, for example, took $10 billion from the Treasury Department, which the company subsequently repaid. It borrowed billions more with the help of the Federal Deposit Insurance Corp. The company also borrowed from the Federal Reserve's emergency lending programs, although both the company and the Fed have declined to disclose the amount of aid provided. But the company said Thursday that it had set aside $5.35 billion, 84 percent more than last year.
"J.P. Morgan said Wednesday that it set aside $2.78 billion to compensate its investment bankers, 28 percent more than last year."
Critics should be inflamed -- and so should taxpayers, shareholders, consumers, and regulators.
While bank execs and managers questionably funnel shareholder dollars to themselves, from March through August, Americans were losing their houses at a rate of more than 300,000 per month. (Bloomberg)
Givn that our nation's unemployment rate is approaching 10%, solid economic improvement doesn't seem very likely. If people don't have money to spend on things like houses, cars, computers, new clothes, and restaurant food, businesses tend to make less money -- meaning that they tend to start cutting employees.
Layoffs, it seems, would only exacerbate the problem, in that even fewer people would have money to spend on businesses, which would lead to even more layoffs, and so on.
Since December 2007 (when our nation's recession reportedly started), we've lost 15.1 million non-farm jobs -- 263,000 of them in September alone.
By the end of August, incidentally, there were only 2.4 million jobs open in our nation. That seems to mean that more than 12 million Americans simply will not get jobs -- no matter how hard they try.
Looking at the winners and losers in our nation's economy makes me think of Marie Antionette. I don't advocate beheading as a solution, but I'm not averse to seeing some of the folks running our nations banks (and other big public companies) relocating to prison cells.
* Real Bonuses Based on Fake Profits
* Save Jobs by Cutting Executive Pay
* Debtor Revolt: Bank of America Goes Too Far
* Are Bailout Funds Being Misused?
* Execs Made Millions While Driving Companies into Ditch
* Post by Chris: On Refinancing Mortgages
Perhaps Obama should stop spending money left and right and let things correct themselves with out his meddling.
Posted by: Jeff | October 19, 2009 at 05:41 PM