Tuesday, March 24, 2009

DealBook Column - If Goldman Returns Aid, Will Others? - NYTimes.com


DealBook Column - If Goldman Returns Aid, Will Others? - NYTimes.com:
"Goldman Sachs is planning to give back its TARP money soon. Very soon, actually...Goldman’s sudden urgency to return the money stems, in part, from the uproar over A.I.G.’s bonuses last week, and the criticism of Goldman over revelations that the firm had been the largest recipient of government money as a counterparty of bets placed with A.I.G. It’s also paying a hefty 5 percent interest payment to taxpayers for that money.

“It’s just impossible to run our business in this environment,” said one senior Goldman executive who insisted on not being quoted by name for fear of crossing the Treasury Department."
Which appears to be good news, but then the authors add this to the piece:
"If Goldman succeeds in returning our money, it could put pressure on other banks to give their money back, too, lest they appear weak."
Which indeed is true. But rather than a cause for celebration (being a strong bank is good), the article takes the position that instead of managing to be a stronger bank, some weaker banks will just give the money back to appear strong when still actually weak. (In other words giving the money back is too inexpensive of signal.)

This is true. And it is a problem, but a problem I would rather have than that of strong banks appearing weak to protect the weak banks.

Why the sudden urgency to pay back the Feds? Possibly the conditions for accepting the money are too onerous.

"And then there is the simple matter that Wall Street and Washington make strange bedfellows.

Paying back the TARP money would probably give Goldman Sachs a bigger lead over its rivals. With a Yankees-like payroll, it will continue to be able to steal the best talent from weaker firms that still have TARP money and are subject to restrictions on pay and the like.

“The guys who have the least chains around them will be able to run the fastest,’ said Meredith Whitney, the banking analyst."
Unintended consequences. Remember them. Propose a bill to tax at 90% bonuses at firms receiving Federal money and suddenly firms no longer want that money.

1 comment:

Cameron said...

It will be interesting to see how it pans out. Is it about the viablilty of the business, or protection of the income of the top level decsion makers?

I wonder what the response might be if they 'bonus up' then bail out, just prior to the organisation collapsing, leaving a new management group to re-appeal for support.

Interesting student debate topic.