Isegoria

Michael Lewis satirically pleads that America Must Rescue the Bonuses at Goldman Sachs:

The total collapse of the global financial system is one thing — everyone at Davos in January saw that coming. But the shrinkage of the Goldman Sachs Group Inc. bonus pool is another. Whatever else the Treasury achieves it must know that if the employees of Goldman suffer any sort of pay cut, it will be judged to have failed. And our country may never recover.

Last year Goldman paid its employees $20 billion, 44 percent of the firm’s revenue. Chief Executive Officer Lloyd Blankfein took home $68.5 million, and many otherwise ordinary human beings took home $10 million or more.

This inspired young people everywhere, many of whom may have privately wondered whether it was still worth their time to become investment bankers. Torn between a future in, say, the law and the manufacture of mezzanine CDOs they sucked up their courage and plunged onto Wall Street. And thank God for that: We needed the best and the brightest to get us into this mess, and we’ll need the best and the brightest to get us out of it.
[...]
To its credit the government has thus far done pretty much all it can to prevent any suffering inside the firm. Its extreme sensitivity to Goldman’s pain is the only way to explain its actions thus far.
[...]
Think of Wall Street as a poker game and Goldman as the smartest player. It’s sad when you think about it this way that so much of the dumb money on Wall Street has been forced out of the game. There’s no one left to play with. Just as Goldman was about to rake in its winnings and head home, the U.S. government stumbles in, fat and happy and looking for some action. I imagine the best and the brightest inside Goldman are right this moment trying to figure out how it uses the Treasury not only to sell their own crappy assets dear but also to buy other people’s crappy assets cheap.

At any rate, it won’t take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all, Warren Buffett just did.

‘Wall Street’ No Longer Exists, Alan Reynolds notes, and the conversion or absorption of all five of Wall Street’s big investment banks into commercial banks raises several issues:

First of all, the financial storms over the past year have — before last week — been largely confined to securities markets and to interbank loans among commercial and investment banks. Bank loans to commercial and industrial business, real estate and consumers continued to expand nearly every month. Commercial and industrial loans exceeded $1.5 trillion this August, up from less than $1.2 trillion a year earlier. Real-estate loans exceeded $3.6 trillion, up from less than $3.4 trillion a year ago. Consumer loans were $845 billion, up from $737 billion. Credit standards are tougher, which is surely a good thing, but interest rates for creditworthy borrowers remain low.

The ongoing slow but steady availability of bank credit helps explain the much-remarked contrast between Wall Street and Main Street — the shaky condition of exotic financial markets compared with relatively benign statistics for industrial production, retail sales, employment and the rest of the nonhousing economy. Most people go about their business without depending on investment banks or exotic varieties of commercial paper.

Second, recent events highlight the absurdity of the attempt by several pundits to blame recent problems on “financial deregulation.” That complaint was aimed at the Financial Modernization Act of 1999, which passed the House by a vote of 362-57 and the Senate by 90-8, yanking the last brick out of the 1933 Glass-Steagall Act’s regulatory wall between commercial banks and investment banks.

If it was somehow possible in today’s world of global electronic finance to the rebuild such a wall, that would mean J.P. Morgan could not have bought Bear Stearns, Bank of America could not have bought Merrill Lynch, Barclays could not buy most of Lehman, and Goldman Sachs and Morgan Stanley could not become bank holding companies. It is hard to imagine how things would have worked out in that situation, but it surely would not have been an improvement.

Since the 1933 regulatory wall has collapsed as definitively as the Berlin Wall, all the giant financial conglomerates now face oversight and regulation by the Federal Reserve, the Securities and Exchange Commission, the Comptroller of the Currency and the Federal Deposit Insurance Corp. Innocents who seek security in regulation need to recall, however, that not one of those august agencies exhibited timely foresight or concern about the default risk among even prime mortgages in some locations, or about any lack of transparency with respect to bundling mortgages into securities. People do not become wiser, more selfless or more omniscient simply because they work for government agencies.

Wall Street was always a metaphor, of course, but so are words like “bailout” and “toxic” debt. Nationalization of Fannie Mae and Freddie Mac was a bailout for creditors (who received windfall gains), not for stockholders or executives. The federally enforced shotgun marriage between J.P. Morgan and Bear Stearns at the initially ridiculous price of $2 a share was no bailout for Bear. The 11.3% federal loan to AIG, contingent on the potential expropriation of 80% of shareholder value, is no bailout either.

By contrast, what was done to stop a run on the money-market funds is a real bailout which could encourage them to hold risky paper and also make it tougher for commercial banks to attract deposits. The proposal to buy up mortgage-backed securities is a bailout too, though the beneficiaries are not just the tattered remains of Wall Street. The bailout consists of shifting the risk of loss to taxpayers. Actual losses could not reach $700 billion unless the securities were literally worthless, which would mean the value of the underlying real estate fell to zero.

What was “toxic” for investment banks is not equally toxic for the Treasury Department because the government does not even bother to keep a balance sheet, much less abide by mark-to-market accounting rules. A powerful motive for converting investment banks into commercial banks is to get around those onerous balance-sheet rules that required fire-sale pricing of securities that were virtually unmarketable during a panicky scramble for liquidity. Strict adherence to those rules made patience a vice and a “buy and hold” approach impossible. This confirms what many of us have long been saying about the foolishness of letting arbitrary bookkeeping rules dominate economic reality.

Turning Wall Street into a bunch of commercial banks is a solution of sorts to a problem aggravated by foolish mark-to-market regulations, not by the inevitable demise of the 1933 wall between investment banks and commercial banks. Something good may yet come out of all this, because that wall never made much sense in the first place.

WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History:

WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.

This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.

FDIC Chairman Sheila Bair said that WaMu’s downward spiral “could have posed significant challenges without a ready buyer.” Referring to J.P. Morgan’s willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: “Some are coming to Washington for help, others are coming to Washington to help.”

Oh, yes, J.P. Morgan is clearly “coming to Washington to help.”

Here’s how quickly a run on the bank can kill it:

Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu’s customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift’s deposits as of June 30.

Note that it only took a 9% drop before regulators rushed in:

Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank’s branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.

In WaMu’s case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.