For Goldman, a Swift Return to Lofty Profits

[fuji]

At some level whether bankers and overpaid and whether baseball players are overpaid is similar. If both are operating in a competitive labour market with a correctly functioning price mechanism then supply and demand will set a fair wage.

When you boil it down my concern about banks is that the price mechanism has failed in a way that results in a market failure.

In particular individuals at banks are incentivized to extract the annual, regular, steady profits that a bank appears to return year after year, but push the long-term liabilities onto the tax-payers.

In that environment they are getting a market wage set by supply and demand curves that assume a taxpayer bailout.

I do not think it's right that the taxpayer should subsidize their salaries, so I view that as a market failure.

With baseball players I don't think that really happens--if a sports team gets into financial difficulty, does the government bail it out, the way the government bails out banks? Maybe sometimes, but never to the same extent.

The profits earned by a sports team would appear to be real, and sports teams do not appear to have the long-run catastrophic failure modes that banks have.

 

[fuji]

Another analogy for those who are not following my concern with banks:

An insurance contract appears to be "fantastically profitable" for the insurance company for year after year after year after year, generating oodles of cash at apparently no cost... right up until the insured person dies and the company has to pay up.

If the insurance company were allowed to book all those premiums every year as "profit" and pay them out as bonuses that would be equivalent to what I claim the banks are doing.

 

[onthebottom]

That does not appear to be a true statement for the underlying enterprise, though it would appear to be true for those who are paid bonuses. As of the mid-1980's American banks had negative net profits over their entire history, when you include failed banks. I can't see how that is "fantastically profitable"......

Can you document this?

OTB

 

[fuji]

I will dig up a reference later on today when I have a bit more time. What pushed it over the edge was the $124 billion that taxpayers had to pony up (and never got back) in the S&L crisis as 1600 American banks went bust. Including other costs paid by the taxpayer the net bill was $160 billion. That's just federal, many states also sunk huge sums into bailout plans that they never got back but I don't have those numbers at my finger-tips.

Oh--and that's just costs to the TAXPAYER. Investors in those failed banks also generally lost everything they'd ever invested in those 1600 banks.

That combined with the fact that American banks took a fairly long time to climb out of the hole they were in after the Great Depression put them into negative territory.

This time around both the bailout sums and the size of the banks books (and "profits") are enormously larger, and I don't know how the money sunk into the banks that have failed and are never coming back compares with the historic net profits of the survivors.

 

[fuji]

Oh I forgot--it didn't help that the S&L crisis came on the heels of the LDC Debt Crisis, in which the largest American banks lost 147% of their capital reserves when Mexico and dozens of other countries defaulted on the foreign debt they had borrowed from the largest private banks in America.

They were once again rescued by a taxpayer bailout in the form of IMF loans, debt forgiveness, etc., extended to Mexico by the American taxpayer.

American banks have lurched from one catastrophe to the other with alarming regularity, it is remarkable that you can call this travesty "fantastically profitable".

 

[WoodPeckr]

Banking is a fantastically profitable business, even factoring in the losses...

OTB

Bet you learnt that at business school, 'fuzzy math 101', did ya grasshopper?...

 

[fuji]

I haven't been able to find the reference yet but I am still looking. I had a link to an article from a couple of years back but my link is dead, I will have to find a new source.

It may only have applied to the 8-10 largest banks rather than the entire banking sector--I'll see. At any rate the numbers I did post above aren't pretty, hundreds of billions of the taxpayer's money on two separate crises within the last 30 years, and now this one.

So long as the banking industry is sucking down that much taxpayer cash on that regular an interval I think you should still retract the "fantastically profitable" claim unless you believe in profiting from taxpayer charity.

 

[onthebottom]

This is a fairly robust accounting of the costs of the savings and loan crisis.....

http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf

OTB

 

[Gyaos]

This is a fairly robust accounting of the costs of the savings and loan crisis.....
http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf
OTB

Was that before or after the North Korean hack?

Gyaos.

 

[fuji]

This is a fairly robust accounting of the costs of the savings and loan crisis.....

http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf

OTB

So according to your numbers, with invested capital of around $29 billion, these thrifts cost the taxpayer in the end something on the order of $124 billion.

That seems like the sort of catastrophic failure I am talking about--when you lose over 400% of the value of your enterprise, and make the taxpayer cough it up.

Now tack that on top of the losses the major banks suffered in August 1982 when Mexico and the rest of Latin America defaulted and see whether you come up with a number that is net positive over the life of the banking sector to that point.

My information is that the number at some point along that chain becomes net negative, cumulative since the inception of the United States of America.

I used to have a reference, but that link has gone dead, I will try and find you a new one.

At any rate--if a "fantastically profitable" industry forces the taxpayer to chip in a few hundred billion every ten years or so, well, I am not really sure what you think is so fantastic about that.

 

[onthebottom]

So according to your numbers, with invested capital of around $29 billion, these thrifts cost the taxpayer in the end something on the order of $124 billion.

That seems like the sort of catastrophic failure I am talking about--when you lose over 400% of the value of your enterprise, and make the taxpayer cough it up.

Now tack that on top of the losses the major banks suffered in August 1982 when Mexico and the rest of Latin America defaulted and see whether you come up with a number that is net positive over the life of the banking sector to that point.

My information is that the number at some point along that chain becomes net negative, cumulative since the inception of the United States of America.

I used to have a reference, but that link has gone dead, I will try and find you a new one.

At any rate--if a "fantastically profitable" industry forces the taxpayer to chip in a few hundred billion every ten years or so, well, I am not really sure what you think is so fantastic about that.

Keep looking.

OTB

 

[fuji]

Keep looking.

OTB

I think I'm going to have to go enumerate the data myself so it will take awhile. In the meantime why don't you comment on how come a fantastically profitable business so routinely requires hundreds of millions of dollars of taxpayer money?

The LDC crisis, the S&L, and this one, that makes three times in the last 30 years. If it's so fantastically profitable why can't it pay for itself?

 

[WoodPeckr]

If it's so fantastically profitable why can't it pay for itself?

LOL!
Probably from all the 'skimming' (bonuses paid) over the years that just got out of hand as the crooked Bankster CEOs kept taking more and more, off the top!
'Skimming off the top', was an old trick these Banksters learned from their prior jobs, when they were running the Casinos in Vegas....

 

[onthebottom]

I think I'm going to have to go enumerate the data myself so it will take awhile. In the meantime why don't you comment on how come a fantastically profitable business so routinely requires hundreds of millions of dollars of taxpayer money?

The LDC crisis, the S&L, and this one, that makes three times in the last 30 years. If it's so fantastically profitable why can't it pay for itself?

Yeah, that's what I thought....

OTB

 

[WoodPeckr]

Yeah, that's what I thought....

OTB

?!??!??!?
What? You think it's good to routinely require hundreds of millions of dollars of taxpayer money every so many years?....

 

[Rockslinger]

Is it true that almost all the partners at Goldman Sach are Democrats?

 

[WoodPeckr]

LOL!
Source????

And K Rove & Mullah Limbaugh doesn't count....

 

[Rockslinger]

Source????

More of a question and educated guess than a statement of fact.
Firstly, Goldman is based in NYC and NYC is a Democratic city in a democratic state. Secondly, almost all the partners of Goldman are from one particular ethnic group who tend to be Democrats.

 

[WoodPeckr]

LOL!
Sounds like your pulling a Laddie on us, with thinking like that....

 

[onthebottom]

More of a question and educated guess than a statement of fact.
Firstly, Goldman is based in NYC and NYC is a Democratic city in a democratic state. Secondly, almost all the partners of Goldman are from one particular ethnic group who tend to be Democrats.

And let's not forget, one of Obama's top 10 donors.....

OTB