Monday, February 2, 2009

Who does Geithner work for?

As someone who has a profound distaste for BS, I nevertheless have to admit that I admire American Bankers. For instance, take the fracas over their 2008 bonuses. While most mortals cannot believe that these guys got paid a ridiculous amount of money while racking up the largest losses in History, they actually want the rest of the World to feel sorry for them!

You see, in "the street", what counts is how much you are up or down since last year. Thus, if you made $10 million in 2007 and $5.6 million in 2008, you are actually suffering a pay cut. Furthermore, in order to compensate for this pain and to make sure that you do not take one of the many offers you may have for $10 million (remember that every bank has government money now) your manager may give you a sizable award of stock and options. Indeed, the $18 billion that caused so much distress are for bonuses paid in cash in NY and does not include any deferred compensation not taxable in 2008. In any case, since many analysts ignore the cost of options, the whole thing is essentially free.

The real reason I admire bankers is that they have managed to convince everyone that they actually have special talents who deserve to make this kind of money. It seems to me that it is far harder to perform surgery than to give a PowerPoint presentation that shows that you need to increase your company's leverage and use the money to buy your competitor or your own stock, but who am I to judge. In any case, the bankers have convinced everyone that they make a lot of money because they are smart and that the proof that they are smart is that, you guessed it, they make a lot money. Never mind that the banks, as we now know, did not really made that money since it is now all being written off.

The politicians in DC, who are not that smart to begin with, are hopelessly mismatched against these compensation geniuses. For instance, Tim Geithner, no doubt sensitized by the tough words from his boss against his old (sshhhh! its a secret) friends, is introducing tough language in his Bad Bank Plan in order to cap compensation at 60% of the World Record Year of 2007! Who is this guy kidding? Not only that, I dare Mr. Geithner to rein in the deferred compensation awards. By the time he catches on, he may already be out of Washington working for one of the large banks.

To add insult to taxpayer-injury Mr. Geithner, like his predecessor, insists on lax rules because otherwise the banks may choose not to participate. It seems to me that if they do not need the money badly enough, we could always use it for something else, but what do I understand about the world of high finance?

In any case, there is enough evidence to believe that Mr. Geithner's Bad Bank Plan will be designed to pay the maximum politically possible price for the assets these very smart people bought for the banks which in turn created the earnings that resulted in their record 2005, 2006, and 2007 bonuses. In addition, he will offer taxpayer subsidized insurance for the other assets they still have marked at par (which is another way of paying close to par) while protecting the sacrosant common equity holder. Why? because the bankers have convinced Mr. Geithner that if current sharholders lose nobody will want to buy bank stocks ever again. He either believes this or doesn't want to fight with his old and, perhaps future, friends.

Fight for the taxpayer? What a quaint idea.

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