Wednesday, January 20, 2010

Obama's Double-Dealing Bank Tax

Government Sachs, indeed.

Forget Goldman Sachs funding a housing bubble even while betting against it. Revisit the famous collapse of Long Term Capital Management, in which (according to a 2000 book by former Journal reporter Roger Lowenstein) Goldman used information gathered from its hedge fund client to bet against the client's positions.
Or revisit a column in this space, circa 1998, about Goldman holding a splashy event in Moscow to sell investors $1.25 billion in new Russian government bonds, which allowed Russia to pay off a $500 million loan to Goldman just before Russia defaulted on its international debts.
Goldman chief Lloyd Blankfein was understandably wide-eyed with wonder at last week's hearing of the Financial Crisis Inquiry Commission. He pointed out that the people on the other side of every Goldman housing-related trade were, for Jiminy Cricket's sake, professional investors.
[bw] Getty Images
He might have added that Goldman bets against its clients every time it buys something they want to sell or sells something they want to buy. He might have suggested that any client who doesn't understand Goldman is looking after its own interests (just as Goldman expects the same of its client) is an idiot and has no business being in business.
He could have, but for an exquisite sense of decorum, also pointed out that one of the things hampering recovery is Washington's own record of double-dealing with respect to bank investors.
Hark back a few months to the shadow play of the Obama bank stress tests. Crediting themselves with mending the crisis, President Obama and Treasury Secretary Tim Geithner ruled that banks were on a solid footing because private investors would provide fresh capital and banks would be free to book profits and earn their way out of trouble.
That was then. Today it's politically convenient to bash banks for the very same profits, and to punish the very same investors with a new Obama bank tax. First, the government coaxes banks into buying back the government's TARP stake (and therefore government's share of future earnings). Then it turns around and helps itself to a chunk of those earnings anyway.
Hmmm. At least Goldman doesn't tell you "We're all in this together" and then sell you short (it just sells you short).
In fairness to Team Obama, this habit didn't begin with them. Hank Paulson and the Bush administration were also guilty of the occasional bait and switch. When Fannie Mae and Freddie Mac were struggling, Mr. Paulson suckered several big-name fund managers into investing in their shares, declaring the housing lenders "well capitalized," insisting their ownership "status" wouldn't change, even gilt-edging the invitation with a ban on short-selling Fannie and Freddie shares.
Bam! No sooner had investors acceded to his invitation than Fannie and Freddie's shareholders were railroaded off to the moral hazard hoosegow when the two were seized and their ownership wiped out.
Of course, Mr. Paulson had a global crisis on his hands and needed to keep congressional support for his bailout efforts. The only crisis facing Mr. Obama last week was the Massachusetts Senate race.
Here's what's really going on. Like Mr. Paulson before them, Messrs. Obama and Geithner are sticking it to bank shareholders simply because it's safe to do so (safer, say, than threatening the Chinese with losses on their massive holdings of Fannie and Freddie IOUs).
Aside from slightly raising the banks' cost of uninsured borrowing, the new Obama tax would do nothing to reduce the well-founded expectation of their uninsured creditors that they will be bailed out next time the banks get in trouble. Meanwhile, the only lesson the shareholders who just recapitalized the banks at Washington's behest can possibly learn is the moral hazard of trusting Washington.
Let's hope the crisis is over. Let's hope the banks don't soon need fresh infusions of equity to deal with more bad loans. If investors didn't get the message before, they've got it now: There will be no upside allowed. Anytime the sector starts to show signs of recovery, Washington can swoop in and grab the profits as a "responsibility fee."
This may be politically expedient given populist blowback over bank bonuses, but it's not a step toward a competitive, responsible banking sector that takes appropriate risks without looking for government handouts or bailouts. On the contrary, it's a formula for turning the banks into what Fannie and Freddie have become: profitless channelers of taxpayer-guaranteed money into whatever loss-making loans politicians happen to want made. Compared to that, give us Goldman every time.

 

34 comments:

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