Unless you live in a cave, you have probably heard about the massive bonuses being received by the big banks this year. To date, the estimate for the top 38 firms is $145 Billion.
This comes at the heels of the biggest handout in history. The U.S. government provided $700 billion to the banks in the initial bailout along with another $247 to smaller banks. Plus, the Federal Reserve has flooded the banks with cash at the expense of savers by dropping its key funds rate to 0%. This is an indirect bailout, but a bailout nonetheless. If that isn’t enough, Congress recently changed the tax law to allow the banks to treat losses (through Net Operating Loss Carryforwards) differently, which provided a benefit equal to the initial bailout. This makes the repayment of TARP money irrelevant because the banks are giving back money that the government will turn around and give back to them through tax breaks.
While we, as American taxpayers, should be furious over these bonuses so soon after the bailouts, we should really be peeved because the banks are setting us up for another round of bailouts. Rather than paying their employees, the executives and corporate boards should be putting this money in a rainy day fund, called bank reserves, because the banks are still insolvent. How can I say that as the banks are reporting big earnings?
The only reason the banks look good is because the Financial Accounting Standards Board (FASB), after massive government pressure, allows banks to mark the assets on their books to a “model”, rather than to the market price. This means that banks are pricing their assets at a much higher value than they are really worth. In some cases, banks are pricing assets that would sell for 30 cents on the dollar at 90 cents or more.
Additionally, the FASB was suppose to require banks to bring “off balance sheet” assets back onto their balance sheet in November of 2009. This has been pushed back to the end of the first quarter of 2010. I expect more push backs as this deadline approaches. Extend and pretend, baby! These assets are the toxic derivatives that have crippled the banking system. Once these assets officially come back on the banks’ balance sheet, they will need more capital to meet regulatory capital requirements.
If you believe, as the banks must, that these assets will increase in value over time, then the banks may come out ok. However, if you believe the assets won’t return to the current “model”, then the banks are going to need a lot of money to cover losses. So the banks are essentially breaking their fiduciary role with shareholders because they know those assets aren’t returning to pre-crisis levels. They are going to need more money to cover these losses. Rather than use $145 billion to cover their upcoming shortfall, they are handing it out to employees. Maybe they figure the taxpayer will just cough up more money when the next wave hits. Or, maybe they figure the banks are done if these assets don’t increase in value because the taxpayer won’t go for another bailout. Why not get one more huge payout before the party ends. This bonus should allow a banker to pay cash for that home in the Hamptons.
So my anger isn’t just about the big bonuses coming so soon after the bailout. My anger stems from the fact that they are going to need this money down the road, and they know it. Yet, they are opting for a big payout, rather than doing what is right.