2009-01-01T08_16_38

How and Why TARP Funds Found Their Way to a Small Number of Bankers

When the luminary on the radio said that we needed to move on and not find scapegoats in the aftermath of the current financial meltdown I have to say I was initially quite convinced by what I heard. It was important, the luminary said, to look forward and not backward, and to not demonize hardworking people. Quite right too, I thought. It is much better to focus on the future rather than the distant past.

Then I glanced at the news, and saw a few column inches, not many in comparison with the fulsome coverage given to the OctoMom, but a few, discussing the latest problem to have befallen a bank.

On this occasion the problem had a slightly different twist. This was not a case of investing in borrowers with insufficient income to repay a loan, or gambling with credit default swaps. This was merely a question of the apportioning of holiday bonuses.

Clearly organizations like banks are unashamedly sales based, similar in many ways to used car lots, though not as honorable. This particular organization had put together a sales incentive plan which involved large compensation packages going to executives at the end of the year in 2008, despite the company as a whole having wracked up crippling losses for their investors. Additionally, to add insult to grievous financial injury, the organization concerned promptly required a government backed rescue by another bank. However, the bonuses paid out to executives of the failing company, on the basis of their huge annual loss, were $3.6bn dollars.

Now when you spread out $3.6bn among many people your money does not go all that far. If, for example, you have a million recipients, each would receive 3.6 thousand dollars. Many people would be happy to receive such a sum of money, and likely there are many, many people in the world who could acquit themselves as well as these sterling professionals at the task of running a formerly successful financial organization into bankruptcy.

However, interestingly, there were far fewer than 1 million executives who divided the $3.6bn. Precisely how many has not yet been divulged, as unsurprisingly, there seems to be a degree of reticence as to who the actual recipients were. Prior to its demise, the failed sales organization employed a total of around 60,000 people. So, assuming each person in the company had been an executive, each would have received $60k, more than a typical teacher's annual salary, as a year end bonus in 2008, having bankrupted their company.

But, more than likely, the largesse was not evenly distributed among the employees and instead a relatively small number of 'seasoned professionals' walked away from the collapse with extraordinarily well provisioned nest eggs, a few small, medium and large islands, and their children's education and legal fees covered for generations.

Say for example there were 60 recipients of the $3.6bn, each on average would have taken possession of $60m. Or if there were 600 recipients, it would be $6m each, if it were 6 executives, each would have ended the year with a much needed $600m fillip. It is fun to do the division. (I continue to fear that the moderately large numbers involved effectively cloak the financial wizardry from both politicians, who count only as far as registered voter numbers and citizens, who count only as far as the number of days to the next pay check).

However, given the bonus bonanza to the end of a loss making year, and the indications of management effectiveness that this portrays, the demise of the bank can hardly be a surprise to many in the financial world.

But, perhaps those dupes who end up paying the final tab can be forgiven for being a little surprised. Those bill payers are, in large part, owing to the TARP legislation, ordinary tax payers.

The tax-payer bailout money, to the tune of many billions of dollars went to Bank of America, who needed that money to support the ailing Merrill-Lynch, the sales organization that so handsomely rewarded its failed sales executives.

Once more an organization's executives have separated many customers from their commissions, many investors from their 401k's, and many tax payers from their tax dollars, laughing all the way to the Bank of America. (As it were).

I therefore cannot agree with the luminary. If tax payers, investors, legislators, and executives do not examine what happened, make corrections, and learn lessons, these circumstances will be repeated indefinitely.

There will always be a fear that unscrupulousness is the norm and any form of investment unwise unless the lessons are learned. That fear will undoubtedly stunt the world's economies. Where executives, auditors, and rating agencies signed off on accounts which were palpably incorrect, laws and penalties should be applied, and appropriate fines and punishment administered, and the excess money should be returned to tax payers.

Personally, I do not favor jail time for financial wrong doers in addition to repayment of ill gotten gains. This after all would cost tax payers hundred of thousands of dollars more per conviction per year (as incarceration is a costly undertaking) and would contravene an important rule of capitalism and common sense: don't throw good money after bad. However, a productive and vigorous contribution to the Peace Corps, building hospitals in Afghanistan, Darfur, Sudan, or Gaza, would provide a wonderful opportunity to give back to society. Far better than setting up innumerable charitable foundations which continue to separate money from the needy, less temptation to engage in tax efficiency 'schemes', wonderful exercise, and an opportunity to see the world.

Of course, these business dealings may have been the entirely legitimate and routine transactions of well educated and sophisticated financial wizards. A thorough and public investigation would allow this to be assessed. Far from looking backward this would seem to be basic common sense.

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