The time for smoke and mirrors has passed


It was interesting to read yesterday that the top 7 executives at Goldman Sachs are going to forgo their bonuses for 2008, but that move seems like more of an optical illusion to dispel the inevitable picture of bankers as hogs feeding at the trough than helpful in a macro-economic sense. The top 3 of those executives, including CEO Blankenfield, each earned about $65 million last year because Goldman’s 2007 financial year apparently earned the firm its largest profits ever. It’s easy to be a Monday-morning quarterback, but, its hard not to argue that those profits were illusory and ill-gotten gains that leveraged the wider economy into a precipitous fall. Not only should these people forgo their 2008 bonuses, and many more firms should follow Goldman’s lead, because a better illusion, um, solution would be for all those executives (including traders and money managers) at Wall Street firms (not geographically defined) that earned in excess of $1 million in 2007 to give back 60% (or more) of those 2007 earnings to a fund that can dovetail with the government’s efforts, and can be used to aid the funding of TARP (the bailout plan) or certain additional issues now swirling around or expected to descend upon us in the near future, i.e. the automobile industry in Detroit, or the commercial real estate loan workouts that are on our agenda for 2009. It would be difficult to legislate something like this, but use this suggestion as a starting point, or a building block toward conceptualizing a way to make this idea more palatable, and perhaps even beneficial. Perhaps the IRS could issue a Revenue Procedure whereby a fund created in this manner could entitle those returning their 2007 bonuses to the fund to get tax credits against income going forward in predetermined amounts (dollar for dollar, or some alternative formulation). Clearly there would have to be an analysis of whether the money the government would forgo in tax revenue would be offset by the money that the fund could receive, and the economic benefit it could generate.

Essentially, this plan calls for private people to take cash assets held now in banks, assets that the banks are not lending against, and they would be transferring those assets to a giant fund that would re-invest the money into the economy and give those private people a tax credit, as well as a philanthropic or community purpose. Such an endeavor would present an enormous logistical challenge, but that endeavor would require creative consulting, money management and investment advice, as well as other trickle-down benefits for professional service providers, investors, and even, banks. Merely criticising the government, or blaspheming the Wall Street hogs, enjoyable as it is, is not truly productive. President-elect Obama said in his acceptance speech on November 4, 2008, that we should think about cooperation and collaboration, and this could be a good start. As a more than tangential benefit, efforts like this may stimulate areas of the market unrelated to the genesis of these economic issues, such as the rental, or the distressed asset areas that are suffering from capital failures due to the trickle-down effects of the economic storm we are now weathering. Economically, we are facing a shutdown in the availability of capital, as investors and banks are holding a disproportional amount of assets in cash, making little, if any, capital available for loans, lines, and credit facilities.

The only way to really change the game, is to actually get in the game!

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One response to “The time for smoke and mirrors has passed

  1. I have to disagree with your posting. If fraud or another crime has been committed in obtaining a bonus, then government intervention and prosecution should follow. If the bonus contract is void or voidable, the parties have the civil court system to resolve. However, presuming with a sweeping stroke that any 2007 bonus paid and using an arbitrary amount is not only wrong, but a dangerous precedent.

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