Earlier this week, Hank Paulson forced the nine top banks to take $125 billion in taxpayer money in exchange for perpetual preferred stock that pays a 5% yield, which rises to 9% after five years plus warrants to buy 15% of the banks' stock. Does this mean that the banks will now start lending out that money to get the economy off its back? Absolutely not. It could go to paying banker's bonuses instead.
And why not? After all, the write-offs of sour investments have more than wiped out all the "profits" these banks reported over the last three years -- during those boom years they reported $305 billion in profits and have recently taken $323 billion in write-offs. And with more losses looming, the top nine banks need to raise $275 billion more.
How much of these reported bank profits were faked to boost banker's bonuses? Why are the bankers who booked these lousy deals keeping the multimillion bonuses they got during those years? And why did Paulson decide to inject taxpayer money into these banks if they're not going to use it to boost the economy?
Paulson's capital injections are not solving the basic problem -- which is the extraordinarily high level of fear in the short-term lending market. For example, the TED Spread -- the difference between 3-month Libor and the 3-month Treasury bill rate -- is at 4.08%. In August 2007 it was at 0.08%. Banks are still very worried that if they lend the money out, they won't get it back. To solve the problem, the Treasury needs to cull -- merge or close the weak banks -- before injecting capital into the winners.
Just as American International Group (NYSE: AIG) used our $122.8 billion for upscale retreats, the nine banks that got our money will probably use it to pay bonuses to the bankers who created this mess. There's nothing that forces them to lend it out and nothing stopping them from using it to enrich the top bankers.
With three million homeowners in foreclosure, there may be more deserving recipients of our hard-earned tax dollars.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG securities.
Reader Comments (Page 2 of 2)
10-18-2008 @ 6:21PM
joe said...
To grease there GREEDY PALMS OF COURSE!Haven't they been doing this all along why should they change NOTHING IS DONE TO THEM their all related to BOY GEORGE!
10-18-2008 @ 8:09PM
Profiting right now said...
I am not having a hard time in this economy. I know where to put my money and when. But, then again I do not work away 8 hours of my day doing task work for an employer. The problem down at the root is corruption. Corrupt politicians voting to use tax payer dollars to rescue companies like Berkshire Hathaway when there is a hurricane, and now the banks. The people who run these companies pays little to no dividend to shareholders and pays themselves millions and millions of dollars to fail at their jobs. The directors of Frontline Shipping, the world's largest oil shipper only gets $300,000 per year and $3 a share in dividends. The Directors own stock and they get paid by proformance of the dividend.. So, they make money at Frontline.. But, American companies pay guaranteed money to a director who may or may not make the company money.. So, corruption by politicians to force auto insurance on us all and use tax money to pay off home insurance claims so buffet doesn't have to pay for it himself and sell his coke shares... and corruption at the highest level of American businesses.. Marijuana could be taxed and no longer paid to fight against and create 20 billion a year for the American economy.. but then the cops no longer get kick backs from local drug dealers... This is the world we live in
10-18-2008 @ 8:24PM
jose said...
the FDIC should stablished limits in the amount of bonus paid by banks. Untill and outsider set limits, banks will keep taking huge risks . The current system is if there is a profit it goes to paid bonuses , if there is a loss is shareholders problem.
10-18-2008 @ 8:30PM
EMIL J KOVACH JR said...
The Financial Industry, And the Banks In Particular came Close To A MORTAL WOUND With The Sub Prime Mortgage, So Called "TOXIC PAPER" Crisis, Unfortunately A Bullet, On It's Way May Certainly Hit The Mark, And Do As Much, If Not More, Damage. The Financial Market Place HAS NOT YET Gone Public, With It's Overwhelming Credit Card Debt, Which Is Just As Un-Collectible, As Any Negative Balance, On A piece Of Real Estate, Many Americans Are Holding MORE Credit Card Debt, Then They Can Ever Possibly Re- Pay, Here You Can't "Walk Out The Door" And Leave It Behind, I Think It's About Time We Started Asking The Right Questions, Of These "Credit Card Companies", And Banks,
And That Question Is--How Much Of that Debt,Carried On Credit Cards Is REALLY Collectible?
EMIL J KOVACH JR
10-19-2008 @ 12:15AM
nick said...
Use it before Obama gets in office, they would have to share it with ACORN and the hood.
10-19-2008 @ 12:51AM
Jack W said...
Make sure you vote out every incumbent!!! They're ALL crooks!
10-19-2008 @ 1:24PM
jo said...
HOW ABOUT A NICE MANICURE FOR THE CEO?
10-19-2008 @ 1:35PM
sword said...
I will be the first to admit that I am not a financial wizard. But the question I have to ask is, where did the government get the $825 billion for the bail outs? I know that, ultimately, it was from the tax payers, but where was this money? What was it supposed to be used for, and why was it not already being used for all the things this nation needs? How is that much money available for a bail out, when our nation has such a huge deficit?
10-19-2008 @ 3:47PM
anthony lamanda said...
This country makes me sick. They have 700 billion going to the banks, and all the banks are going to start doing is laying off, and getting rid of workers to increase there profits at the top. How does this help anyone? These assholes should be held accountable for firing there employess and i'm not talking about the insulting $400 dollars you would get from unemployment. There should be serious fines for large corporations who get help from the government and start laying off hard working Americans. Or at least give them an automatic 1 year of there salary if they are laid off, because it's pretty obvious they are not going to get another job in today awful job market. Now thats a real bailout!
10-20-2008 @ 5:58AM
AG said...
www.savelongisland.org/news2.html
10-21-2008 @ 4:40AM
tune said...
1 bail out money should be directly to the people with cashchecks in
direct ratio to tax they paid in the last five years or zero tax zero
welfare for five years - zero tax will take care of zero welfare in
spending & jobs. zero middle-man-governments/corporations -
spending/waste/redistribution. no need to have so many gov/corp army
maning the tax/redistribute inefficent unnecessarily created posts
that gets in the way of a decent life. mr-harvard-mba-bush can put
that in place today. see the economy boom like magic. global golden
years.
2 we are not electing a debate/plan/promise/speech - that's all talks
& by lawyers too. we are electing a
president/person/character/experience/record - mccain 08.
3 only black man can freepass to harvard/wealth/whitehouse.
freepass/affirmativeaction/blackracecard makes this housing/financial
crisis - jail them - treason.
12-22-2008 @ 9:49PM
Terry said...
How in the hell are ANY bonuses justified. I know the company I work for that the number one requirement for a bonus is PROFIT. If the Company doesn't make a profit - we don't get a bonus - period. What the hell makes these individuals any different? They didn't make a profit - They had to be bailed out! That goes for ANY company, it doesn't matter if it's a car manufacturer, a bank, an investment firm whom ever - If you received a bail out it SHOULD BE MANDATORY THAT NO ONE GETS A BONUS PERIOD!!!!!!!!!! and should probably have ALL executives take a PAY CUT!!!!! What don't you understand? Who feels the same as I do? SOUND OFF!!!! This is CRAP!!!!!!!