Thursday, December 17, 2009

Money For Nothing

"That ain't workin', that's the way do it. Money for nothin' and your chicks are free." 
- Dire Straits 

While I'm not sure what the "chicks are free" part of this lyrics from a song first released on the 1985 Dire Straits "Brothers in Arms" album means in relation to the banking bailouts, the "money for nothin" part certainly strikes a chord (pun intended) these days. You can't help but think about it when considering the furor made over the year end bonus packages of bank executives by the Pay Czar and President. 

The news has been filled lately with stories about how banks are returning to profitability and paying back TARP money that was loaned to them by the government, fulfilling the prophecy by political leaders that the original investment is thereby justified. I think that I've made myself clear about not liking the government stepping into the employee compensation process, but one has to wonder how such compensation could have been earned in such difficult times. How did these corporations justify an expenditure for lavish salary packages at a time when the economy has been mostly stagnant? Obviously, the payment of these bonuses must be predicated on the successful management of their respective organizations.

It appears that under the guidance of these so-called over compensated managers that even in these difficult financial times banks, unlike many other businesses, were able to make profits. It seems that these talented financial wizards were able to play the system now managed rather closely by the Federal Reserve and the Federal Government, like a cheap fiddle. The Federal Reserve has been lending money to financial institutions recently at an effectively 0% lending rate in order to stimulate the economy and prime the system with capital. The banks, instead of lending this money out to people and small businesses as intended, used this all but "free money" to buy out the now discounted assets of other financial organizations. They also used it to buy the debt incurred by the very government that they were being bailed out by and borrowing from, at interest rate returns of up to 4%. 

So what we are basically seeing here is that banks borrowed money from the government to buy loans that the government was forced to make in some part to finance the money that they were both giving and loaning to the banks. The end result of this nonsensical "Capital Carousel" was that these supposedly incompetent bank executives were able to cash in and make a profit on the even more incompetent leadership and policies of the government claiming the wisdom and ability to know how best they should operate. 

This may appear to be nothing more than trickery and deserving of little praise, but you have to give these managers credit (sorry, poor choice of words) for being able to manipulate the system handed to them to the advantage of their employers. 

You may not like these people, but you have to admit that they are probably smarter than (or in cahoots with ) the government employees who were supposed to monitor and control them. You don't have to admire these people, but they may therefore be worthy of some sort of credit and compensation. It may not be rock and roll, but I believe that even Dire Straits founding member Mark Knopfler would agree that if ever anything did, this may qualify as "Money for nothin'".

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