Goldman Sachs and Morgan Stanley Survive! On The Back of Taxpayer Deposits?

September 21, 2008

Now let me state from the outset – I don’t claim to be a financial wizard, but I find it curious that in order for the last of our country’s investment banks to survive they must become – well – regular banks.

If somehow we haven’t gotten it thus far – AMERICA IS IN FINANCIAL CRISIS!  The scope of the crisis is truly unknown to the average citizen and while I am no doomsayer – it is not over.

The borderline unethical financial practices of these institutions are the root cause of their demise.  When you loan money to people who can’t practically pay it back in the interest of profits – you are, in my opinion, acting without sound business ethics.  But here’s the deal – if it were you or I, we would be conviced of some fraud or conspiracy.  That would mean jail time.  But when your crime (yes I said crime) is so large that it shakes the foundation of our financial markets – you get bailed out and make no mistake the Fed’s action today (on a Sunday) is a bail out.

Think about it – over the course of the past three weeks our government in one form or another has spent up to nearly 1 TRILLION of our taxpayer dollars to shore up our financial institutions so that we would not experience another GREAT DEPRESSION.  Wise or not remains to be seen.  All I report on here are the facts.

Goldman Sachs and Morgan Stanley are the remaining two investment backs surviving.  Lehman Brothers filed for bankruptcy and will be sold to Barclays and Merrill Lynch was purchased by Bank of America.  Fascinating that little NCNB (former North Carolina National Bank) became Bank of America and now is the largest bank in the US with the Merrill acquisition.  Who said the South would not rise again.  But I digress.

According to a report by CNN:

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

It is clear that this change of status is designed to use “deposit” as a means of leverage giving them a stable source of funding.  The question is – who would want to deposit funds into either institution.

Answer:  In the surprise announcement late Sunday, the central bank said that to provide increase funding support to Goldman (GS, Fortune 500) and Morgan (MS, Fortune 500) during the transition period, they would be allowed to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.

So let me get this straight in my mind – the federal reserve is going to make loans to both Goldman and Morgan giving them cash to offset their poor loan portfolio making them appear to be safe.  To me that is like paint a rotten fence with white paint and calling it new.  This is nothing more than a disguised bail out.

According to MSNBC: After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.

But as commercial banks, Goldman Sachs and Morgan Stanley will have permanent access to emergency loans from the Fed, the same privilege that other commercial banks enjoy.

So here are some questions to ponder – and feel free to respond!

Question 1: Should the Fed have taken the actions to allow Goldman and Morgan to survive by allowing “normal” banking deposits?

Question 2: Do you feel that the actions by the “investment banks” have been ethical or unethical?  Why?

Question 3: With the massive actions taken over the course of the past three or so weeks, do you feel more or less confident in our nations economy?

As a business ethics speaker, I can say that there has never been a time in my lifetime that demands more thought, focus and ethical consideration of actions taken than now.  Business is good and business done with right ethical intention can grow and prosper.  But, as I say in practically every presentation I make – Every choice has a consequence.  Now we are reaping the consequences of choices made – not so long ago.

For all our sakes let’s hope that we can weather the economic storm ahead.

Your comments are welcome!


Government Bail Out! $200 billion – now $500 Billion – Oops now $700 Billion – Is it too little too late?

September 20, 2008

The first paragraph from Yahoo news reads:

A half-trillion dollar bailout that the Bush administration and Congress are negotiating this weekend for faltering financial institutions could unload their bad debt on the government, and in turn the taxpayer.

So let me get this right … financial institutions made bad loans that are either delinquent or in default to people who should not have received them in the first place and now in order to keep the CREDIT markets afloat the government is going to do a massive bail out so that these same institutions can continue to loan.

Do not get me wrong I agree with the statement made by Treasury Secretary Paulson…”I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.  The financial security of all Americans … depends on our ability to restore our financial institutions to a sound footing.”

His statement is accurate, but the whole concept is that the economy is based on consumer spending and borrowing.  In fact, whether we wish to admit it or not, the entire US system is based on borrowing.  The government is the biggest borrower of all.  And unless somehow history does not repeat itself – eventually there is a day of reckoning when you are expected to pay back what you owe.  What happens when the government and/or the taxpayers can’t repay what the government has borrowed?

But enough of the big picture…what about now and the impact?  First, most of us have no idea how close we have come to a major depression.  In fact, while I am no doomsayer, rarely is reality what is stated by the government.  More times than not the outcome is far more costly than what is predicted.  So we very well may not have seen the end of this financial mess.

According to CNN: The plan: The federal government would buy up “hundreds of billions of dollars” of illiquid mortgage assets at a deep discount from banks. The Treasury Department is likely to run the program directly, unlike the savings and loan crisis of the 1990s that led to the creation of the Resolution Trust Company.

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson.

Now what is clear about this plan is that financial institutions get to clean up their balance sheets so that they can continue to stay in business and LOAN. 

Question: Wonder what consequences, if any, the bank or financial institutions will incur?  Any penalties for making stupid loans to unqualified individuals in the first place?

Question: As inefficient as the government is how will they be any better at collecting on what is due than the financial institutions are?  Bet, they won’t be…rather either one or two things will happen: (1) they will do just what the banks would have done – FORECLOSE and sell the property off at deep discounts; or (2) somehow FORGIVE the debt and allow the property owners to own at less than what they borrowed in the first place.  Either way – people who have played by the rules PAY!

According to a CNN article: The plan will help banks shore up their balance sheets by removing hard-to-value assets. This would address the seemingly endless rounds of writedowns and capital raising that have been rocking the financial sector.

Without these bad loans weighing on their books, banks may be more willing to lend. Or at least that’s the goal.

The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.

Danger! Without the bad business on the books Banks would find it easier to raise capital and MAKE MORE LOANS.  The question still remains – who or what will make sure that banks don’t repeat (in the interest of big profit) what they did (not that long ago) to get into this mess?

Over the course of two days the price tag has gone from $200 billion to $500 billion and now I see on MSNBC that it is $700 billion.  Now, as Forrest Gump would say…”I’m not a smart man,” but I know that this government bail out will cost each American a lot of money.

WHAT ARE YOUR THOUGHTS?