Thursday, December 18, 2008

Where is the bailout money going?

Two very interesting articles related to the bailout. Before we go into this remember one thing - financial mismanagement on Wall Street is OK, financial mismanagement everywhere else is a sign of failure. Wall Street speculators vital to the economy, mom and pop housing speculators
are the foils that did us all in
. There are two articles today that pretty much spell these out. First we will look at an ABC News article titled Morgan Stanley Is One Bank That Cites a Loan From TARP Money. This article tries to take a peak at where the bailout money is really going. Lets take a look -

Goldman Sachs reported Tuesday that it paid $10.93 billion in compensation for the year, which includes salaries and bonuses, payroll taxes and benefits. That is down 46 percent from a year ago. Goldman Sachs received $10 billion from the Treasury.

"Bonuses across Goldman Sachs will be down significantly this year," a bank representative told ABC News. The spokesman refused to disclose the size of the bonus pool or how much of the compensation fund of $10.93 billion was planned for bonuses.

"We do not break down the components of compensation; however, most of that number was not bonuses," he said. Goldman Sachs added, "TARP money is not being paid to employee compensation. It's been and will continue to be used to facilitate client activity in the capital markets."

Fred Cannon, chief equity strategist with Keefe Bruyette and & Woods, an investment bank that specializes exclusively in financial services, said, "It is difficult to say what the TARP funds are directly used for. In terms of compensation, while TARP funds may not directly pay for compensation, the funds do provide additional overall cash to the companies."

Last week Congress was angered to learn that giant insurance company American Insurance Group, which received $150 billion in TARP cash to stay afloat, was paying more than $100 million in "retention bonuses" to 168 employees.

One of our favorite AIG responses is that other divisions are making money, we can not punish them all. Too bad that does not seem applicable to other industries. In an opinion piece from The Los Angeles Times titled UAW busting, southern style illustrates some of the big differences and preferential treatment the bailout is taking. Lets take a look -

They claimed that they couldn't support the bill without specifics about how wages would be "restructured." They didn't, however, require such specificity when it came to bailing out the financial sector. Their grandstanding, and the government's generally lackluster response to the auto crisis, highlight many of the problems that have caused our current economic mess: the lack of concern about manufacturing, the privileged way our government treats the financial sector, and political support given to companies that attempt to slash worker's wages.

When one compares how the auto industry and the financial sector are being treated by Congress, the double standard is staggering. In the financial sector, employee compensation makes up a huge percentage of costs. According to the New York state comptroller, it accounted for more than 60% of 2007 revenues for the seven largest financial firms in New York.

At Goldman Sachs, for example, employee compensation made up 71% of total operating expenses in 2007. In the auto industry, by contrast, autoworker compensation makes up less than 10% of the cost of manufacturing a car. Hundreds of billions were given to the financial-services industry with barely a question about compensation; the auto bailout, however, was sunk on this issue alone.

It is interesting trying to distinguish why some industries and companies are more vital than others. Why some pay-rates can be congressional fodder for weeks while other compensation packages do not even warrant a glance. It is interesting.

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