When this first domino, the housing market, was toppled, a chain reaction resulted. As early as 2003, stresses in the housing market were apparent and it was clearly having an impact on the GSEs. When looming problems with Fannie and Freddie were brought to Congress’ attention, it was Barney Frank who infamously exclaimed, “Let’s roll the dice with Fannie and Freddie”. The rest of Congress concurred and that decision may lead to over $400 billion in losses before the dust settles.
GIVEN THIS SET OF facts, how can the administration credibly say that Wall Street was the sole cause of the problem? The fact is that the government invested in the banking system-it was not “bailed out.” The automakers were bailed out, and Fannie and Freddie were bailed out; and we will likely never see a return of our investment in those zombies. TARP funds were extended to save the economy, not just to save the recipients.
Why single out the banks? Because it is politically popular? The banks have repaid most of their TARP money, with about $20 billion of interest to boot. The administration has unfairly vilified the big banks. Who among us would like to be treated the way the government has treated the banks? They were given TARP funds; some reluctantly agreed only after the support was forced upon them. Then, after the fact, compensation was restricted at banks which received the money, and, recently, it has become apparent that each bank has jointly and severally guaranteed repayment of all TARP funds. Who would have knowingly signed up for that?
And Wall Street is being chastised for making profits. This is amusing as the main reason the Street is making so much money is because of government intervention. And I am not talking about TARP. Two major competitors were allowed to fail before it was decided that some institutions were too big to fail (too big to fail produces many shortcomings and should not be part of a capitalist society, but that is another column for another day). Less competition is a good thing for business. Imagine if two of the large national brokerage companies disappeared. How happy would the survivors be?
Additionally, the Fed’s monetary policy is allowing the banking industry to recapitalize as they borrow at rates close to zero and can either make loans to achieve massive spreads or simply buy risk-free instruments and make spreads of hundreds of basis points. The administration clearly agrees with this policy as a re-nomination of Fed Chairman Bernanke would not have occurred otherwise. The government is allowing these profits to be made. Funny that they begrudge them.
The constant bashing of Wall Street has been particularly punishing to New York. I am not suggesting that the Street has not done a poor job of explaining that their bonuses are really not bonuses-they could have done a better job of explaining the compensation structure. The Street has historically paid about 50 percent of revenue in the form of compensation. This year, the percentages will be well below the historic norms. Moreover, much of the bonuses will be paid in restricted stock, which is a second body blow to our local economy and is simply a response to political pressure. The city and state do not collect income taxes on pay that is not distributed and taxes are not paid immediately on restricted stock. This forgone tax revenue, and the resulting decrease in disposable incomes, is devastating for New York.
The result for the local economy is that tax revenue will be off by billions and billions of dollars, adding to our fiscal difficulties.
Equally important, bonuses paid in restricted stock cannot be spent to buy products. Most of these products would have been purchased locally. Also, what about all of the jobs that will be lost due to cuts that would need to be made to balance municipal budgets? Even more of today’s precious jobs will be sacrificed as tax revenues fall even lower than expected. Those additional jobs lost produce an additional drag on our economy.
So, yes, the way Wall Street bonuses have been paid is anti-stimulative to our economy. So if you love New York, consider the consequences of agreeing with populist anger against our economic engine.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,050 properties in his career.