The biggest banks and brokers are on pace to award $145 Billion in bonuses for 2009, Up 18% from the year before, according to a WSJ study.
This bonus bonanza is based on two simple factors: Zero % money, courtesy of the Fed, and a massive accounting fraud — one that happens to be legal.
Ask yourself how hard it is for any finance firm to make money — risk free! — when they can borrow from the Federal Reserve at a rate of zero, and then turnaround and “lend” that same cash to the Treasury (buying bonds) at 3% ?
I suspect this was essentially the Bernanke/Paulson plan (now Bernanke/Geithner) all along — to s-l-o-w-l-y recapitalize the banks via the Japanese model. They selected the easier but less effective Japan option versus than the Swedish model, which forces insolvent institutions to reorganize, write down bad loans, recapitalize the banking sector (which allows banks to start lending again), but punished bondholders and wipes out shareholders.
That is how capitalism is supposed to work. Instead, the socialist bankers saved the banks (and their own asses), rather than the banking system.
What may thwart the massive Fed giveaway is the self-interested institutions, who are not lending, not writing down debt, and capturing the lion share of this wealth via bonuses. Perhaps they realize the true state of their balance sheets, and are making hay while the sun is shining.
On top of this, the recapitalization plan only works if these insolvent institutions get to hide their massive losses from their owners — namely, the shareholders (and in some instances, the taxpayers).
Thanks to the Congressionally mandated FASB rule changes back in March of 2009, Mark-to-Market was replaced with Mark-to-Make-Believe. We do not if these banks are actually profitable (GS), whether they are barely solvent (Chase/JPM), somewhat insolvent (BofA) or totally bankrupt (Citi). Given the lack of transparent accounting, we simply do not, and cannot, know.
Hence, once again we see record bonuses based on huge profits that may not be real. And we won’t find out the truth until the FASB forces accountants to accurately report losses.
Until then, we must accept an unfortunate reality: We have built our recovery upon a financial system, loosely based on fantasy!
Banks Set for Record Pay
WSJ, JANUARY 14, 2010