Opinion: Puts and Calls: The Bailout

Tom Karol Occasional Political Commentator
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GM proudly reported on Wednesday that General Motors Co. repaid $5.8 billion to the U.S. Treasury and Export Development Canada. GM Chief Executive Ed Whitacre wrote in the Wall Street Journal that the company is paying back the loans “in full, with interest, years ahead of schedule.” Whitacre said no one — neither taxpayers nor the company itself — was happy that GM needed government loans. “We believe we can best thank the citizens of the U.S. and Canada by making sure that their investments are hard at work every day, building high-quality, fuel-efficient vehicles our customers can count on,” Whitacre wrote.

GMAC, the bank holding company that was previously owned by GM and now is 56 percent owned by the U.S. government, has a different strategy. GMAC has determined that the best way to thank the taxpayers and its owners is to pay its chief executive about $1.2 million for the 45 days he was employed last year. GMAC also paid out $7.7 million to its chief risk officer, $5.7 million to the chief executive of its mortgage unit, $4.9 million to the finance chief and $4 million to the chief marketing officer. Leveraging such valuable leadership, GMAC reported a record $3.9 billion loss in the fourth quarter, a $10.3 billion loss for the year and losses in nine of the last 10 quarters. The Congressional Oversight Panel’s March 2010 oversight report stated that despite a $17.2 billion TARP investment, there is still no clear business plan for GMAC.

In January 2010, President Obama proposed a new fee on “major financial firms” to recoup — on behalf of American taxpayers — the $700 billion paid out in TARP, saying, “We want the taxpayers’ money back, and we’re going to collect every dime.” For those of you keeping score at home, ProPublica reported that about $185 billion has been returned, and more than $26 billion has been earned on the money invested or loaned. Only a couple hundred billion dollars to go!

Financial Reform

Those billions in new fees may be closer than you think. Vitalized by the passage of health-care legislation that most Americans didn’t want, the implementation of vast financial and consumer reform — which almost 60 percent of Americans do want — is a on a fast track to approval. The 1,200-page proposal reportedly passed the Senate Banking Committee after a 21-minute markup (which works out to about a second a page) in which Republicans pulled hundreds of amendments. There is unlikely to be any populist opposition to this regulatory reform in 2010. The bill includes a number of provisions restricting executive compensation which is a political slam dunk. The Wilson Research Strategies found no evidence that financial regulatory reform will be a key issue in the 2010 elections, as health care and the bailout are expected to be.

There is even more political pressure to do something about the TARP recipients that are now thriving, and the recent SEC suit against Goldman Sachs continues to be the lead story in both the financial and political press. There is an old saying that there is nothing wrong with a witch hunt, as long as you find a witch. The recent SEC case against Goldman Sachs is turning into a first-class witch for advocates of financial reform. Some people may question the legal niceties of the suit or the nuances of the conduct, but no one supports questionable ethics by a company reporting first-quarter profit doubling to $3.5 billion. Outside Goldman, there are few proponents of the form or substance of the unique CDO fund in question or the conduct of the sales and operational personnel. Goldman may well settle or even win the SEC suit, but the story has lost Goldman and opponents of financial reform key hearts and minds.

“Goldman,” “profits,” “fraud,” and “derivatives” are the only words anyone needs to mention for congressional leaders to unfurl more banners of financial reform. Consider Connecticut Democrat and Senate Banking Committee Chairman Chris Dodd’s statement: “Let’s be clear, we don’t need to know the outcome of this case to know that the opaque nature of unregulated asset backed securities fueled the financial crisis. Wall Street financial firms continue to game the system. We must pass Wall Street reform to bring practices like these into the light of day and protect our economy from another devastating blow.”

Goldman is not rolling over, however. The AP reported that Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein will testify before the Senate’s Permanent Subcommittee on Investigations on Tuesday to discuss Goldman’s role in the sub-prime mortgage crisis, but Blankfein is expected to be questioned on the lawsuit. Goldman has denied the SEC charge, and Blankfein told Goldman employees over the weekend, the company “has never condoned and would never condone inappropriate activity by any of our people.”

Follow Up

As a proud alumnus of the SEC Division of Enforcement in the 1980s, I hesitate to follow my own column of yesterday with yet another SEC story related to the Goldman suit, but there is a growing sentiment that the SEC suit filed against Goldman on April 16 was, at best, conveniently timed and possibly coordinated — perhaps not for possible political purposes, as reported yesterday — but to draw attention from a scathing internal report on SEC conduct that the Times of London described as “a damning picture of failure and inertia at the SEC.” The Goldman suit, filed the same Friday that the report was made published, has received widespread publicity, while the report has been cited by only far fewer news sources.

The Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme,” dated March 31, was made public on April 16, the same day the Goldman suit was filed by the SEC. CNBC has reported that the SEC chairman had the report since April 1. The 151-page report details that the SEC knew of the likelihood, if not certainty, of an ongoing $8 billion “Ponzi” fraud in the Stanford case and took more than eight years to bring an action. Among the numerous problems reported are serious allegations of misconduct by SEC personnel, including enforcement officials who stopped the investigations and later sought permission from the SEC to work for Stanford. According to the report, SEC Inspector General David Kotz was told by SEC enforcement staff that senior management did not favor the pursuit of Ponzi schemes and other frauds that were difficult to investigate and time-consuming to prosecute, but that management favored “quick hits” and “Wall Street” cases. The report “reveals an entirely new level of the agency’s many failures to protect investors,” said the Stanford Victims Coalition, a group that represents former Stanford Investors.

Some additional observations:

  • The report found that the SEC did not pursue the Stanford case because it “was difficult, novel and not the type favored by the commission” (p.25). The Goldman suit is widely acknowledged by securities professionals to be difficult, novel and not the type favored by the Commission.
  • The SEC’s investor-focused Web site to help investors avoid fraud, includes a special “Ponzi fraud” section where the SEC actually cites its efforts in the Stanford case as protecting investors. That same site also has links to report fraud and get more information, but neither work.