So we now have an official demonstration of what we all knew to be true: banksters giving their right to loot their companies top priority, and the greater fool public be damned, with Goldman the most egregious sinner. That firm’s self serving protestations to the contrary, it was a ward of the state, and would not exist now were it not for the munificence of taxpayers. It continues to profit from a raft of subsidies, ranging from FDIC guaranteed debt, a whole alphabet soup of special Fed facilities, and super low interest rates. As Linda Beale points out:
A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks. That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk. That advantage may amount to as much as 48% of the TBTF banks’ profits this year (or as ‘little’ as 9%, on very conservative assumptions). The government, by the way, gets nothing for this implicit guarantee–unlike a commercial guarantor, it is not being paid a regular premium for the service.
So a significant portion of Goldman and other big bank profits are effectively windfall profits due to government largesse. And they are paying themselves bonuses on it. That was NOT what all these subsidies were supposed to be about. They are a way to recapitalize the banks in a way that is
covert not politically contentious. But the finance cohort is abusing that privilege and reverting to its pre-crisis practice of effectively stripping their firms of needed equity to pay themselves, a practice economists George Akerlof and Paul Romer depicted as looting in a classic 1994 paper. Hence the logic behind the 50% bonus supertax: it is explicitly to encourage the big banks to retain more equity and pay less out.
Goldman, per the Independent (hat tip readers Edward and Scott), is out, as usual, to have its cake and eat it too, to enjoy the benefits of all the rescue subsidies but not bear the related tool:
Goldman Sachs has threatened the UK Treasury with plans to move up to 20 per cent of its London-based staff to Spain in a standoff over tax and bonuses.
It’s believed that the Wall Street investment bank, which paid more than £2bn to the Exchequer’s ailing coffers in corporation tax alone last year, has fired a warning shot across the Government’s bows in response to the tax measures unveiled in the pre-Budget report earlier this month.
Goldman Sachs International was the biggest contributor from the financial services sector to Britain’s purse last year. Previous reports suggest that in some years the firm’s staff have contributed more than £1bn in personal income tax to public coffers.
A City source said: “Goldman could move a relatively large number of people if it wants to. Given how much Goldman and its staff contribute to the tax take, the firm has plenty of leverage. This is a bargaining position more than anything.”
The bank, which employs around 5,000 staff in London, is believed to have strong links to the Spanish government, although it has a relatively modest number of employees in the country. Although staff moving to Spain would not receive any special tax incentives, the bank could avoid paying the bonus tax, details of which, so far, remain sketchy. A Goldman Sachs spokesman said it is looking at all options as it negotiates with the tax authorities over the bonus tax.
Yves here. Negotiates? Why should Goldman enjoy any such rights in this matter? It operates in business that require licenses and benefits greatly from the massive and costly safety net that has been deployed under the financial system.
The Bank of England has indicated that it would regard the departure of banksters as a cost it is willing to bear in the interest of having a financial system that operated more prudently than the one we have now. But having Goldman shift staff to Spain and yet be part of the financial grid and therefore still able to suck off the Fed and the Bank of England when it gets itself in trouble is abuse, pure and simple.
The Treasury may blink at the prospective loss of revenues, but if the government in the UK is reasonably unified on this matter and had any guts, it could bring Goldman to heel.
I was in Japan in 1985 when the head of Merrill in Japan, which had one of the longest-standing foreign securities operations in the island nation, told me of a recent conversation with a senior official at the Ministry of Finance. Japan had pretty much no written securities laws (Japan is not a contractual society); everything was subject to bureaucratic “guidance”. Merrill wanted to do something that it regarded as permissible under the rather scanty regulations in existence; the MOF official made it clear he took a dim view of it.
The Merrill chief said, “What can you do if we go ahead anyway?” The MOF official said, “How would you like to be audited every day?”
A MOF audit was a particularly exquisite form of torture. At the start of the business day, a team would arrive, all wearing white gloves. The leader would blow a whistle, and announce, “Let the audit commence!” The auditors would run and slap seals on all the file cabinets (so they could not be opened) and impound the computers.
Now you can’t do that to a TBTF institution these days, but there are plenty of other ways the UK could punish Goldman. This is a starter list, and readers are encouraged to come up with their own ideas:
1. A departure tax on all UK staff relocated to a time zone within two hours of GMT. It should be VERY painful, the only question being whether to levy it on Goldman or the employees.
2. Harassment. This is crude but would be very effective. Given what a total surveillance society the UK has become, the officialdom probably has a pretty good handle on who in the UK works for Goldman, and if it put some effort behind it, could identify the non-UK based Goldman employees who visit England regularly, and in particular, the staffers who would be relocated to Spain. I am sure it could be made very difficult and time consuming for them to enter the UK (being whisked to a holding tank for 4-8 hours on a regular basis would put quite a dent in a busy investment banker’s schedule).
England, unlike the US, was an unashamed imperialist in its heyday (see Niall Ferguson for details) and therefore its officialdom has fewer compunctions about using throwing its weight around in an open fashion.
Upon reflection, this move by Goldman could represent a fantastic opportunity, if the powers that be in England have the will and presence of mind to take advantage of it. Goldman could be made an example of what happens when you bite the hand that feeds you.