1) How did banks make so much Money?
Let's be clear in pointing out that "bank's" plural did not necessarily make "so" much money, but instead it was a small minority of banks - especially Goldman (which garner's all of the presses attention) that are the key focus. While many banks (BofA, Citi, etc.) completely faltered in their ability to evaluate opportunities and the corresponding level of risk, the unpopular yet accurate assessment is that (just as capitalistic - dog eat dog models would predict - no matter how painful) those that "got it right" were rewarded. They were rewarded by increased market share in what it is they are selling - their ideas on the markets, their strategy, economic outlook, etc. You are right about certain banks being absorbed, even it were as painful as watching two blood relatives wed, for concerns of their offspring, and now having the weak lead the weakes - with the exception of JPM and Baer Sterns.
This is not a gouging of unnessary cost to the consumer as you are having readers worry (the way this currently reads) about a monopolistic environment. It is a flooding of dollars to those "banks" that have been the most right or the corresponding least wrong on a multitude of fronts. Regarding TARP, I have listed a link below to a portion of the interview with Neel Kashkari - the man charged with oversight of TARP. Please note that all of us not just think, but know that there are and were shortcomings with the TARP program. It is a matter of perspective, and the lack of understanding about the goal of the program by members of congress, media, and the relative "expert brother-in-law/neighbor/postman/pastor - financial advisers even that lack the appropriate knowledge on how to properly digest the intentions and effects this program had. This was not a program designed to "increase lending" in the since of providing more credit to more people - Remember that is how we got into this entire mess, which was propped up by Greenspan's low interest rates.
This was a program but in place to ensure that we would HAVE a financial system when the dust settled. The intent was to fill a gap in BANKS balance sheets, that would allow them to lend to "worthy" recipients that displayed the ability to actual pay them back. This adjustment has made it more difficult for people, businesses, etc., to obtain credit - Which I can honestly say I have 1st hand experience with trying to help a family member get a student loan - unsuccessfully I might add. Even though it is tough, it is an adjustment that we all should be willing to shoulder, so that there is no a repeat of our new economic reality.
Our society has transformend from the blue-collar, hardworking families of old, to the more "educated", handout, all about me, excess of pop-culture, and surpassing the Jones' mentalities - fueled by cheap credit, foreign governments, and leaders inability to confront problems we face (healthcare, social security, etc.).
Getting off of my soapbox, some of these firms made strategic (I will get to the problems here in point 2), draconian cuts to certain areas of there firms, were given and in some cases forced (JPM, Goldman -
Goldman sat on over $100 Billion in CASH while the government forced it to take TARP money - a paltry $10 billion if memory serves me correct - out of fear of showing weakness in the other banks) to take this money, in hopes of bolstering balance sheets to make sure certain firms were around in order to lend to consumer's, for companies to make payroll, continue operations, complete just-in-time delivery systems that are based on credit, etc. It is a closed system with one step building off of another. Firms either made wise uses with the money that was, let's not judge, and call it "provided" to them, or they didn't. Good management that was fine before hand made wise decision's (JPM, Goldman for example), and other banks continued with their inept management and poor decision making.
http://www.cnbc.com/id/15840232?video=1301531895&play=1
Moving on too point 2:
Why do they have to pay so much to top guys (or to be politically correct) women as well?
I do admire your since of trying to impart unique wisdom and attempting to make since of all of this for those less informed looking to you for guidance; however, I do fear that you are doing nothing more than furthering the very misunderstood fundamentals of maintaining the competitive edge, and worse furthering a misguided populist mindset.
Too often companies, not just banks, will pay up for "top talent" with no track record of success. For those of you that are sports fans I will allude this to the NFL for instance with the promotion of the "hot pick" coaches that are barely 30 years old, younger than some players, and some have panned out - others are proving to be train wrecks. Their failure is a byproduct of their own ambition and lack of experience. They may know football, but not all that goes along with "being the man", which is all to often not understood by subordinates that may know "the job" - the stuff that falls within a job description. The others are truly all-stars and have demonstrated they were put in those positions for the right reasons - which is worth big money.
Unfortunately, there are positions where the is no economic justification for proving that you are the best, and being able to quantify the ramifications of what "being the best" truly is. Teachers provide a great framework for that argument, more importantly grade-school level teacher's. No matter how good you are, there is unfortunately no direct relationship between the level of service you provide the current and future of mankind - private school's - maybe. Instead these people are understood to perform their jobs for the intrinsic value their receive - not the "outlandish" bonuses that come at the other side of success.
I think it is safe to say that (another unfortunate reality) a large percentage of jobs in the US fall into this category; however, there are those that do not. There are those jobs which are rewarded, theoretically, to equate to a persons successes - be it past, present, or future. When the conditions are right and someone demonstrates the upper strata of the necessary skill set, rapport with client's and employees, sophistication, education, respect among peers and clients, vision, judgment, etc. - you have someone that is worth a whole lot money.
Unfortunately the market for those things tends to be in one of the highest paid professions that has, until now, flown under the radar - INVESTMENT BANKING and the cousin hedge fund managers. Growing up you heard all the time that "I want to be a Dr. or Lawyer", but never an investment banker. It is one of the most unknown professions in the world, and I would bet if you asked what someone in IB does 90% of them wouldn't just not know - they would have no idea. At least with hedge funds the number of "informed" would fall to around 50%, where people could hopefully identify them as some sort of investment vehicle.
This is really a supply and demand issue, where just about any competent hard working person can become a Dr. or Lawyer, but it takes a very special person to have the competence, drive, competitiveness, credentials, vision, tolerance, leadership, dedication, stamina, etc. - among many other things. This makes for a very small market of people to select from, and an even smaller number that have all of those quantitative and qualitative abilities that make it to the top. The ability to take market share, innovate, increase results, gain trust from clients and potential clients, motivate, and work within the confines of a highly demanding profession makes those that can fill all criteria extremely valuable.
Goldman gets, probably the worst rep, for those outside of that firm. There were very stern warnings regarding bonus handouts, bloated salaries, and other items that caused a lot of firms to cut the aforementioned compensation earlier in the year. As a result, Goldman and more boutique firms that had the ability to pay for PRODUCERS did just that - weaking those weak firms even further. So please realize this is a very real, albeit subtle, reality of the world we live in. The contracts are not the problem either, it is what is being paid for that is. Performance goals should always be in place, whether you are a fireman or investment banker. What is being evaluated and for what is being compensated must be realigned under the guidance of "those in the know", or appropriately structured C level executives. Out with those that have failed, an emulation of those that succeeded, and with a little innovation on where we go from here.
The innovation is the part where we often go astray, with some things working (internet), and some things that don't (SIV's, CDO's, Sub-Prime Mortgage Securitization). When PROPERLY handled, and not politically influenced by those that have absolutely no clue - we can better the world around us. Let's please realize that we are hovering around 10% unemployment, and should be counting our lucky stars that we are not far worse off. Could things have been done more efficiently, certianly - but more importantly they were done. There was not someone sitting around and just watching the situation unfold leading the populist crowd out there to be really have something to complain about.
Often times people attempt to assert their progressive ideologies on the markets, commerce, social issues, etc., when we have one of the best teachers of all right in front of us - nature. "Only the strong survive" is one observation that holds true as a universal truism, that has held up since the beginning of time and much before you and I. To believe that we have the ability to alter that, even temporarily is ludicrous at best. Coming to the realization that the strong will prevail, does not mean that we do not need to have guardrails on the edge of cliff's as we are always on the edge. The regulatory environment needs to change, but it must do so only in accordance to the things that matter - not reforms on pay to limit profitability that drives the economic (and through matriculation social) development of the world. Putting a cap on the earners of over 80% of US tax revenues only lowers the standard of living for everyone in the country. We as a people can not EVER bring down those that have been "successful", but we should all challenge ourselves to bring ourselves, and inherently those around us up - as we have done for the rest of the world in the short 200+ years we have been a nation.
Disclaimer: I am not an investment banker, C level executive, TARP recipient, or any other benefeciary of any of these policies being discussed.
