What exactly do they expect the banks to do with the money they earned in 2009? Well, there are really four choices. 1) Give it to the government as a thank you tip. Their shareholders would sue their brains out and win (and the government would probably just hand it to Louisiana and Nebraska anyway). 2) Give it to their shareholders through dividends. That is more reasonable, though the shareholders themselves should be the ones to weigh in on this and they seem pretty happy paying large bonuses for talent and reaping high stock prices. As a very similar measure to dividends they could keep it as retained earnings. The banks already have too much cash on hand and are being yelled at for not lending it out (by the way, the lack of lending isn't a problem of not enough cash, it's a problem of not enough projects they're confident in, and the fact that many of these "banks" never did commercial lending to begin with). 3) Give it to charity. Goldman Sachs is already forcing their employees to give 10% away, in a gesture of appeasement sure to generate laughs from the Left at the insufficiency, confusion on the Right, and only Neville Chamberlain's ghost smiling in the middle. Goldman, you run a great firm, but the reason it's called C-H-A-R-I-T-Y is that it is voluntary. Or, finally, of course, 4) Pay it to their employees.
But a FutureOfCapitalism.com reader points out in an email that there is a fifth option left unmentioned by Mr. Asness. In addition to the Asness four (government, shareholders, charity, employees), there's the forgotten number five -- the bank's customers. The banks have been making huge fees and spreads on companies and clients they serve. Banks could easily reduce their fees significantly on capital raising activities and, in effect, "subsidize" corporate borrowings of their clients. This would pass on some of the huge benefits they have received from FDIC guaranteed loans -- the Temporary Liquidity Guarantee Program, which gets a lot less attention than the AIG counterparty issue that Thomas Friedman wrote about this morning -- and access to other cheap financing from the Federal Reserve.
Nobody talks about this. The underlying assumption is that if the "market price" is 2% for a debt underwriting, a bank couldn't do it for free or something like that. Under the "fifth option," a company borrowing $1 billion would have investors purchase the debt, but Goldman and others would take no fee, passing along a $20 million savings to corporations that did not and are not benefiting from the policies that have benefitted and continue to benefit the banks.
I can already predict the objections. The bankers will say, only half-joking, that if they had wanted to work for no fee, they would have been bloggers, not bankers, while privately worrying about the difficulty of eventually getting fees back up. Internally, notwithstanding the famous Goldman Sachs team ethic corporate culture, employees in parts of the bank that are making money may not be too thrilled about subsidizing a fee holiday for their peers in other parts of the firm. The folks at Citigroup will accuse Goldman of predatory pricing, and their sponsors in government will wonder how the government is ever going to get its money back if Goldman is going to start undercutting Citi on fees.
But it's worth at least exploring as an option, no?