Capitalism or Socialism?

The stock market ended down a little yesterday after being up at different parts of the day. Volatility will continue as companies report earnings and new economic data is announced. We expect the economy to remain weak for some time and earnings, in most cases, to be bleak. The market has had a strong run in the last couple of weeks and caution should be in the air.

The most significant event yesterday occurred in Washington DC. The House voted to tax employee bonuses up to 90% if the employer is a company that received at least $5 billion in government funds through Tarp. The Government has an uncanny ability to do dumb things and yesterday proved it. Everybody is outraged that AIG distributed retention bonuses to the same employees who wrecked the company. In the context of the bigger picture, these bonuses only represent 1/10% of the money given to AIG by the government and perhaps Congress should move on and focus on the many problems facing this country. Of course the insensitivity should have been avoided however, not all companies receiving TARP funds should be painted with the same brush.

The United States is the leading Capitalistic nation in the world. Companies are started with an entrepreneurial spirit and grow to be larger organizations by incentivizing workers to be innovative and work hard to improve the profitability of that company. Wall Street firms thrive on a system where workers' base salaries are an insignificant portion of their total compensation. These employees work 60 to 100 hours a week with the hope of generating out sized profits which in turn will lead to large bonuses.

2008 made it clear that many financial institutions garnered excessive profits because they used too much leverage. The result was a financial calamity never seen before by most investors. The Federal Reserve and the Treasury Department have supplied trillions of dollars to stimulate the economy and liquefy the banking system. Government money was given to many unstable banks to not only bolster their balance sheets but to also stimulate lending. Companies like Goldman Sachs will use the government funds to grow their businesses and increase their lending to corporations. However, companies like Goldman will not sacrifice their entire organization for the good of the country. Taxing employee bonuses at companies who received TARP funds is paramount to asking the most successful professionals to get on the elevator, hit the lobby button, and join a company unencumbered by TARP.

Is this what Congress wants? They don't know because the House hasn't thought out the consequences of their actions. Are we becoming a Socialist society? Hopefully not but we guarantee you that Goldman Sachs and others will be giving back TARP funds by December 31, 2009 as they will be out of business if they can't incentivize their employees and partners to generate high returns on capital. Of course, corporate leverage needs to be lower but capitalism must persist. If Congress wants TARP funds to be used to invigorate the lending environment, it must wake up and smell the coffee.