Goldman, CIT And Capitalism: Some Musings

Prepare to be bored for here are some idle thoughts on a few of the events of the past week.

To everyone’s surprise, there were a couple of events that indicate a faint glimmer of free market capitalism may yet exist in the land.

First, one of the Swiss banks, I believe is was Credit Suisse, actually sold some mortgage backed securities without any sort of government guarantee, financing or other Rube Goldberg sort of backing. To add insult to injury they did so without the benefit of any rating from the geniuses that have been paid billions to assure everyone that their securities purchases were money good. Imagine, some investors actually stepped up to the plate, analyzed the prospects of repayment, decided they were acceptable and bought some paper without anyone holding their hand. That sounds so archaic.

And then, the Fed, FDIC, White House, Treasury Department and who knows what other actors actually held their collective breaths and allowed a mid-tier financial player to fend for itself. Though they seemed to be sorely tempted the barons of bailout finally said pass and suggested to CIT that they had best figure out how to get out of the pickle they put themselves in without any help from the government. The liberal blogs pointed out the inequity of it all and lobbied for more federal interference but even they seemed to realize that the tide might be turning on this little experiment in industrial planning.

The other side of the coin saw the two survivors among the behemoth financial institutions virtually printing money. Goldman and JPMorgan turned in eye popping earnings for the second quarter and put everyone on notice that their dicks haven’t shrivelled at all. They stand unrepentant, powerful and ready to take on all comers while they richly reward the fortunate among their ranks.

They, in fact, made the argument more eloquently than any others that there really isn’t any reason to continue to tolerate their existence in their present forms. Saved by the government, they enjoy unimaginable earnings leverage due to their access to government financing and an implicit guarantee of continuity and impute from this license to enrich themselves. There seems to me little reason that they should continue to enjoy such outsized public support in order to garner more private wealth.

Break the mold. I’ve harangued about this before and will continue to do so. Investment banking, proprietary trading and private equity belong in the private sphere with no access to government support and no expectation that any firm engaged in these activities will receive such. Commercial banking on the other hand will always, at some level, operate with implicit guarantees and that’s precisely why it should not be allowed to engage in the activities enumerated above. There is no public benefit to risking the taxpayers’ money supporting those endeavors.

The jury is still very much out on how all of this shakes out. I wouldn’t bet much money that the big financial institutions don’t continue to enjoy their privileged position but at least the heart of capitalism still has a bit of a pulse.

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