Break Up Goldman Sachs?

03/18/2010 05:12 am ET | Updated May 25, 2011

To put that $23 billion bonus pool number in perspective, it is the most Goldman Sachs has accumulated for bonuses in its history -- twice as much as in 2008. And it is doing so while memories are still fresh that just a year ago taxpayers had to step in when Wall Street, and even Goldman, were facing a run on the bank.

It's miraculous. Wall Street implodes and takes down the rest of the economy bringing us to the gates of the Great Depression II, and Goldman Sachs makes more money than ever before, even more than during the height of the largest bubble in world history. Happy days are here again.

Where did all that money come from? We are owed a detailed explanation for how Goldman Sachs (with JP Morgan not far behind) made a killing while the rest of the economy was getting killed. More importantly, it would be good to know what value their well-rewarded labor contributed to the real world.

Here's what we do know: Goldman Sachs, like all the other major banks and investment houses, was in serious trouble when the fantasy finance boom collapsed. The entire financial sector was on life support as the value of their assets plummeted. Goldman had hedged $13 billion of its risky bets by buying insurance (credit default swaps) from AIG. Had AIG gone under Goldman Sachs would have received pennies on the dollar and perhaps would have also gone over the bankruptcy edge.

But we, the taxpayer, bailed out Goldman first with $10 billion in TARP and then indirectly when we saved AIG so it could pay off its bets in full. Goldman got par value --- they got the entire $13 billion. How sweet it is!

Even though Goldman Sachs has repaid the $10 billion in TARP money it still is benefiting from $53.6 billion in taxpayer support in the form of asset and liquidity guarantees. (See Nomi Prins's excellent accounting.)

So what? They're smart. They're good at what they do. And they're not failing. So shouldn't we just let them bask in their well earned bonus money?

No. In a saner world we would take this opportunity to cure several problems:

  1. Goldman Sachs and the other major Wall Street institutions are still too big to fail. In fact they are even bigger than before. They should be broken into much smaller entities that are small enough to fail. The free market won't get us there. We need Teddy Roosevelt type trust busting.
  2. The 23 billion bonus pool should be hit with a 90 percent windfall profits tax. Look, I don't care how they "made" their money. All of that money, one way or the other has come from the trillions of dollars the taxpayer has poured into Wall Street. It's defies all logic to think that Goldman Sachs could have a record year while the system collapses and while more than 29 million are unemployed or underemployed. They are very fortunate we bailed them out. It's time to pay us back.
  3. In general, we need to get Wall Street compensation back in line with the rest of America. The issue is not about tying compensation to long term growth and reasonable risk. The issue is that the pay is ridiculous compared to the real contribution to our society. We've permitted a bonus/bailout culture to emerge and this is the time to put a lid on it. I suggest a President's wage cap: no one on Wall Street should earn more than the President of the United States until the unemployment rate drops below 5 percent. You think that is too draconian? Then how about instituting a 91 percent marginal tax rate on all income over $3 million a year (which, accounting for inflation, was the rate during the Eisenhower era.)
We are truly at the crossroads. We can decide to continue with our billionaire bailout society where we encourage wealth to accumulate in the hands of the few and then bail out the system when it collapses. Or we can return towards a fairer distribution of wealth with a much smaller Wall Street without institutions that are too big to fail.

If we choose to recapture some of this booty, we then can deal with our most pressing problem: how to find enough sustainable work for our people.