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The Socialism of Losses and the Privatization of Profits


Arguably, it's unmoral, but banks are just playing by the rules the government gave them.

In a year when Clark Griswold's jelly of the month club would have been considered generous on Wall Street, banks are making sure their employees will be able to put in the swimming pool they've been dreaming of… probably behind their new vacation home.

Rumor has it that Goldman Sachs (GS) will be doling out an average of $595,000 per employee, some 64% more than last year. JPMorgan (JPM) employees will be getting slighted at just $463,000 on average. Peers Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) will likely follow suit.

As expected, the general public is outraged. And why shouldn't we be? The taxpayers -- otherwise known as the capital providers of the TARP bailout funds -- were key contributors to the bottom line. Since the concept of a bonus is a reward based on individual contribution made to a bottom line, aren't we all entitled to be a major part of the collective bank bonus pool?

As unfair as it seems to have bailed out an industry that made catastrophic mistakes after taking obscene amounts of risk (all based on greed), no one should technically be upset. The banks have repaid their TARP funds, making them free to act as private sector firms again. Government intervention at this point is considered socialistic.

Of course, the government always puts on an act as if its main purpose is to side with the American people. Obama and his gang are publicly lashing out, using their favorite Wall Street title -- fat cats. Ludicrous tax penalties are being considered that Wall Street will eventually devise a plan around. And extending a fee to select bailout recipients is an idea being tossed around to help Americans feel less hatred toward financial firms.

It's a little late for the government to be penalizing the banks, though. The return of big bonuses simply reveals the consequences -- or lack thereof -- of socializing losses. And the government is quite naive if they thought for a second that the bankers, who were never even slapped on the wrist for their actions, would learn a lesson by handing them a cushion of bailout cash. It simply proves what the American people have been saying throughout the past two years -- without systematic failure, the banks will never learn their lesson.

The reality is, there's really nothing that can be done today. As difficult as it is to admit, the entire bonus situation boils down to an ethical issue, not an official wrongdoing. By making excuses, misty eyed executives are whining that people will leave if they aren't paid these bonuses -- especially since the bonus payouts are skewed to key players at the top of an organization.

I say hand them a tissue and let them walk away. There are hundreds of thousands of unemployed financial professionals dying to work, probably with no bonus at all. There's no shortage of talent in the industry right now.

The purpose of a collapsing bubble and the recession that follows is to bring an economy back down to earth. American consumers, who for the most part, didn't have a personal bailout, are cutting up credit cards and taking their lifestyle down a notch, proving that they've learned their lesson from hardships faced.

Taxpayers have the right to be angry that the other guilty parties in the bubble aren't suffering too. But they should project their fury toward the government, not the banks. The socialism of losses and privatization of profits is a model that allows this behavior. Arguably, it's unmoral, but the banks are playing by the rules the government laid before them, with taxpayer money.

Just as governmental leaders are disillusioned that they endlessly tap resources like the American taxpayer and Chinese government to fund their ventures, the government's bailout conditioned banks to think they can do and spend whatever they want, too. Because when it's all said and done, no matter how much risk they take or how much bonus they receive, they now feel too powerful to fail.
No positions in stocks mentioned.
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