Comments on: Goldman’s profits

By: Ed

Ed — Sat, 17 Oct 2009 23:21:00 +0000

Goldman received $13bn from the government as its hedges against AIG wouldn’t have paid out, since AIG didn’t go bust. By deciding to bail out all the other (apparently) unhedged counterparties through AIG, surely they had to compensate Goldman, who would otherwise have been penalised for their own prudence and superior risk management. Obviously it’s not ideal that the taxpayer funds this, but rewarding failure and screwing the successful really would be a bad state of affairs.

Am I missing something?

By: Greg Webb

Greg Webb — Sat, 17 Oct 2009 00:34:00 +0000

Russ, I agree with your view on Goldman Sachs. Goldman Sachs took very risky positions and lost, and the company should have declared bankruptcy. But, though the magic of federal government bailouts both directly with Goldman Sachs and indirectly with AIG, the company survived to make large profits and pay very large bonuses to economically undeserving executives. These overpaid executives have excellent political skills, but not so good risk identification and management skills. And, the government’s intervention rewarded these fools handsomely. It also kept others from benefiting from Goldman’s mistakes. This keeps the vicious circle going with idiot politicians using taxpayer money to bail out foolish executives in bad times and foolish executives using a portion of their bailout-funded bonuses as campaign contributions to keep idiots in political office.

By: Kevin

Kevin — Fri, 16 Oct 2009 23:36:00 +0000

Sounds like that’s a “no.”

I think this would have been a better foundation for the article than the $13B. It does beg the question, but since we can’t know what would happen to firms’ financial contracts if implicit government guarantees of some firms were pulled, some question begging is to be expected.

By: Gary

Gary — Fri, 16 Oct 2009 23:29:00 +0000

Here's some tax share data. The top 25% pay 86% of federal income taxes and the top 1% pay 40%. Perhaps the numbers change if we consider payroll taxes, so I'll wait to see what Russ has to say.

By: Methinks

Methinks — Fri, 16 Oct 2009 23:15:00 +0000

Oy. Sorry, I got distracted in the middle of writing this. This data does NOT say that the top quintile pays 54.2% of all taxes.

What it says is the top quintile pays a higher percentage of its earnings in taxes and that taxes are progressive. So, even when payroll taxes are factored in, the top quintile pays significantly more.

By: Gary

Gary — Fri, 16 Oct 2009 23:06:00 +0000

Thanks Methinks.

Would also be interesting to see data on state level taxes (although I don’t think it’s relevant for our bailout discussion). Know of any?

By: Methinks

Methinks — Fri, 16 Oct 2009 22:52:00 +0000

Ah, the fabled “lockbox”. I understand what you’re saying. I also understand that payroll taxes create an obligation for the government – whether government is going to be able to meet that obligation in the future is another question.

If you consider all taxes paid on income the same, why not just look at the total effective tax rate instead of concentrating on categories? Who cares how much of it is called “payroll” vs. “income”?

http://www.cbo.gov/ftpdocs/98xx/doc9884/12-23-EffectiveTaxRates_Letter.pdf

2005 data (from G. Mankiw’s Feb 26, 2009 post)

Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent

Looks like earners in the top quintile pay 54.2% of all federal taxes. However, I don’t think it’s accurate to ignore the obligation payroll taxes create. When you factor in that obligation, the top earners pay even more in taxes.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 20:37:00 +0000

What’s the point? To confuse people, alas. And it’s working. And many
people think their payroll tax goes to “their” retirement account. Not so.

By: Methinks

Methinks — Fri, 16 Oct 2009 20:32:00 +0000

Okay. So, what’s the point of categorizing it? Who cares if higher earners pay much much more of something called “income tax” and much less of something called “payroll tax” if the higher earners pay much more overall?

BTW, you’re going to get into some hairy details. Any money earned on investments is not considered “employment” income and isn’t subject to the payroll tax. So, people living off their capital aren’t going to pay payroll taxes. A lot of “the rich” fall into that category.

By: Methinks

Methinks — Fri, 16 Oct 2009 20:19:00 +0000

J. Paulson made a lot of money on his short. Great for him. I was pleased to hear it when it became public.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 20:01:00 +0000

It IS all income tax in the sense that it all goes out the door to pay
for the stuff government does.

By: Methinks

Methinks — Fri, 16 Oct 2009 19:54:00 +0000

I thought the payroll tax was forced savings for retirement and not really a tax. Since the higher earners receive less than they pay in and lower earners receive more than they pay in, why is payroll tax relevant? You’re basically saying it’s all income tax. If it’s all income tax, the higher earners still pay much much more in total – even if the amount that’s called “payroll” tax is proportionally smaller with respect to their total income.

By: Gary

Gary — Fri, 16 Oct 2009 19:41:00 +0000

geckonomist, I agree. I’m just quibbling with the point that the “average” American is footing the bill.

By: Gary

Gary — Fri, 16 Oct 2009 19:40:00 +0000

Russ, thanks. I’d love to see some data.

By: Mike M.

Mike M. — Fri, 16 Oct 2009 18:41:00 +0000

Well, I’ll say this… The fact that they have derivatives buried in their level 3 footnote with no description of what they are or how they’re marked says that, if marked to any semblance of a market, they would adversely effect their bottom line. Sometimes non-disclosure is all you really need.

That footnote is basically what hedge fund managers like John Paulson keyed in on — realizing that eventually real losses would result from those fantasy book values.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 18:35:00 +0000

I am against capping pay. I’m in favor of letting bad decision-makers go out of business.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 18:35:00 +0000

They all benefited. They were all lending and backing up each other. It really was something of a Ponzi scheme with you and me left holding the bag.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 18:34:00 +0000

Rich people pay a large share of the income tax. Their share of the payroll tax is much smaller. Payroll taxes are a significant share of government revenue. I’ll try to look it up and post on it.

By: Anonymous

Anonymous — Fri, 16 Oct 2009 18:33:00 +0000

Many banks that received TARP money didn’t want it. That isn’t what the piece is about. The piece about AIG. And Bear Stearns for that matter–I don’t know what they owed GS when they were going down.

GS claims the AIG bailout was “immaterial” to them, partly because they had collateral for about 1/3 or a little more of the money. They claim that collateral was liquid but why am I skeptical? As you say, we will (probably) never know.

By: mesaeconoguy

mesaeconoguy — Fri, 16 Oct 2009 17:13:00 +0000

That information is highly guarded. The Fed system account manager (NY Fed) receives daily balance sheet and position information from all primary member dealers, and would have the full historical and financial picture, as well as effectively real-time snapshot info.

An aggregate picture can be found in the Fed z.1 report:

http://www.federalreserve.gov/releases/z1/Current/

The key difference between Goldman, Lehman and Bear is Goldman’s crap assets (probably) never exceeded their capital base.