Stand-up Economist

The Stand-up Economist, Dr. Yoram Bauman, did stand-up at the 2009 meetings of the American Economic Association. This man is hilarious and the video is very entertaining. I wonder what would happen if I tried to become the "Stand-up Political Scientist." I'd probably be juggling 6-8 part-time jobs like Bauman and not taken seriously by academic departments. Scratch that idea.

(ht: Mankiw)

Panic!

Eric Loomis has a great idea:

It's been a year since the financial crisis first hit. Thirty years of tearing down New Deal and Great Society regulations undermined the apparatus to stop financial panics from taking place. In my mind, the recent collapse has a lot more in common with 19th century panics than the Great Depression. But to explore this a bit more, I want to spend the next week examining the different financial panics in American history.

First up: The banking collapse of 1837, in which 50% of American banks failed.

US Treasury Cashes in

It was announced today that Goldman Sachs' repayment of the $10 billion in TARP funds last month that the government provided to the bank in the midst of the financial crisis last fall, generated a 23 percent annualized return for American taxpayers.

Goldman Sachs agreed to the Treasury’s request for $1.1 billion to repay warrants the government received when it invested $10 billion in the New York-based firm last October. The payment is in addition to $318 million in preferred dividends.

The company’s warrant transaction “was the best deal for taxpayers yet,” said Linus Wilson, a finance professor at the University of Louisiana at Lafayette.

The firm is paying about 98 percent of the warrants’ value, based on Wilson’s use of the Black-Scholes and Merton option pricing models. By contrast, he estimates that BB&T Corp. and U.S. Bancorp have struck deals with Treasury to pay less than 60 percent of the value of their warrants.

The 23 percent annualized return to taxpayers “is reflective of the government’s assistance, which benefited the financial system, our firm and our shareholders,” Chief Executive Officer Lloyd Blankfein, 54, said in a statement. “We are grateful for the government efforts.”

A warrant is essentially an option that allows holders to buy stock at a previously specified price. The US received these warrants in addition to preferred dividends in the deal to provide the liquidity.

Not too shabby of a return. $1.418 billion, or about 23%, in what is essentially interest payments for that $10b cash infusion. A nice little comparison - in the same 9 month span (from October to July), the S&P 500 is down roughly 20%.

We'll see what the market value at auction on those JP Morgan and Morgan Stanley warrants yield. We'll also wait to see how much the already agreed upon warrant values at a handful of other TARP-taking banks rakes in. From the initial evidence, it looks like the bailout turned out to be a pretty good investment for the US Treasury.

It's Earnings Season!

Goldman Sachs, the investment bank, today announced that its second quarter earnings rose to $3.44 billion, and that it had put aside $11.4 billion for salaries, bonuses and benefits in the quarter, up by nearly half from a year ago.

At that rate, Goldman employees could, on average, earn roughly $770,000 apiece this year — or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history -- nearly $70 million. The latest headline results — $3.44 billion in profits — were powered by earnings from the bank’s secretive trading operations and exceeded even the most optimistic predictions.

Many analysts were surprised that Goldman posted such hefty prospects, especially since it was only last month that Goldman repaid the $10 billion that it received from the U.S. Treasury Department in October. Although it is widely believed that Goldman was required to take the funds, even though they probably didn't need the extra capital.

Megan McArdle comments on why these profits shouldn't have come as such a surprise:

This is not actually hugely surprising, given that three of their biggest competitors went out of business or were acquired in the last year; as financial markets unfroze, Goldman, which had one of the cleanest balance sheets, was bound to see a hefty increase in their profits.

Goldman's stock price has also rebounded nicely, up about 77% since the beginning of the year. (Dammit, should've bought it!) It also turns out that by paying back the TARP monies last month, Goldman also freed itself from any government interference into their compensation practices, thus allowing Goldman to freely pay its employees these nice little bonuses.

Many are up in arms about paying these people so much money, even if they did as well as it seems they did this past quarter; McArdle addresses a bit of this in her post. But what are we supposed to do? Have the government intervene again, this time to cap pay inside a private corporation that made record profits, just because they made record profits while the rest of the economy is still tanking and unemployment is about to cross 10%?

I don't think that'd be a good idea; we already set a pretty bad precedent by bailing out the banks in the first place, even though it was probably needed to restore market confidence and recapitalize institutions that were in trouble. Further meddling, especially into the compensation practices of a financial firm not under government ownership, would be setting another bad precedent.