As Barack Obama takes the reins of a quickly sinking ship there appears to be little which he, or anyone, will be able to do to prevent the US economy from further turbulence. Nouriel Roubini, who has gone from unknown university professor to sage in the twelve months, even suggested that the US banking system is insolvent, claiming that US banks and broker-dealers will lose US$3.6 trillion, compared with their capital base of $1.4 trillion.

If this is even remotely accurate, the US Government may end up nationalizing virtually the entire banking system. To pay for that, the government will either need to borrow (by issuing bonds) or print money like the Weimer Republic. While nationalising the banks may seem like a good idea now, especially compared with the complete botch-up the current managers have done, but as Bill Bonner notes:

The bankers make mistakes… but are least their intentions are pure; they are motivated by greed. In the fat hands of the government, on the other hand, decisions will be more political — they will be made to appease pressure groups, to favor trendy causes, to pay-off supporters or punish opponents.

From an economic standpoint, these will slow down real growth… and cause strange misallocations of capital and financial distortions. Instead of being driven by naked, honest greed, in other words… the economy will be whipped forward by corruption, favoritism, and hidden political agendas.

The problem for Obama is that he was elected on a platform of change — of “Yes we can” — not of economic and fiscal responsibility. Obama has to do something, anything. Sadly, that anything will almost certainly involve throwing more good money after bad.

Last week, Obama’s press secretary Robert Gibbs, announced that Obama had “directed his advisers to come up with new restrictions on the second half of the $700 billion financial-rescue plan, saying the money won’t go to ‘line the pockets of people’ who’ve gotten financial assistance [and that] the American people need to be greatly assured that their hard-earned money is not going to the bonuses or the remodeling of an office at a bank that’s in trouble.”

Such rhetoric sounds remarkably like what Hank Paulson was saying before he gave away US$350 billion in TARP money to a bunch of imbecile banks, insurance companies and car-markers a few months ago — most of whom are coming back for more in a manner that would embarrass Oliver Twist.

Here’s some free advice to America’s new leader. Forget about any more bail-outs instead, Obama should take an equally ineffective, less harmful and far more popular route — that is, create the Banker Bonus Clawback Bill of 2009.

The Clawback Bill would require bankers working at firms that receive taxpayer monies (or become insolvent) is liable to repay any (after tax) bonus received in the past three years. If a bank declares a profit but later restates their results, senior executives who received bonuses based on those fictitious profits would also be liable to pay interest as well on their bonus payment too. For example, the US$4 billion which Merrill Lynch effectively pilfered from taxpayers to remunerate its employees last month would be immediately repayable in full after Merrill’s acquirer, Bank of America was forced to request another government hand-out of US$20 billion last week.

American banks weren’t the only ones paying is bankers millions to destroy capital. Australia’s own Babcock & Brown dolled out more than $100 million to senior executives in the past five years. Last Friday, the company announced that shareholders would be wiped out after creditors undertake a debt-for-equity swap.

While pin-striped bankers would a retrospective clawback is highly unfair, it would do wonders for Obama’s popularity. Main Street, already angry at former Henry Paulson’s (himself a former bonus-rich banker) TARP plan, are downright furious to see the same culpable investment bankers who received taxpayer money funneling those funds straight to the same incompetent employees. ‘Bonuses’ were intended to motivate superior performance by employees not fulfill bankers’ culture of entitlement. (Not to forget the hidden stimulus of such a plan — Manhattan real estate agents would experience an influx of customers, desperate to sell their Fifth Avenue duplex, while divorce lawyers will also experience unprecedented demand for their services.)

If shareholders are foolish enough to sit by while directors fritter away capital to employees that is one thing. But when those shareholders are taxpayers, and those employees have destroyed the entire capital base of their company, the bonuses, which were never actually earned, need to be reclaimed.

They can then be used to fund the next bailout.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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