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The Bailouts: One Year Later

October 16, 2009

From the Washington Post:

Goldman Sachs and Citigroup reported third-quarter profits Thursday, joining J.P. Morgan Chase in outstripping the expectations of financial analysts and solidifying their places as among the banks that have benefited most from the government’s massive rescue of the financial industry.

Goldman said it earned $3.19 billion between July and September, nearly the most it has ever made in three months, a record it set earlier this year. Citigroup, burdened by massive losses on loans and investments, managed a profit of $101 million largely on the strength of its investment bank.

The results have undercut conventional wisdom that the prosperity of banks depends on the prosperity of their customers. Generally, bank profits lag behind economic recoveries as banks wait for people and businesses to start borrowing again. But the federal government has reversed that relationship by investing more than $1 trillion in its efforts to prop up financial markets, seeking to revive the banks as a means of reviving the economy.

The banks also are benefiting from a survivor effect. There are fewer companies left on Wall Street. Lehman Brothers went bankrupt. Bear Stearns merged into J.P. Morgan. Merrill Lynch merged into Bank of America. Citigroup has been badly weakened.

“The best environment for Goldman Sachs is very, very strong global economic growth, and that’s not what we’re in right now. But you know, our market shares have improved, and I think we’re getting a bigger share of a smaller pie,” Goldman’s chief financial officer, David A. Viniar, said Thursday.

Both the Bush and Obama administrations have defended the bailouts on the grounds that they were necessary as a means to preserve our free market system. Yet it looks increasingly as if our government’s $1 trillion investment in the financial sector has had the opposite effect. For those banks deemed too big to fail, the message of the bailouts is clear: there is no need to be cautious, for its “heads I win, tails the taxpayer loses” (Paul Krugman’s phrase). With the added benefit of dwindling competition, Goldman Sachs and Citigroup can’t lose. And apparently they haven’t.

Perhaps some of these third-quarter profits will trickle down to Main Street, reassuring taxpayers that we haven’t been scammed altogether. I’m not holding my breath.

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