RECONCILING THE BAILOUT
NEW YORK -- Secretary of the Treasury Henry Paulson assured the general populace that Wall Street would not be allowed to accept taxpayer money and maintain bonus levels of years gone-by; further adding, "Taxpayers will see a return on their money while simultaneously seeing Wall Street becoming more fiscally responsible." Then came the first $250 billion plan, and skepticism resurfaced.
"I know what people are thinking, but this is the only way to stabilize the financial sector," Paulson explained when confronted at a news conference on this historic morning.
One reporter asked whether Paulson could explain how falling stock prices could impact still profitable brokerages so deeply. He did.
"You see, financial institutions invest in one and other because they know that if everyone keeps giving money to each other, then stock prices inflate, and stock holdings inherently increase in value. Profits becomes smaller as a stock hits a ceiling, so someone loses out but this is usually a small investor with delayed information so it doesn't impact the economy all that much."
But, at its most basic levels, stock represents ownership in a company. Therefore, stock price indicates the profitability of a company. If a person invests $10 on a share of a company, proper pricing would suggest that the shareholder would cover their investment within 20 years based on annual dividends; a modest 5% annual coupon return.
On the contrary, companies like Goldman Sachs, despite posting $1.62 earnings per share in the third quarter of a downward spiraling year, continue to offer shareholders a 1.47% annual dividend. Such a dividend is approximately worth $1.40. Where does all of the excess profit go?
CEO Lloyd Blankfein explained that this is not the whole story of stock valuation. "People make money off of the discrepancy in stock prices. When stocks are too low, people pounce on the opportunity to profit."
When asked how his stock could possibly suffer a 53% drop if the company is still technically making money, Blankfein responded, "That is where speculation comes in. You have to speculate as to whether or not Goldman can cover your investment over the long-haul."
According to their numbers, they can. "Right, I mean to say, will we cover? It is ultimately up to us whether we pay a proper dividend or not. Besides, I don't get paid to deal with these details. Servicers are taking care of it."
Chairman of the Federal Reserve, Ben Bernanke, had another spin on things.
"Look, when stocks fall, money is lost. These companies need capital to make the money back. When they do so, the American taxpayer will receive their interest."
Accordingly, George W. Bush has announced that he will adamantly pursue privatization of the social security system based on the aforementioned logic that a brokerage that "lost" money for people can conservatively invest and make all of the money back with basic, short-term loans.
Editor's note: Paulson, a former Goldman Sachs CEO, added that trading stock of major companies is not to be confused with a Ponzi scheme. Blankfein, a recipient of nearly $70 million in bonus money last year, explained that trading stock is not like gambling because it is based on concrete numbers; although he does believe that the New York Stock Exchange could benefit from adding a Quinella, Exacta, and Trifecta option to their services. Servicer: a company that pays you the stock price that you want when you sell your stock, then finagles the bagel in convincing someone else that it is worth their money to pay more for a declining stock.
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