NORTHERN TRUST, GOLF AND THE VELOCITY OF MONEY

There has been quite an uproar about Northern Trust "lavishly" entertaining clients at the PGA event at Riveria CC last week. John Paul Newport addressed this situation in his weekly article in the Wall Street Journal on Saturday.

It really is an interesting situation. NT received $1.6 billion of TARP funds last fall. The politicians, the media and many taxpayers are saying, "why is our money being used to throw parties?" On the other hand, NT says, "hey, we made record profits in 2008, our balance sheet is fine and we only took the TARP money because the government asked us to." NT is doing business as usual, entertaining clients.

This is certainly not a black and white issue. There are also unintended consequences. Companies throughout the world are cutting back on spending, especially for outings. What about all the companies and people who depend on such outings for their livelihoods?

What about all the people who work at the Cloister in Sea Island which has seen numerous cancellations? Or those at Turnberry Isle in Aventura, Florida who saw companies like Goldman Sachs cancel a big three-day conference? Or the Greenbriar which has seen occupancy plummet?

My humble view is that the criteria should not be whether an institution took TARP money or not. It is whether the institution is profitable. If a bank was profitable in 2008 (no small feat) and then it is spending its profits. If it was unprofitable, sorry, you can't spend like that until you become profitable. Why punish an institution that is profitable? And then punish a whole industry that supports numerous jobs?

We must remember the economic theory of the velocity of cash. Those who have excess cash above their current and future needs actually need to spend cash. Profitable companies need to spend cash. This cash goes to companies that pay workers who spend that cash to live to other companies that pay other employees that pay cash to live to other companies and so on.

Imagine if every single person stopped spending anything except the most basic of necessities. More and more locations and companies would close, more jobs would be lost, more government spending would be required, more debt would be incurred and it would get even worse.

The political leaders, the TARP recipient leaders and the media must look at the impact on ALL the stakeholders in any given situation before reacting.

Cheers, Mike