Can $140 Billion Heal the Pain of a Serious Upbraiding?
Last week, the Wall Street Journal reported that "[m]ajor U.S. banks and securities firms are on pace to pay their employees about $140 billion this year." Referring to their appearances on yesterday's talk shows, the Washington Post headline today is that "Top aides to Obama upbraid Wall St." for bonuses after bailout. Look folks, you reap what you sow. If you don't like your current predicament, consider the alternative paths that we -- you, me, the Bush administration, everybody -- could have taken to our present position.
If the firms had been allowed to go bankrupt, committees of debt holders would now own what is left of the firms and be paying new management to run them. No public funds would have been expended to bail them out, and so it would be none of our business what the executives were being paid. Everyone would know, because we would have demonstrated it last year, that the taxpayer was not on the hook if these firms were to find themselves undercapitalized next year because they had paid out too much cash this year.
If these bonuses are being paid by any of the firms that took bailout money, and if that bailout money has been repaid, then what's the problem? Government officials insisted to us that we had to bail out these firms to prevent damage to the broader economy. In that case, mission accomplished -- the broader economy did not fall into the abyss. We should be celebrating the return of prosperity to Wall Street as we would the return of prosperity to any sector of the economy. And next time this happens, we should have more confidence to advance the bailout money on less generous terms -- higher dividend payments on the preferred stock and more warrants for the government. You live and learn.
If these bonuses are being paid by any of the firms that took bailout money, and if that bailout money has not been repaid, then what we have here is a failure to communicate. Surely, the government is not an unpaid creditor to these firms with no power to restrict the outflow of cash to all other sources, including cash payments to employees. Surely, our government officials were not so incompetent as to allow that to happen. So what is needed is not an upbraiding but an intervention. Spend your Sunday doing that next week and everything will be fine.
But that cannot be everything that's troubling these "top aides." It must be the more insidious findings that come from simply following the money. The article in The Post notes:
Many banks and other firms have been enjoying fat profits this year in their trading and investment arms. But much of this success has come as a result of new government policies that have kept interest rates low -- on debt and mortgages, for example.
Sorry, I'm not persuaded. It was a deliberate policy choice to keep interest rates low so that financial institutions will be able to conduct as much business as possible, business that ultimately finds its way to the real economy. Financial institutions that have repaid their bailout money are not compensating their employees with money that they don't have. And, according to this logic, they have it because of policy choices, like low interest rates, that have been part of what we've called the solution to our problems. The proper response is to congratulate them, not upbraid them. And of course to enjoy the income tax revenues that get paid on the corporate profits and the compensation.
So it cannot be the mere appearance of profits after bailout. It must be that the government has not yet been made whole from all of its bailout activity while some of those who were helped in the bailout are paying cash out of their firms. It is as simple as noting that Goldman Sachs received $12.9 billion from the AIG bailout, that AIG has not repaid the government, and that the Goldman Sachs bonus pool is on a pace to hit $21 billion this year, matching its pre-crisis high from 2007. Shouldn't we be getting our $12.9 billion back out of that $21 billion?
Of course we should, but the government did not put itself in a position to do so. That would have occurred had we not given the money to AIG, but allowed AIG to fail, and then at our own discretion, decided whether we should advance money to Goldman Sachs and other counterparties to AIG's actions to prevent AIG's collapse from taking them down. Had we done that, then Goldman Sachs would be on the hook to the government directly (or gone), and there would be no way to pay such large sums out in compensation without the government's consent until the government had been repaid. If I sound like I am repeating myself, that's because I am.
An arm for an arm
While I am sympathetic to the "let them fail" argument, it strikes me as "cut that arm off--a new (better one) will grow back in its place.
"Committees of Creditholders" would have included transactional accounts that had no more intention of becoming creditors of Bear/AIG/Lehman/Merrill than a shopper at a Sears who pays cash for a service plan.
Letting AIG fail and then sorting out the debris runs the risk of a 21st-century run. There *is* a place for government providing liquidity insurance in a shadow-banking system. Else
Of course, this raises the issue of moral hazard, which must be dealt with via audits and regulation.
Goldman Sachs
I think you meant Government Sachs. Now that it is clear that their solvency during the crisis and subsequent profitably is contingent on cheap financing provided by the fed (and corresponding downside risks guarenteed by the taxpayer) I think it is fair to consider goldman sachs a ward of the state that simply is better at lobbying. Thus, just as the trend has been to call GM - Government Motors it is only appropriate we do the same with Goldman Sachs.
No income, no income tax to the governmnet
$140B in bonus income probably yields about $55.5B in tax revenues to the federal government. If bonuses were cut in half or more, so too would the tax revenues be cut.
Also keep in mind this will be repeated annually.
Rule of Law issue
I'd have fewer problems with this if it wasn't done ex-post-facto or through traditional equity ownership rights. If TARP legislation spelled out compensation limits before anyone took TARP money, and if TARP money was optional, that would be a far different story. Or if the government had purchased a traditional equity ownership in the companies through the market, and applied traditional ownership rights.
Unfortunately, the way it played out smells like class warfare and damages the perception of rule of law for very little true benefit. I know of a hedge fund that decided not to participate in the distressed asset process because of the legislative uncertainty regrding ex-post-facto pay limits back when the bonus "claw back" was being discussed.