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 (NYSE:GS) received $12.9 billion from the AIG (NYSE: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.

About Andrew Samwick 89 Articles

Affiliation: Dartmouth College

Andrew Samwick is a professor of economics and Director of the Nelson A. Rockefeller Center at Dartmouth College in Hanover, New Hampshire.

He is most widely known for his work on the economics of retirement, and his scholarly work has covered a range of topics, including pensions, saving, taxation, portfolio choice, and executive compensation.

In July 2003, Samwick joined the staff of the President's Council of Economic Advisers, serving for a year as its chief economist and helping to direct the work of about 20 economists in support of the three Presidential appointees on the Council.

Visit: Andrew Samwick's Page

1 Comment on Can $140 Billion Heal the Pain of a Serious Upbraiding?

  1. It’s like a re-make of “Night of the Living Dead” where Wall St. brokers are the zombies. The prevailing argument seems to be, and correct me here if I’m wrong: “Well, Paulson (former CEO of Goldman Sachs) talked them into it, and Congress was stupid enough to sign off on it. No laws were broken. You lose.”

    It’s as if they just fill in an “A” for Harvard MBAs under the pesky non-financial courses like Sociology and History, class attendance not required.

    Washington owes Wall St. a great deal, but there is a line, after which Washington looks after Washington. 40% of the unemployed have had no work for TWO YEARS.

    Washington can either make a public example of some of the firms of Wall St. by punishing them ex post facto, or a Huey Long style populist demagogue can sweep the 2012 elections like a whirlwind. That’s a fact. Washington is going to take care of Washington by taking a few heads, and people on both sides of the aisle are going to love it. Their constituents are going to love it.

    That’s that. No one weeps for logic.

    In the days of Standard Oil, Rockefeller forbade Standard Oil executives from flaunting their wealth for precisely this reason. Who cares about what’s “according to Hoyle” fair to a bunch of Wall St. “Master of the Universe” suits who deliberately divorce themselves from the social consequences of their actions?

    If Wall St. mounts a campaign against the tax, Washington will just re-institute the Glass Steagall Act. Call it “The Nuclear Option” to save the Establishment from the second coming of Huey Long.

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