Bank Bonuses and the Reform Agenda in the Balance

Health care reform hangs in the balance at the same time we learn from the Cuomo Report that nine banks, all recipients of federal bailout support, paid an astounding $33 billion in bonuses in 2008, including more than 4,700 bonuses of at least $1 million. Though seemingly unrelated, health care reform and the bank bonus scandal are interconnected. When Washington politics seems merely to be a scam, even worthy policy initiatives like health care reform are likely to go down in flames. On the other hand, if Washington would now move aggressively to claw back these ill-gotten bonuses, the public would also place increased trust in Washington to tackle reforms such as health care.

Consider just two of the banks involved in the bonus scandal: Citigroup and Merrill. Together they lost $54 billion in 2008 and received $55 billion in TARP bailout funds. Yet this did not stop them from paying $9 billion in bonuses for a job well done. Merrill's top four bonus recipients pocketed $121 million, and the next four took home $62 million. Citigroup, propped up from collapse by the U.S. government, paid a shocking 738 employees more than $1 million each.

Everything is wrong with this picture. Even in a good year much of the Wall Street bonus package is merely banking on special privileges from the U.S. government that allow the big banks to gamble to the hilt. In a bad year, like 2007, the Wall Street bonuses are brazen. In 2008, the year that the banks nearly brought the global financial system to a halt, the $33 billion are without a shred of legitimacy.

Perhaps $3.7 billion explains why all too many in Washington seem ready to allow the abuses to stand. According to opensecrets.org, that's the amount that the financial sector paid in lobbying during 1999-2008. This was the largest lobbying outlay of any sector of the economy. Perhaps $474 million adds to the explanation. That's the amount of campaign contributions by the financial sector (both individuals and PACs) during the 2008 electoral cycle, again the most by any sector.

This largesse produced the deregulation of the late 1990s that allowed the bonuses to soar on the mirage of unregulated credit default swaps. That's the same deregulation that eventually led to the trillions of dollars of asset losses now being picked up by Americans and other taxpayers around the world. And of course that's the deregulation that has made possible the soaring compensation in the financial sector, a point demonstrated convincingly in a recent scholarly paper by Philippon and Reshef.

What is needed now? First, we need government action to claw back the ill-gotten 2008 bonuses. All nine of the banks covered in the Cuomo Report received TARP funding. All have depended on government largesse in other ways as well, including transfers from AIG, itself bailed out by the government, and cheap loans from the Fed. A recent Financial Times story explained that this year's Wall Street profits are also padded by what is essentially insider trading with the Fed in the market for U.S. Treasuries. As Paul Krugman has rightly emphasized in his recent New York Times columns, the banks' wins have been our losses. Even if the banks are making profits again, they have polluted the world's financial system with trillions of dollars of losses incurred by the rest of society, and owe the renewed profits significantly to taxpayer largesse.

First, let's recall (if we need reminding!) that $33 billion is a rather meaningful sum to pay out to some thousands of people. After all, in a world of extraordinary hunger and suffering, all of the rich world combined recently promised a total of $20 billion over three years to relieve the plight of hundreds of millions of people in the world's hungriest farm households. Yet here is $33 billion in a single year for some thousands of bankers in nine banks during a catastrophic year. The $33 billion per year, or $330 billion over a decade, would also pay for roughly one third of the extension of health insurance to the 46 million or so uninsured Americans. In short, we will suffer a huge lost opportunity, as well as a blow to social justice, if Washington simply winks cynically at the "finality" of these unjustified bonuses.

Second, let us reject the view that bank compensation is in any event a matter to be left solely to the banks' shareholders and management. As Prof. Lucian Bebchuk of Harvard Law School has rightly emphasized in the Financial Times and elsewhere, even if bank shareholders were to gain a better control over management compensation than they have now, the shareholders and managers actually would still share the incentive to gamble recklessly in view of the government guarantees and expected future bailouts. Bank shareholders will not adopt bonus schedules that protect the public from the excessive risk-taking of the banks. Only bank regulators can do that.

President Obama promised real change in Washington so that our country can escape from the poison of insider interests and unprecedented inequalities in wealth and influence. His agenda for change has the public's support, enough to win the 2008 election and re-election in 2012 if the reforms are adopted and implemented. It would be tragic to squander this chance for change by Washington remaining passive as the banks flagrantly abuse the taxpayers' trust and hard-earned income.

 

Follow Jeffrey Sachs on Twitter: www.twitter.com/earthinstitute

Comments

[LHB58]

Sachs is right in tying the ongoing TARPS fiasco with health care reform. In the minds of many of the people I talk to, both on the right and the left, THIS is the issue with which most people negatively identify the Obama admistration. in touting Health Care reform, you have to justify Obama's bailout of troubled financial institutions, and their ongoing misbehavior. That's almost impossible, which makes it that much more difficult to argue for meaningful health care reform. As far as a "contract is a contract goes" banks have gone far out of their way to increase interest charges and fees for their loan customers, by using the finest of fine print to justify their behavior. I can't think of any contract that doesn't have SOME loophole in it that can't be exploited by a clever lawyer. Don't pay the barstids, in other words.

[CharlesMichaelCouch]

These Banksters that control our nation win every time by dividing the people between left and right. There is no left and no right. There is only the people and the Banksters at war. The Bansters always win because the people don't know they are at war. So, the people continue to be decimated by the Banksters and their hired "hit men" who masquerade as Democrats and Republicans betraying their party at will to accomplish the Banksters objectives. Who wants to pretend to be a defecting Democrat this week? Does that get us enough votes to neutralize the people's will? Ok, we need a couple more pretend defectors. Who else wants to be a Bluedog this week?

Charles Michael Couch
Brooklyn, NY

[muckraker3]

A corrupt regime supporting a corrupt Banking system at the expense of the rest of us. Jail these people!

[lobear00]

We seem to go from one extreme corrupt regime , right into another. This nation can't seem to get nothing right, except "Corruption".

[Carl Caroli]

Here's the change we need and change we can all believe in:

1) Kick the lobbyists out of Washington.
2) Eliminate corporate and PAC campaign contributions
3) Bring back progressive tax rates of up to 70%, the way they were before Reagan endorsed greed.

Unfortunately none of these things are on Obama's agenda, which is too bad, since I had high hopes for him. He's using the wrong people (Geithner, Summers, Emanuel) negotiating, or I should say, compromising away any real reform. It is a mistake of grandiose proportion. Now is not the time to compromise - it is the time to fix this mess and it's being watered down to the point of uselessness.

[hectorlj3]

Democracy is the government of the people, by the people and for the people, or so it is said to be; then we do not have a very convincing tinge of democracy. Our government better shows a "government of the people by the rich (oil, health care, weapons, financial, et al) for their unlimited greed benefit". I am an engineer, PE, so i have not been trained to see anything but reality and to me it is clear that something seriously shaking has to be done if we are to even save the planet from these people, so unscrupulous are they and unlimited their greed that they and their relatives will sink together with us , the people, who travel in the same Mother Earth ship if sinking the ship produces big profits for them. I do not have an answer but we the people must start demanding from our leaders more seriousness in sailing our ship, our own existence is at stake.

[lainey]

The disparity between CEO's and their employees-­-regardles­s of the industry--is, in my opinion, at the heart of our economic woes. While there is nothing wrong with pursuing money (we all have to have it and a sense of financial security is helpful), there comes a time when enough is enough. Salaries and bonuses need to be put into perspective. Who needs 34 million year after year?

[jbatch]

Another sign that propping up the old system will fail. If you always do, what you've always done, you'll always get what you always got.

There is an assault on our country and our values by greedy bastards on the one hand, and ignoramouses on the other -- people who insist we "keep the government's hands off [thier] medicare." Both of these elements are Republicans, united in ignorance or greed.

Meanwhile, we spew out carbon, triggering irreversible self-amplifying feedbacks that will turn the Earth into an alien planet.

And what is the media doing? focusing on "balance," which gives the ignorant and the criminal the same weight as the thoughtful and well-intentioned, crippling all hope of a meaningful national debate on anything.

Meanwhile, Obama and the Senate seak "bipartisanship," negotiating with people who put the interests of their Party and the corporations that own it over the good of the country and the wishes of their constituents.

America is doomed.

[nickmantas]

I guess there is enough money to go around for bonusses to those who tanked our economy but not enough for Health Care Reform.
"Blue Dogs" do us all a favor and GO TO HELL!

[BLBass]

The question of trust, on both sides of the partisan divide, is exactly what the Obama administration has been (willfully?) ignoring when dealing with the financial rescue. All else aside it is leaving a political wedge for Republicans to hijack populist anger for regressive purposes in the midterm elections. That they would further neglect its impact on the politics of passing an urgent progressive agenda, especially on health care, is unconscionable.

[AnotherMcIntosh]

What was Obama's response on February 24th to public anger over revelations regarding bonuses paid with public funds.

"So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. "I promise you, I get it."

"I get it" is what he said.

He used such words to indicate that he was on the job. That he was taking responsibility. That he was going to take action.

Other than saying "I get it," however, what has he done?

Why don't his actions match his words?

[Bonobo]

I agree with the sentiment, but I'm dubious that a clawback would be practical, or even possible. There doesn't seem to have been particularly good tracking on the bailout money, so it might be rather like trying to do a clawback on the cash crates the Bushies shipped to Iraq. The one thing I still have confidence in the financial sector is it's ability to launder ill-gotten gains. You can bet it isn't in Switzerland anymore.

Much better simply to raise the highest tax bracket, or even make a new one. This really wasn't just bank employees at fault, but a whole system of unwholesome influence of great wealth on our political system. Also, this way maybe Obama won't have to break his promise not to raise taxes on the middle class, like Geithner and Summers were hinting at this weekend.

[UtahPatriot]

Obama is just as corrupt as anyone that has occupied the WH, he promised ;

No Lobbyist- He Lied
No Ear Marks - He Lied
Transparency - He Lied
Real Reforms – He Lied
I realize now that when BHO lips were moving, he was lying…..How can we believe anything he says now.
He should be impeached.
The Obama doctrine ...tell the lie often...find ignorant people to repeat it......tell more lies.....call it an emergency.....tell the lie again ...and MSNBC will try to make it truth.

[TJCole]

What reform Jeffery..?

Come on you must be joking...we are seeing anything but reform...

[mcmchugh99]

He's my thought for they day. If there's another shock to the system, and banks start to go down again, then let them. Let capitalism crash out this time. There's no more money to bail it out again anyway.

Let the system crash and start over again. If the people really want the free market, then let's just take them at their word and let them have it--full blast.

I didn't feel this way six months ago since I thought the collapse of capitalism might very well lead to fascism rather than the kind of democratic socialism that I support. Now I'm willing to roll the dice.

[maddy48]

Congressional Democrats should be watching his back, carrying a strong Democratic message foreward. Our youngest, most visionary president came into office facing enormous obstacles to his agenda - could it have been any better planned than to introduce a financial crisis & a wiped out treasury JUST prior to his election. He's doing more & better than any president in the last 50 yrs. but the legislators & coporate machine he must engage with are bought & backward looking. More than I ever knew existed in the Dem party. What to do w/ all those purchased slaves to Wall Street? He needs more Grayson's, Sanders & Frankens working w/ him.

[mcmchugh99]

That's a good argument to just letting this system crash if another crisis comes along--and it very well could. All that's keeping it alive now is a massive infusion of government money, but that has reached its limits.