Of Billionaires, Bailouts and Bonuses
Let's weigh the pros and cons of the record bonuses going to Goldman Sachs, JP Morgan Chase and Morgan Stanley (and many others) during the worst economic crash since 1929:
Pros:
1. The bonus winners found a way to get rich. This is America and if you're smart enough to figure out how to play and win the money game at the highest levels, the money is yours. That's the real world.
2. They wouldn't be making so much money, if they weren't creating value. We may not understand the ins and outs of high finance, but in a market economy they have to create value in order to earn their money. Obviously, they create an enormous amount of value.
3. You're wrong to think these profits and bonuses came form the bailouts. These firms didn't need the bailout money. Their losses were hedged anyway. They're just really good at what they do. They've earned their wealth.
4. We may not like it, but financial services are America's future, not making consumer goods that low-wage countries can make better and cheaper. We lead the world in financial services. That's a key part of our GDP and thank goodness it's back on track.
5. If they don't pay out their bonuses, their best players will leave. That's the supply and demand of the marketplace. You don't like it? Then get a job in finance and claw your way to the top.
6. We want the financial system to be profitable. You can't stop a financial crash unless financial profits return. The bonuses drive the profits.
7. Inequality is good for society. It promotes a culture of hard work. It sets high standards. It promotes excellence. It makes our economy grow. Also, it's the natural order of things. Not everyone can be a star.
8. Wall Street's wealth really does trickle-down. The wealthy spend their money in a myriad of ways that create jobs. Workers who make luxury items need jobs just as much as those who make cheaper consumer goods.
9. You may not like the bonuses, but the alternative is too much government intrusion into our lives. Do we want the government to set wages? Do we want government to confiscate wealth? Next thing you know, the Pay Czar willl be telling the Yankees what they can pay A-Rod. It's not just a slippery slope, it's a cliff. You don't want an America where wages are set by bureaucrats and politicians.
10. Finally, enough with the hypocrisy. The financial sector should not be blamed for the crash. Let's look in the mirror. Everyone got too greedy. Consumers fell in love with credit and the government encouraged people to buy homes they couldn't afford. And you know it's true that when we do well, so do your 401ks. Don't tell me you're not peeking at your investments as we bring the stock markets back to life. We may not be doing "God's work"; but we're doing your work.
Cons:
1. If not for our bailout money and guarantees, there would be no bonuses or profits on Wall Street. Nada. Bupkis. It's our money and they should pay it back through a windfalls profits tax. It should not go to bonuses.
2. There is something very wrong with the financial sector. The pay structure is totally out of line with the rest of America. The free market is not functioning properly in that sector. The government must intervene.
3. Most of the profits come from high stakes gambling. These record profits do not reflect real value.
4. There is no connection between these profits and the economic health of America. There are over 30 million Americans without work or forced into part-time jobs. The major financial firms are doing nothing at all to fund industries and to create work.
5. Extreme inequality is a disaster both for our economy and our well-being. We have the worst income distribution since the 1928-29. When wealth is concentrated in the hands of the few, it leads to financial gambling, which inevitably leads to bubbles and busts.(See The Looting of America )
6. You can't blame the government for the crash. In fact it was lack of government regulation, not too much, that let the markets run wild and turn into a casino.
7. You also can't blame the consumer. The drive for subprime loans came from Wall Street which wanted more and more of them to package into fantasy finance securities.
8. Our society will be ruined if we don't redistribute a portion of the wealth that has accumulated in the hands of the very few. We need wealth taxes on those with over $500 million in assets and Eisenhower era 90 percent marginal tax rates on those with yearly incomes of over $10 million. That money must go to job creation.
9. We need to tie the fortunes of Wall Street to that of Main Street. The best way would be a President's Wage Cap: No one on Wall Street should earn more than the President of the United States until unemployment drops to below 5 percent. We need shared sacrifice and shared prosperity.
10. If lower-wages drive the best and the brightest away from Wall Street that would be a plus for our nation, not a minus. We'd be far better off if these croupiers helped create new forms of energy rather than new fantasy finance games.
Any additions or corrections? If not, the Pros seem have it, by popular default...so far.
But you have to wonder: why? The defense of the Billionaire Bailout Society is so thin, so faith-based, so contrary to the common good. Yet as we speak, the handsomely paid flacks for the elite are "messaging" us into oblivion with focus group-tested fairy tales about entrepreneurial virtue, free-markets and the curse of government interference. And of course, their tax-payer funded lobbyists are swarming over the political system to prevent even the mildest reforms.
Sadly, It may take another crash of even fiercer proportions to mobilize a deeper, more lasting response. Till then, this holiday season we'll be watching record bonuses go to those least in need, while unemployment continues its record climb.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
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The current custodian of America's wealth, Treasury Secretary Tim Geithner, is not doing a good job. The time for corrective action is now.
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Beyond the pro's and con's--
Goldman Sachs and that club will be seen in history as profane terms--dark forces who devoured the hands that fed them. Those extortionists, along with the Gordon Gekko attitude, will be seen as manifestations of a very dark age when Greed spawned like cancer, producing yet another example of the poet's declaration--"Man's inhumanity to man."
Just for starters, I'd like to see the CEO's of G.S., and the other W.S. entities we've saved, express a touch of gratitude to the U.S. taxpayers. I'd like to see those CEO's stand before the TV cameras and say, "We are deeply indebted on many levels to you--the American taxpayers--who have saved us from financial collapse. You have provided the incredible sums of money for us to not only survive and quickly thrive again, but also to pay immense bonuses to people in our club. We may not pay you back, but you will be in our thoughts regardless of which paradise we choose to move to when the U.S. economy really does collapse. Our familial dynasties will continue to prosper forever because we've looted more money from you than you could ever count. And, by the way, so long suckers."
Somehow, I just don't think those "leaders" are up to that level of honesty and candor yet.
TEN POINTS:
1. BANKSTERS GOT R1CH EASY WAY=USING HIDDEN FEES ON CROOKED INSURANCE! CASINOS are MORE Regulated!
2. BANKSTERS CREATED VALUE FOR THEMSELVES EXTRACTING VALUE FROM SUCKERS WHO F00LISHLY THOUGHT MARKETS WERE FAIR.
3. BANKSTERS SKIMMED-OFF PROFITS BY DUMPING RISK (Hedging) on OTHERS+TAXPAYERS. BANKSTERS USE Taxpayer Money to Continue their Leveraged SCHEMES.
4. Financial Services=NOT America's future! Making goods=Look at China #1 Creditor Nation!
5. BONUSES =KEEP THEIR BEST AND BRIGHTEST (MOST UNETHICAL) TH1EVES? This CROP of Wall Street CR00KS CAN NOT BE REHAB1L1TATED, FAR T00 C0RRUPTED BY EASY SCAMS! MUST GO!
6. BANKSTER System PROFITS=SKIMMED INTO EMPLOYEE POCKETS= NO SUCCESS
7. WALL STREET INCOMES = 400 to 550 TIMES the Average American
INEQUALITY=BUILDS THRIFT+CHARACTER IN POPULOUS = G0D’S WILL+NATURAL ORDER
INEQUALITY=Hard work+ Excellence+ Economic growth+30 Million Unemployed
INEQUALITY= Saves Stardom for the STARS?
We must Return to a TOP TAX RATE of 63% to 94% for 50 years pre-Reagan on incomes over $550,000 (70% on $212,000 in 1981)!
8. BANKSTER PROFITS TRICKLE-DOWN to Workers making Luxury Yachts and Such!
Untrue in Broad Sense!
TAX TOP INCOMES TO DENY DRAINING OF VALUE from REAL Economy +Replenish Gov Budgets!
9. BONUSES MEAN = NO GOVERNMENT CONTROL = MORE THEFT
10. BANKSTERS DID NOT CAUSE CRISIS (MUCH)?
Madison Avenue Mortgage Marketing+ Wall Street Created FEE LOADED MORTGAGE DERIVATIVES!
Wall Street Ownership of Government and Laws created the Vacuum of Controls on Finance!
Number 6 in the cons is wrong. It is hard to blame the consumer for sub-prime loans (though you can blame the consumer for getting over enamored with debt in general) because the vast bulk of the sub-prime borrowers really had no idea what they were signing up to.
You can, however, place the blame where it really belongs: on the mortgage brokers. The push to sub-prime happened because mortgage rates stayed low for a long period of time. After a few years of relatively stagnant and low rates, refinances of existing mortgages began to dry up (everyone had already had refi'ed) and taking away roughly 50% of the average mortgage brokers book. Mortgage brokers needed to fill that gap, so they started looking for new markets, i.e. sub-prime which were just 3% of the average book historically but ballooned to more than 40% as brokers looked to replace the lost refi revenue.
Goldman Sachs did not give out sub-prime or any other kind of mortgages - that is not their business. CountryWide on the other hand...
Oh and your "President's Wage Cap" would get throw out in the courts in about a second and a half. Though if it did pass, it would help to bankrupt New York City and State...
The central problem with the government is bribery (private campaign finance). Unless we make bribery illegal, the government will continue assisting the bankers in stealing LOTS of taxpayer money. We must all concentrate our efforts to make bribery illegal first , and then concentrate on everything else. Otherwise, we will continue seeing uphill battles against big money like the one we saw with health care reform.
Help me with this:
Bonuses have to be paid because if they aren't paid, the "talent" will go elsewhere. Makes sense. You pay the folks that drive the profits. But these guys made a mess of things. How do they deserve a bonus?
They don't deserve a bonus and they have no talent. If they had any talent, the economy wouldn't have collapsed.
thank you lightningbolt, well said.
it's gambling without the taxes and regulations of Vegas, Atlantic City, etc.
+1 to you lightningbolt.
If I may, an addition to the "cons" list.
a. Wall st. made their profits by misrepresenting paper, selling junk bonds as quality paper.
b. banks are guilty of helping clients evade taxes, evade regulation
c. rather than the market stabilizing prices, the market is prone to bubbles that fleece ordinary investors
d. wall st. allows predatory takeovers, in the sense they execute a hostile takeover on a company, load that company with debt, and sell it off in pieces.
e. much like item d, but wall st. puts the company in bankruptcy as a pretext to breaking the union.
f. the wall st. wealth is not actually real wealth. Rather it just appears so on paper.
g. predatory lending has real effects, especially with the poor.
h. wars have been started over assets being liquidated. Seriously.
While I agree with you, mostly ... Wall Street wealth is real. It's as real as any other wealth, backed by the Sheriff with the gun serving the eviction notice on a widowed mother of five. That gun is very real. Loosing your children to this obscenity is very real.
Ever more the reason for change to the "system."
Americans have been too dumbed down for democracy to work. Money politics will always win in the long run in a corporatist state. Maybe the paranoid right is right: the end of America is coming.
If Americans were smart enough to form a giant protest or a national strike to make bribery (private campaign finance) illegal, then we might get democracy back. As long as bribery remains legal, the government will continue to work for those who can pay the bribes.
Yes, there ARE pros and cons. The difference is, some of these cons have a moral dimension that makes them outweigh many of the pros. It's just WRONG for a country to base its wealth on gambling. It's just WRONG for millions to go without food, healthcare, needed medication, and education so a few others can have multiple mansions, jets, yachts, and private islands. Our country was always proud of its middle class. Our education system used to be the envy of the world. The middle class defeated the Fascists and the Nazis. Are we now aiming for the lifestyles of Czarist Russia?
Agreed - the inequality in this country is immoral! It's a threat to most Americans.
ad 5.
Is BS. Accounting and risk disclosure as well as the structuring of compensation must be extended until all stakeholders (including the implicit ones, i.e. the taxpayers) can see and tell that compensation results from risk adjusted performance measurement.
This is very onbviously not the case at all. Proof: the argument from the 'marketplace for financial talent' which we are made to listen to so often is totally empty and invalid and refers to nothing real as soon as compensation is based on risk adjusted performance measurement. So the executives would be contradicting themselves.
The whole notion of a 'price' for 'financial talent' is a hoax. It is a fiction which can exist only because there is TOO LITTLE of a market for the individual risks on the balance sheets of banks, and TOO LITTLE disclosure about the relevant performance measures, instead of the FAIRY TALE of an auction in which the market determines the 'price' of talent.
Just look at how many banks are STILL, TO THIS DAY calculating their bonus claims from revenue. It's a joke.
It would be a pity if the argument got lost just because it seems lengthy. It's really extremely simple.
The point is:
As soon as compensation is based on a risk metric that deserves its name, and the financial markets aren't rigged (i.e. there really IS competition and low market entry barriers), it simply doesn't matter much what the name of the firm is on whose balance sheet profits are being earned.
Differences can exist but they are marginal. They are due to small changes in funding costs and balance sheet structure (which could argueably differ for some institutions and be counterproductive for some, due to bad management). But if the market for the managers of those risks were truly competitive, then such differences themselves wouldn't amount to much.
So the whole notion of 'talent' being paid several times the compensation depending on the contract is from lala land. Any firm that lets itself get caught signing such contracts should be closed down immediately, because they are making it obvious that they don't know what they're doing.
The New York Yankees disprove this notion that talent is worthless. We live in a specialized economy. If you choose to do something that isn't so special ... you get paid in not-so-special minimum wages.
While being a teacher is an admiral goal to teach your children, the reality of money is that at the end of the day, "He who has the most gold makes the rules."
Don't like it? Go live in Star Trek lala land. A dollar is exchanged as a contract for the purchase of good and services. Get really good at making those trades and the market favors you abouve other competitors. Eventually, because it is a FREE market, meaning anyone can make the choice to be hard at work or hard at watching tv ... the market favors the producers.
Do you really want to take your car to a mechanic that watches YouTube all day?
Do you really want a doctor that is too busy playing golf?
Do you really want a lawyer that is drowned in Vodka?
No, you choose to spend your money on competence ... talent. The more talent, the more money is spent to retain them.
BTW, the bonuses of Wall Street are a sham. Essentially paying off the swindlers for knowingly faslifying the truthiness of the entire bankrupt system.
But yes, talent does exist ... and you apparently don't have any ... and I'd venture to guess you are equally bad at understanding how money works.
I like the format of this column.
ad 6. 'the bonuses drive the profits'.
Of course not. The profits should be used to recapitalize and strengthen the balance sheet. Even at Goldman Sachs and the other big 2, because even Goldman Sachs and the other big 2 are miles away from being able to weather a TRUE financial storm. Executives who claim otherwise should be asked to provide proof for their claim or else be held accountable by shareholders (meaning: they should be fired). Unless the big 3 recapitalize and strengthen their balance sheets, no investor will feel the need to revise their notion of what an adequate level of capital looks like.
con ---
-those foisting fraudulently rated triple A "securities" on the unsuspecting are engaging in criminal behavior and should not be rewarded
If the financial sector is just gambling to enrich itself and not being an effective mechanism to put money into sectors that make real products and provide a long term return, it needs to be thoroughly revamped - all the way back to the business schools.
One major problem with all the discussion is that there is little talk of industrial policy.
Bernanke doesn't seem to get it that manufacturing, eliminating the trade deficit, rejuvenating U.S. tech leadership (and taking the profits from what we develop), and providing good jobs for the middle class is as, or more, important than finance for finance's sake. Geithner and Summers simply don't get it. Matter of fact, to my knowledge, Treasury has never played a positive role in any trade negotiation and it certainly has been asleep at the exchange rate switch for well over a generation.
Countries that are doing well have industrial policies and look to create competitive advantage. They certainly don't give handicaps to the competition like we do.
If Democrats want to win again, they had better get on the stick and bring back manufacturing jobs instead of using stimulus money to help fund manufacturing in China and Finland (electric car).
Let us give credit to Ben Bernanke, who studied the Great Depression and correctly assessed what had to be done to prevent a meltdown on that scale. Let us review the moral hazard we have now created. There is something deeper and more sinister than the fact the Wall Street Profiteers now know the government won't let them fail so they are free to take more risk. By rescuing the financial economy so quickly, America has been lulled into a false sense of security. Without strong and meaningful Wall Street oversight and regulation, we run the risk of another economic catastrophe. And here is the crux of how well Ben Bernanke did his job, next time the catastrophe will be so big even the US government won't be able to rescue it. This is because 1) Wall Street will take bigger risks, they are taking bigger risks even now, there are over $700 trillion worth of credit default swaps out there and 2) The US government has used up its capital on this bailout, there isn't much left for the next one.
Les correctly points out the propaganda that is being spread to combat meaningful regulation. It is up to us to heed his call, not fall for it, and push our government to do the right thing.
The fundamental lie: we had to prevent a "meltdown" at that level. Why? Price fixing only benefits the people holding the assets, not the consumer making the purchases.
No where in the Constitution does it say that investors are inherently more important than wage earners. A meltdown, or deflation, would result in those who chose to save their money being able to purchase the deflated assets.
Contraction is an inevitable part of the economy, an unfortunate lesson that will be learned in greater magnitude every day that we allow the farce of the current unsustainable financial system to continue lying so blatantly.
The white house is were these crooks go so the Obamamaniac can filch the public and provide our money to these crooks.
Les, why are you trying to fit a rational solution to what is a moral problem?
Allowing fees to be skimmed from a retiree, is a moral dilemma. A woman who can't afford to pay for her pain meds, that's a moral problem. Growing the market cap for your corporation, now that's just pure numbers.
100 years ago, corporate charters had to show they provided a clear good for the public interest. Seems like an age ago.
http://www.context.org/ICLIB/IC41/Rowe.htm
^documents how corporations used to be linked to the public interest.
It is BOTH a moral problem AND a total loss of legitimacy in terms of arguments.
The publicly stated view of the financial sector is BOTH demonstrably false AND morally reprehensible.
If you ask me, a solution of either one of the problems (the moral one or the argumentative one) is possible only if the two are discussed separately. (Even though they interact.)
The reason is that otherwise what happens is that any time you point out a moral shortcoming the response will be a false argument and any time you respond to a false argument with moral outrage the response will be that some fancy facts about the hidden truths of finance (which are freely made up as you go along) require us to accept immorality.
It's a huge one-two punch.
very true, and very sad that you have such an accurate answer. :)
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