Bagging Bank Bonuses – Another Miss

The Obama administration and many politicians are looking to score big with the public by going after the ‘fat cat’ bankers. With the recent announcements that exceedingly large bonuses were in the offing for major financial companies there was a seismic-scale reaction among the new media, the public, and therefore of necessity the politicians. Everyone in their own appropriate way predictably went postal.

Now I can understand how this little factoid would prove to be a highly effective irritant given the current economic problems and difficulties that have affected everyone, not just domestically but internationally. It doesn’t require any special insight or intuitive feel for the emotional and subjective reactions that have and are playing out in public and private. And I have to admit that I also thought that the bonuses were inappropriate and that the banking and financial institutions executives and probably many of the employees receiving such bonuses should be held to account for the “wrongness” of these bonus amounts/levels. But I think that my reasons for believing that the bonuses are unjustified are different than the vast majority, if not everyone else.

I also think that the remedies that are being pursued are either mis-guided and/or ill-conceived.

So as to why the bonuses are wrong, let’s see where I deviate from the norm.

Everyone* holds that the financial institutions and banks were the primary actors responsible for the financial crisis due to their unconstrained willingness to take risks that they did not understand or probably in some cases did not care that they understood. I agree that these players were essential parties in the disaster, and that they exercised exceedingly poor judgment given their fiduciary responsibilities. They were not alone however. Politicians, policy-makers, government bureaucrats, and let’s face it the public in general were all contributors to the fiasco in any number of ways. Some are more guilty than others, but it would be irresponsible to make just the ‘bankers’ the scape-goats for this mess. I don’t want to let them off the responsibility-hook, but I think there are others to consider for their own appropriate remedial repercussions.

Now since the disaster and the bail-out that saved their (and our) collective asses, the economy has struggled and started to recover. And these companies have also experienced improvements in their status, which is the very thing that set the stage for their action to award the big bonuses. In fact, given that the companies that took TARP money when they were in trouble, these institutions deliberately and aggressively sought to re-pay the bail-out funds. And they did this with full intention of getting out from under any Government over-sight or influence in their operations. Now free of such constraints, they decided that their successful rebound from the precipice is sufficient justification to warrant awarding very good (perhaps obscene) bonus amounts. And that’s where everyone says, hey it’s not fair. We bailed you out, and got nothing or worse; and now you’re getting rewarded for you part in the crisis.

I don’t see it that way. They aren’t being rewarded for their part in some of the stupidest investment decisions that they could possibly have made. And it is not true that we did not get anything out of the bail-out. We did save ourselves from the greater disaster that could have come from hiding our heads in the sand and doing nothing.

What the bankers and their ilk are being rewarded for is the inevitable. The economy had to recover to the current point eventually (or else it had to crash), and in this case it recovered in part because the excessive fear of a collapse had abated. Investments were returning and the economy was and is improving. Did this recovery really happen because of the banks? Did the financial institutions and their management really do anything that ‘caused’ the recovery to the point that we have now? Or did our bail-out produce the stability? And did not the return of our businesses and industry to a positive growth outlook create an economic value that required the banks to attain “profits” from the positions that they had caused their businesses to have sunk to from their own mismanagement?

So my problem with the bankers is that they are rewarding themselves for returning to profitability that they were not directly responsible for, and perhaps not even contributory to. So if the bankers are just benefiting from our risk, for our actions, and from our work; I think the bonuses are misplaced.

And the efforts to tax the banks to get our funds back is not unreasonable; but the approach will be used by the banks to make this a cost that we pick up and pay for. And they will still pay large bonuses whether they do a good job or a bad one. And it’s not just the banks that are stealing money from your pockets in this manner. The executives of most large corporations are using the same approaches to rewarding themselves huge bonuses. Rewards for achievements that “only they could have delivered” and that is why we have to give them these fortunes; otherwise we can not “keep these special individuals working at the company” without these large payments. If they would leave to be paid more elsewhere, well let them go. If enough of them leave, the price for their high-caliber talent will either crash like the economy did, or we will find that there are a lot of even more talented people who will do even better then them.

Notes:

* I concede there is always some none-zero subset of people who will be an exception, but in this case it is certainly a uniquely small subset.