Hands Off Goldman Bonuses

The title of this post is somewhat misleading – designed to be provocative to get you to read what I have to say. Indeed, I am going to defend Goldman Sachs' (GS) right to pay what it likes to its employees. But, I am also going to defend your right to be outraged and to look for redress.

Socialism?

Let’s start this off with another provocative statement which encapsulates my thinking on the issue:

The teabaggers who showed up in the summer at Town Hall meetings to shout down politicians and scream ‘socialism’ at anyone who would listen because Barack Obama was going to pull the plug on granny need to redirect their anger. By socialism I take it they mean central planning in a capitalist society. If they want to see socialism in action, look no further than banking.

Yes, that’s how I want to lead into this issue.

Let’s state the obvious: banking is a legally sanctioned cartel. In the US, the federal government by law has nominal control over the entire monetary and lending apparatus - both the printing press and interest rates – via the Treasury and the Federal Reserve respectively. The state and federal government also control who gets to be a bank by accepting and rejecting applications for bank charters and seizing banks which fail to meet their obligations as safe and sound lending institutions.

Let’s call this what it is: socialism. One can argue whether this is the right way to run a banking system. But let’s put that (ideological) argument aside and focus on the specific issue of bonuses within that system – and whether the government’s controlling them is ‘socialism’ and whether we should accept that control.

Should the government get to dictate who gets how much in the financial sector?

Goldman’s bonuses?

When Goldman Sachs reported record profits for the third quarter of this year, they also told us they were setting aside a record amount of money to pay bonuses. Goldman’s record bonuses were not the only signs of champagne and caviar on Wall Street: JPMorgan Chase (JPM) reported preparations for huge payouts as well. Even Citi (C) and Bank of America (BAC) are poised to pay billions. Over in the UK, the same is also true in the City of London, one reason London residential property prices are rising. Bankers are poised to make tens of billions.

Meanwhile, in the real world, the unemployment rate is still rising, we are seeing record numbers of foreclosures, and households are struggling with unprecedented levels of debt. And much of this has to do with the the inability or unwillingness to lend by those same bankers, many of whom are making millions individually. Clearly, there is something wrong with this picture.

The Obama Administration, which helped orchestrate a bailout of the banking system as the first priority when it came into office, has been asleep at the wheel quite frankly. It should have been patently obvious to them that bailing out the bankers while allowing them to pay themselves billions in the middle of a depression was going to create a backlash, ruin their credibility as agents of change and sow the seeds of a Democratic Party nightmare in 2010.

Obama has wasted political capital bailing out the financial sector. This is why people were yelling socialism at town meetings when Obama wanted to pass healthcare reform – something you should see as misdirected anger which the health insurance lobby is all too willing to exploit. What’s funny is that the bailouts are not just killing Obama’s street cred; they are also poisoning the chalice on Wall Street. Big bank CEOs – to name a few instigators – spited the man by not showing up at his big financial reform speech. And bankers are not ‘happy’ with Obama for having received their bailouts as political contributions are down.

At least they are beginning to realize their mistake. They are now admitting publicly that even Goldman Sachs would not exist except for the largesse of government. Witness these comments from Larry Summers as reported by Paul Krugman on Monday.

There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.

But, what are you going to do about it? Are you going to try to cap bonuses? How about a windfall tax as has been proposed in Britain. This is where I say “keep your hands off Goldman’s bonuses.”

Capping pay

Is capping pay a legitimate way to run an industry? Paul Krugman thinks so:

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that.

All I can think is that this was another example of something we’ve seen before: Mr. Obama’s visceral reluctance to engage in anything that resembles populist rhetoric. And that’s something he needs to get over.

No, it’s bad economics.

Here’s an idea:

You, down the street, packing and hauling those boxes –everyone else in the city is making $27,000 for packing and hauling. You’re making $43,000. I don’t care if your company is more profitable — that’s too much. We’ll leave you a little upside but not THAT MUCH upside. Your pay is officially capped at $37,000.

Is that what you want?

You say:

Edward, it’s different with bankers. They’re just greedy. They don’t need the money for basic necessities like food, rent and utilities.

Neither do Madonna, Will Smith, or Tiger Woods. Should we cap their pay too?

You say:

Well, no. They earned the money. The bankers are greedy. Greed is not good. It is excess and it needs to be stopped. It’s just not fair.

Now, you are on to something.

The issue is the bailouts

The problem here is fairness. What you have here is a case where bankers have received huge wads of taxpayers’ money to save them to perform their central roles in supporting economic growth as lenders and depositary institutions.

The populist take: The banks took the bailout money and, instead of lending, they went out, leveraged up, and put their casino money in proprietary trading, mergers and acquisition and broker dealer activities. Then they paid themselves record – not just large, but record – bonuses with our money. It is theft, plain and simple.

I hope I have the sentiment about right. I share those sentiments.

The question again is: what should we do about it? The position that government can just arbitrarily reach into some private enterprise’s internal affairs and make individual decisions on its behalf is indefensible. That is not how capitalism should work and I am not buying into that argument.

What should have been done when Obama came to office in the first place is bankrupt organizations should have been seized and broken up, sold, recapitalized or liquidated. That is what was discussed in February as nationalization, but what I call pre-privatization. If insolvent big banks had been seized during the panic, all contractual obligations would have been rendered null and void. There would have been no $100 million payout for Andrew Hall, no billions in bonuses, nothing. The slate would be wiped clean and the government as temporary owner (and a bankruptcy judge) could briefly decide who gets what before the assets were disposed of. And of course, all of the other problems like overcapacity, lower lending to protect weak capital bases, excessive risk taking would have disappeared as well.

But, of course, that never happened because the Obama Administration and Congress are captured. Rahm Emanuel is famously rumored to have said ‘never waste a crisis.’ Well guess what, your administration just wasted a crisis. As for capture, call it kleptocracy. Call it corporate communism. Call it crony capitalism. Call it whatever you want – that ship has sailed. We never took over the banks. We never demanded a say on pay in exchange for government backstops. We gave the banks everything they wanted with no strings attached. Oh, there was the stress tests. But the stress tests were a sham right from the word go. Irrespective, the government has no legal authority to reach inside Goldman Sachs and start dictating pay any more than it has authority to do the same at your company.

What the government has the power to do is three things:

1. Break up the big banks (This is something Marshall wrote about last week. It was erroneously attributed to me by Seeking Alpha. But, hey, it was an editor’s pick, so it’s obviously a good piece. I just can’t take credit.)
2. Start regulating the banking industry properly.
3. Prosecute fraud and criminality in banking.
4. Set up a proper too-big-to-fail resolution process to seize bankrupt large financial institutions.

What can you do?

1. Stay informed.
2. Speak out.
3. Show politicians you want real change.

Financial Reform Poll Memo

Comments

[Jasper M:]

This situation reminds me of some WW2 graffiti, from the Netherlands, when it was occupied by the Nazis, that appeared when they first started rounding up the local Jewish population. The original is likely too politically incorrect to print here, but a current version might be translated as -
"Keep your dirty hands off those dirty Goldman bonuses!"

You don't have to approve of something to recognize that it has a right to exist, and that contravening that right is, ultimately, a threat to all sorts of other things we DO approve of.

Oct 21 04:31 AM

[DL1947:]

There is only one way to keep the bonuses in the financial sector down to being reasonable ; and it is to tax them , but I would not want to live in a country that taxes the employees of one sector of the economy differently than those of other sectors . So if you decide to tax earnings over 500 000 at 60% and those over 1 000 000 at 70% you will not only catch the bankers but also the movie stars and the ballplayers which is fine ; and if I am not mistaken all levels of government need to get a little more revenue these days .
This is much better than government starting to tell who can pay what to whom .

Oct 21 04:59 AM

[Michael Clark:]

I agree with DL 1947: tax the bonuses. I agree: this can't be a bank tax -- it has to be a 'excess income' type of tax. I would rather not have to do this -- but, as we've seen, corporations won't police themselves. Nothing is quite as obscene as watching banks, on the verge of failing, begging Washington for taxpayer money in order to survive, seeing average American citizens going into default and bankruptcy because of bank lending policies, while their tax money is used to pay bank bonuses in billions of dollars. Where is the leadership in the banking industry? There is no moral leadership: everyone out for himself. It's time to end this insanity. If the bankers quit and move to Switzerland, let them go. These are the same geniuses who ruined the global economy afterall -- bankers don't need to be geniuses; they need to be steady, methodical, and averse to gambling.

Oct 21 05:38 AM

[untrusting ...:]

Edward,
Good article as usual.

There is a difference between athletes, rock stars, movie stars, and even small business men. They are essentially individuals EARNING and playing with their own money, not with investors and other people's money.

Whereas public corporations are playing with investor's and other peoples money not their own. They are essentially fiducaries and they have vast control over others money. They also have hugh power and influence, by virtue of the control of OPM, which individuals and small business do not. And lastly, it is very questionable if one can legitimately claim that these public corporations EARNED the money (in the same sense that athletes, rock stars, movie stars, etc really did earn the money by performance). A very good case can be made that the public companies essentially stole much of the money and gamed the system (political payoffs, lobbyists to enact legislation favorable to them, hugh political donations, large government contracts via influence, insider trading profits based on regulatory capture, and many others). Further, the tiny fraternity of big investors combined with the old boys club of the Board of Directors and senior management essentially set any level of compensation they want, of course to reward themselves very very well. It is not really an arm's length unbiased transaction (like athletes, rock stars, etc are). Nor is it even really based on performance as the public companies executives so like to claim. If that were true, they would have truly earned very little based on their stock performance over the past ten years and real value to shareholders over the last ten years.

So our view is that none of these public company executives have anywhere near the scope or responsibility of the job that the President of the US does. The President earns what, $500K/year + benefits. Why should any public company executive earn more than the President of the US and pay themselves with OPM? Now, it is probably impractical as well as objectionable on free-enterprise dogma to restrict public company executive pay. However, one way to deal with executive pay would be to allow public companies to pay whatever they want, just make all compensation in excess of the President's compensation ($500K) 100% non-deductible on corporate tax returns. The key is use and control of OPM. Any private corporations, partnerships, small business, individuals, etc should be free to pay themselves whatever they want, because it is not from OPM.

Oct 21 05:55 AM

[WMBANZAI7:]

Goldman Sting Part I

www.youtube.com/watch?...

Oct 21 06:33 AM

[WMBANZAI7:]

Goldman Sting Part II

www.youtube.com/watch?...

Oct 21 06:42 AM

[WMBANZAI7:]

Goldman Sting Part III (the Payout)

www.youtube.com/watch?...

Oct 21 06:43 AM

[buyitcheap:]

Goldman and the other banks bear a great deal of culpability in this. The idea that they are rewarded for it, is sickening. They should be facing criminal prosecution, not giant pay days.

Oct 21 08:13 AM

[a. palmer jr.:]

I guess I'm one of the few that think that any company given money by the taxpayers should be regulated by same. If they want to give the money back they can lift the regulations. The government should have let them fail, but since they didn't they should have done the banks like they did the car companies. We, the taxpayers, should absolutely have the right to tell the bailed-out banks what their employees should make. They tell the mailman what he can make and bailed-out bankers shouldn't be treated better. We shouldn't be given the bailed-out bankers a retention fee, if anything we should be pushing them out the door.

Oct 21 08:21 AM

[Edward Harr...:]

You bring up a good point about the agency problem in large corporations. When Wall Street firms were partnerships, they were more risk averse in my opinion. The fact that large corporations are run by managers (who have some stake) instead of owners sets up a conflict of interest that leads to problems.

That is an issue that definitely needs discussion, especially in regards to shareholders' rights and compensation practices.


On Oct 21 04:31 AM Jasper M wrote:

> This situation reminds me of some WW2 graffiti, from the Netherlands,
> when it was occupied by the Nazis, that appeared when they first
> started rounding up the local Jewish population. The original is
> likely too politically incorrect to print here, but a current version
> might be translated as -
> "Keep your dirty hands off those dirty Goldman bonuses!"
>
> You don't have to approve of something to recognize that it has a
> right to exist, and that contravening that right is, ultimately,
> a threat to all sorts of other things we DO approve of.

Oct 21 08:23 AM

[Value Added:]

The notion that any bank is too big to fail is flawed, IMO. The fault lies with the close ties between Treasury and Fed officials and the investment banking industry. Look at it this way, the dollar is not too big to fail (as we are seeing), and the bailout of these companies is contributing to the failure of the dollar and another huge bubble. The second fault lies with the decision to provide the bailouts with no preconditions. Now, having done that, the government has no right whatsoever dictating compensation or confiscatory taxation of those companies or individuals. The government acted like a group of suckers - ignorant or not of the bonuses that would be paid - and are only exhibiting indignation because the taxpayers are unhappy.

The best course of action is to vote the scum out of Washington. We can only hope that the next group of politicians will act in the taxpayer's interest and break up the juggernaut of the investment banks on Wall Street. This needs to be done by legislation acting on the "industry", however, and not by resorting to illegal or unconstitutional moves against individuals simply to satisfy the angry crowd. (And I share the anger.)

Oct 21 08:44 AM

[Crocodilian:]

Kudos to author for using a simplistic title to lead into a more complex discussion-- most of the time, people writing on complex issues make them simple,

Author Harrison doesn't do the "its very simple" punt . . . he says its complicated, which is exactly right: it is.

I would add that there's an issue here beyond fairness: efficiency. Some argue that restraints on pay and risk taking are inimical to the efficiency of the system . . . but I'd say that a system which, absent government intervention, ran itself into insolvency is inherently inefficient, and the problem is the nature of the compensation.

Goldman, and everyone else in the financial industry, is highly incentivized to see enormous leveraged bets made, bets which are so large that if they fail, they risk doing systemic damage. Their bonuses come when those bets go well . . . and everyone else picks up the tab when those bets go poorly.

It seems to me that what is needed in financial services compensation is a tax on profits that reflects that added risk that a particular activity has added to the system. A stock broker? Adds little or no risk to the system. Same with an insurance salesman, a mutual fund portfolio manager . . . but someone who constructs complex interest rates swaps (as for example, JP Morgan did for Jefferson County, Alabama) . . .this kind of financial engineering brings with it massive risks assumed by others, which should be reflected in the compensation of the financial engineers, this adjustment would make the system _more_ not less efficient (it would be "fairer" too, but that's less important)

Oct 21 09:09 AM

[john s. gordon:]

the notorious GS bonuses, like some food products, are illegal immoral & fattening.
> jack

Oct 21 09:19 AM

[Graham and ...:]

Another solution might be to have an honest accounting of bank "profits." If they were shown for the money-losers and drain on society that they really are, no one could justify such bonuses.

I don't have a problem with large bonuses--if they are honestly earned.


On Oct 21 05:38 AM Michael Clark wrote:

> I agree with DL 1947: tax the bonuses. I agree: this can't be a
> bank tax -- it has to be a 'excess income' type of tax. I would
> rather not have to do this -- but, as we've seen, corporations won't
> police themselves. Nothing is quite as obscene as watching banks,
> on the verge of failing, begging Washington for taxpayer money in
> order to survive, seeing average American citizens going into default
> and bankruptcy because of bank lending policies, while their tax
> money is used to pay bank bonuses in billions of dollars. Where
> is the leadership in the banking industry? There is no moral leadership:
> everyone out for himself. It's time to end this insanity. If the
> bankers quit and move to Switzerland, let them go. These are the
> same geniuses who ruined the global economy afterall -- bankers don't
> need to be geniuses; they need to be steady, methodical, and averse
> to gambling.

Oct 21 09:35 AM

[Leftfield:]

The article's description of the problem and solutions seems fair to me. The cost of the complete failure to address any of these problems puts the bailed-out bankers in undeserved privilege (we're paying their salaries now, they're on government salary, in my view). And, as Value Added says, they're destroying the dollar, so why are they TBTF?
Politicians win either way; they're all millionaires through "contributions" for selling us out, and from kingly lifetime benefits, and they can still reasonably hope voters will retain their historical cluelessness.

Oct 21 09:36 AM

[ResourceWise:]

While ‘outlandish’ bonuses do generate indignation is vast quantities, they’re just a symptom of a massive problem with the global financial system - a system built on arbitrage and leverage that facilitates theft of wealth from earners and savers. Governments – who are supposed to represent the interests of all their citizens need to take a hard look at the activities that are conducted under the banner of financial services and determine which are useful to society and which are harmful. Outlaw harmful activities and prosecute those that indulge in them. By demanding arbitrary caps and punitive taxes on earnings, we only legitimise activities that are injurious to the financial health of society and perpetuate the weaknesses in the current system.

Oct 21 09:44 AM

[Angry Banker:]

Apparently I will be the lone voice of opposition to this article, even though I know it may earn me dozens of thumbs down.

Sure Goldman was a beneficiary of the bailout. But they also paid back their funds quickly and according to the terms of TARP. That means they get to run their business again without government interference in how they pay their employees.

But grudgingly I agree that the government gets to have a say on pay for firms still using TARP funds. Although I still say that in many cases, damage is in fact being done by capping compensation, because good employees (and in the case of Andrew Hall, profitable divisions) are leaving, meaning the future profitability of the very firms that TARP is intended to help is being threatened by the TARP rules. That's BAD for taxpayers because it reduces the likelihood that TARP will get repaid.

And don't give me this garbage about how we should be prosecuting the executives as criminals because they are being awarded large bonuses. Most of the executives in charge of the firms that are still on TARP are NOT the executives who were in charge when their firms were taking the big risks that got them in trouble. In reality most of the old management teams were swept out during the early days of the crisis and have been replaced with new management who are doing their best to fix the problems created by their predecessors. Some of these current executives however continue to be ostracized and vilified publicly as if THEY were the people who caused their banks to fail (which isn't true) and then to add insult to injury we tell them we're not going to pay them either.

Personally I think anyone who has the courage and willpower to run one of the TARP banks today should be receiving extra "combat pay" just for dealing with all the crap he has to put up with from politicians, regulators and opinionated bloggers every day.

Oct 21 09:56 AM

[Living4Divi...:]

If Goldman was truly a private company, then I would say "hands off Goldman bonuses"

As Paul Krugman said: "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."

The govt bailed out Goldman, although Goldman paid back TARP, we continue to provide implicit support (if they get into trouble again, we will loan them another 25B)

Therefore, the Govt has a say in the pay practices.

I think it is egregious that they pay bonuses in a year after record losses and requiring govt assistance. If I was a shareholder in GS I would be hopping mad.

I also agree with Graham and Dodd Investor, that Goldman's "profits" are suspect. But, then again, due to loose accounting rules, many companies profits are suspect. The jurisdiction to correct this problem belongs to the SEC (and maybe office of Banking Supervision, Comptroller of Currency), but not to Congress.

Oct 21 10:09 AM

[Living4Divi...:]

Angry Banker - The US continue to provide implicit support as the lender of last resort (if they get into trouble again, we will loan them another 25B). Therefore, the Govt still has a weak say in pay practices. Since GS is an important pillar of finance and has become too big to fail, the Govt, unfortunately has a big say in how the business is run. No bank should be allowed to put the entire banking system at risk of financial collapse.

On Oct 21 09:56 AM Angry Banker wrote:

> Sure Goldman was a beneficiary of the bailout. But they also paid
> back their funds quickly and according to the terms of TARP.

Oct 21 10:14 AM

[Living4Divi...:]

Angry Banker wrote "And don't give me this garbage about how we should be prosecuting the executives as criminals because they are being awarded large bonuses. Most of the executives in charge of the firms that are still on TARP are NOT the executives who were in charge when their firms were taking the big risks that got them in trouble."

I agree wholeheartedly.

As for the ex-executives who got the company into trouble, most of them got paid big bonuses for taking on huge risks and running their banks into the ground. Only a minority of the executives are being prosecuted for this, by and large, most of the the bad bankers have escaped prosecution.

That is the real injustice.

Oct 21 10:19 AM

[davidbdc:]

I agree.......as soon as they repay the AIG money and pay fees for all the FDIC backed money they got for much less than any local bank could get and return that money in exchange for money raised from investors......then they can whatever they want as long as they play by the rules of the market. And if society believes that we need incentives for these people to work in "real" industries then tax policies can be implemented to limit the differences in pay that currently exist between Wall Street and any other industry. In fact revamping our tax code to reward small business owners over corporate managers would be a good way to encourage growth and innovation.

Where the additional outrage should be is that we still don't know who was shorting the heck out of the financials last year and whether or not they were also spreading the rumors of immenant collapse.........I believe that many of these firms were profitting from almost destroying the system.

On Oct 21 09:56 AM Angry Banker wrote:
>
> Sure Goldman was a beneficiary of the bailout. But they also paid
> back their funds quickly and according to the terms of TARP. That
> means they get to run their business again without government interference
> in how they pay their employees.
>

Oct 21 10:27 AM

[a fat panda:]

"Sure Goldman was a beneficiary of the bailout. But they also paid back their funds quickly and according to the terms of TARP. That means they get to run their business again without government interference in how they pay their employees."

The problem here is that you are the lone voice of disinformation.

TARP - which has been repaid - is only a small part of all of the welfare we have shoved at the banks (not just GS). They get TAF, the FDIC guarantees, and my favorite is that the Fed owns the guarantees on something like 80% of the US mortgage market. TARP is just a portion of the money that has been given to the welfare queens of the 21st century.

Your logic is horribly flawed. It is like me going to the bank and telling them that they have been paid in full because I paid the July 2009 payment. Repaying one payment doesn't make you whole. Repaying the loans, doesn't mean that you aren't getting welfare in 10 different places.

It isn't just you - no one has the slightest idea of how much welfare we have given the banks or how much it impacted their earnings. The banks don't know. The government doesn't know. You are the lone voice that says it doesn't exist.

Why are they still a bank holding company (other than access to tax payer money and cheap loan guarantees).?


On Oct 21 09:56 AM Angry Banker wrote:

> Apparently I will be the lone voice of opposition to this article,
> even though I know it may earn me dozens of thumbs down.
>
> Sure Goldman was a beneficiary of the bailout. But they also paid
> back their funds quickly and according to the terms of TARP. That
> means they get to run their business again without government interference
> in how they pay their employees.
>
> But grudgingly I agree that the government gets to have a say on
> pay for firms still using TARP funds. Although I still say that in
> many cases, damage is in fact being done by capping compensation,
> because good employees (and in the case of Andrew Hall, profitable
> divisions) are leaving, meaning the future profitability of the very
> firms that TARP is intended to help is being threatened by the TARP
> rules. That's BAD for taxpayers because it reduces the likelihood
> that TARP will get repaid.
>
> And don't give me this garbage about how we should be prosecuting
> the executives as criminals because they are being awarded large
> bonuses. Most of the executives in charge of the firms that are still
> on TARP are NOT the executives who were in charge when their firms
> were taking the big risks that got them in trouble. In reality most
> of the old management teams were swept out during the early days
> of the crisis and have been replaced with new management who are
> doing their best to fix the problems created by their predecessors.
> Some of these current executives however continue to be ostracized
> and vilified publicly as if THEY were the people who caused their
> banks to fail (which isn't true) and then to add insult to injury
> we tell them we're not going to pay them either.
>
> Personally I think anyone who has the courage and willpower to run
> one of the TARP banks today should be receiving extra "combat pay"
> just for dealing with all the crap he has to put up with from politicians,
> regulators and opinionated bloggers every day.

Oct 21 10:53 AM

[Dialectical...:]

No one would argue we shouldn't get to cap the pay of members of Congress or cap the President's pay. The reason is obvious -- because we are the ones paying the bill. And I think it is pretty clear that we are paying the bill when it comes to the massive amounts of "relief" we have given the banks in backstops and loans. I agree with the premise that we should keep our noses out of private compensation (for both movie starts and bankers) but I think that hand in hand with this is the notion of letting them succeed or fail on their own terms. If the government had bought 10 million tickets to Will Smith's latest movie to make sure that it wasn't a flop, then heck yeah I'd have a problem with someone saying we had no right to cap his pay.
But this is not about how I want to see the pay capped... it is about how many other problems are created when we start to interfere with the markets. We should have left the banks alone. Then anyone surviving to pay billions in bonuses would have deserved them and the poorly run banks would be out of business. No paradoxes or conundrums there.

From a practical matter given that we have bailed our the banks I agree that taxation is the only marginally fair way to the government to participate in all the profits they made possible.

Oct 21 11:22 AM

[Tesa:]

You have to realize for anyone to extract millions from markets, others have to lose money.

Those assets sold during collapse of the markets at lower valuations became assets were sold by the public and bought up by the financial markets who sold at higher prices to make a profit. It is the public assets that got raided because of the collapse.

We have a case here where finanancial institutions are selling and buying public assets with public money and they use leverage to increase their take in any directions that the winds take them. The other side of their trades are public assets and pensions that they can raid. The speculative highly leveraged markets provide the means to bubble up and then collapse the markets on a whim.

The public assets have become subjected to gambling house evaluations through excessive use of levering as the source of funding for a gambling industry that extracts cash from it.

Upon miscalculating and losing their game the governments have no choice but to fund their game all over again because they have public assets as their hostages.

Financial money game has become a very profitable business as the risk is shed to the public and profits are extracted through sphisticated computer programming that trade these assets.

Both the financial industry and the governments are very aware of that scamming the public has become a big in financial industry but public is prevented from regulating it through vast amount of propaganda that is propagated by those that profit by these schemes.

Oct 21 11:33 AM

[Tesa:]

davidbdc, it doesn't even matter if they pay it or not. It is the public assets that they have raided to make those profits. Many people have lost their assets when the markets collapsed. GM and Chrysler are bankrupt.

The profits that they make through buying collapsed assets was not ever theirs.

Oct 21 11:38 AM

[Avooch:]

Goldman was bankrupt except for the grace of US taxpayers

Oct 21 11:45 AM

[Ray Lopez:]

What you apologists for GS fail to realize is that GS took government guarantees and cash when nobody would lend to it and it was due to fall. The government foolishly gave money without taxpayer consent. GS paid it back--but now wants business as usual. That's wrong.

A special tax on Wall Street is in order. We don't need finance taking up 15% of the economy when the government is acting as a backstop. No other industry save the car industry (also a wreck) does that.

Oct 21 12:08 PM

[NUNAY the KING:]

If the US Government had the proper procedures in place and enforced them, including owning the same amount of shares that you are shorting, a great majority of the problems discussed above would have never occurred.
That being said, the solution is really not that difficult. The MAX salary should be 40X the average wage earner of the entire country, gleaned and set by the IRS. BONUSES, and ALL OTHER COMPENSATION should be tied, long term, to the performance of the company. Each company should be allowed to set their own performance pay and payout, I am sure the debate would then rage over how soon the bonus payout could begin.....

Oct 21 12:13 PM

[rime:]

Tax 'em high is just short-sighted. For one main reason:
It stifles demand - if a guy getting a $1mio bonus is taxed at 70% he's not going to put money back into the economy. He's buying fewer goods and services that only serves to harm the average taxpayer (the person who is outraged here). He doesn't buy a car, house, dinners, clothes, vacations, or buys less of them. House prices don't go up as demand is further stifled, people don't recoup their current losses or it takes longer.
Besides the government is more to blame than Corporate America - they artificially kept interest rates low for a prolonged period and generated a bubble. They forced banks to take money that may not have needed it (GS didn't need it) and let Bear survive but Lehman fail. Big mistake. Anyone should be allowed to fail - what destroys the market more is inconsistent policy from policymakers, over-reaction, delayed reaction or thoughtless reaction.
Banks make products out of what is available in the economy. Yes to make money, but seldom at the cost of huge risk. Risk-reward is often the key factor and people don't get paid more for taking more risks. Besides, those that earn big bucks get the majority of that in stock or options, which derive their value from the price of company stock. So putting that at risk does not serve the supposed purpose.
There is no Wall Street vs Main Street. Everything is intertwined - the 'main street' economy depends on a smooth-running Wall Street. Good vs Evil is too simplistic and merely gives people soundbites that they haven't really though through fully.
More importantly, no government in this country should ever decide how much someone gets paid. Get your socialist state and then see how happy you really are!

Oct 21 12:58 PM

[gato:]

Quote:"Rahm Emanuel is famously rumored to have said ‘never waste a crisis."
Rahm is/was right:.OK,.. It's time we gave him/them what he/they want!. A crisis!...Hmmm!..Let's start a revolution by:

Re-instituting the U.S. Constitution into law(What "a revolutionary" idea!)

1-Stiff penalty of jail time (life) for "any" violation(s) such as declaring war, without the proper legal process.
2-
2- Allowing "all" citizens to bear arms, as now specified. (Just to remind these thugs, that we/they live in a dangerous world and self defence might be required)
gato

Oct 21 01:01 PM

[Adam Sharp:]

Ed, you said "The position that government can just arbitrarily reach into some private enterprise’s internal affairs and make individual decisions on its behalf is indefensible."

I think these bonuses and bailouts are what's really indefensible. They have benefited in countless ways - loose money, direct bailouts, debt guarantees, FHA loans and other mortgage initiatives which pad profits and transfer risk to the taxpayer, being able to sell crap securities to the Fed.

How you can call that a "private enterprise's internal affairs" is beyond me.

Oct 21 01:33 PM

[rime:]

Adam, the crap securities you refer to are the mortgages of Mr & Mrs Average Joe who coveted the $500k McMansion when they only earned $60k a year (talk about leverage!) And that $500k McMansion would have been worth $300k two years ago (and probably is right now). That they initially believed that was a good idea for them was wrong. That commercial banks lent to them was also bad. Make lending practises reasonable but not prohibitive. The Fed should raise rates shortly so we don't end up with another mess. That Wall Street firms packaged them and sold them was usual business - in the past though defaults as a % of the overall were much less than in this case. And by the way, that practise of reselling mortgages has to exist - it just needs homebuyers buying the home that is right for them and their income bracket.
The same people who are outraged at the crisis are in some cases the same ones who set the ball in motion.

Oct 21 01:59 PM

[Charlie J:]

I cringe every time I see such shortsighted suggestions (70% tax). You might feel good that you'll be putting it to those rascally wealthy people, but you're missing something very important, which is funding of startup companies. I'm an entrepreneur who has started a couple of companies in the past (all of you use a technology that my second company created). I've also been a seed investor in over a dozen companies, including one just last week. If you put taxes at 70%, do you think I will take the risk of funding a startup, which is inherently very, very high risk?

Let's say I put $200K into a company and it does well and I get $2M back when it is acquired. Then, the govt (which of course would be much better at spending that money than I would) takes $1.4M of it, leaving me with $600K. I get my $200K back and a $400K.

I'm sorry to have to tell you this, but in that situation, I'm not going to make that investment. 7 out of 10 times, it is going to go poof and disappear. Those 7 times I lose the $200K, which is $1.4M. Three times I get a $400K profit, for $1.2M. Even if I pick three winners out of ten (which would be pretty darn good, actually), which each get a 10x return (which would be more than pretty darn good), I'm losing money.

I haven't given any thought to how one should keep bonuses down in a sector that you don't like, but taxing EVERYONE to accomplish this would be counterproductive.


On Oct 21 04:59 AM DL1947 wrote:

> There is only one way to keep the bonuses in the financial sector
> down to being reasonable ; and it is to tax them , but I would not
> want to live in a country that taxes the employees of one sector
> of the economy differently than those of other sectors . So if you
> decide to tax earnings over 500 000 at 60% and those over 1 000 000
> at 70% you will not only catch the bankers but also the movie stars
> and the ballplayers which is fine ; and if I am not mistaken all
> levels of government need to get a little more revenue these days
> .
> This is much better than government starting to tell who can pay
> what to whom .

Oct 21 02:07 PM

[gato:]

My second comment:
The bonus packages should remain, but with a "slight" modification as follows:
1- Any bonus payment above $10,000 would be payed in U.S. coins preferably in nickles, recipients would have to personally pick up the funds at a local post office passport ID required(They need the business)
2- If the bonus recipient prefers the bonus money could be placed in a gov. run fund for 5 years minimum for 3% p.a. interest to build low income housing or to rebuild bankrupt auto firms maintaining jobs for the working class.
3- All wages would be set off the Presidents pay, which would be the highest in the country $500K max. However, the first year the Pres. is in office is usually "on the job training" so, the President his salary would be adjusted for that say $150K and rising to $500K if the he/she manages to prevent(s) war.
4- Inflation would be indexed as follows: Inflation up 2% p.a.
Congress and appointees pay would be indexed "down" 2% p.a.
5- Elections and electioneering would be have to be completed in 3 months max.

Oct 21 03:16 PM

[pacalis:]

Practically, if and when the public finds a way to curtail or restrict these large windfalls, these profiteers will be long gone and these restrictions won't matter. The US is in an end game and the powerful are grabbing and securing all they can while the public bitches and moans. There's not much skim out there left, particularly as transactions dry up and productive capital declines. So the good news in that wall street bonuses will soon solve themselves. The bad news is that we don't have enough Charlie J's, and worse that there are more in China every day.

Oct 21 03:29 PM

[pacalis:]

Let's say these are all great ideas... Should Obama appoint a Presidential "Titanic Deck Chair" Czar to implement them?

On Oct 21 03:16 PM gato wrote:

> My second comment:
> The bonus packages should remain, but with a "slight" modification
> as follows:
> 1- Any bonus payment above $10,000 would be payed in U.S. coins preferably
> in nickles, recipients would have to personally pick up the funds
> at a local post office passport ID required(They need the business)
>
> 2- If the bonus recipient prefers the bonus money could be placed
> in a gov. run fund for 5 years minimum for 3% p.a. interest to build
> low income housing or to rebuild bankrupt auto firms maintaining
> jobs for the working class.
> 3- All wages would be set off the Presidents pay, which would be
> the highest in the country $500K max. However, the first year the
> Pres. is in office is usually "on the job training" so, the President
> his salary would be adjusted for that say $150K and rising to $500K
> if the he/she manages to prevent(s) war.
> 4- Inflation would be indexed as follows: Inflation up 2% p.a.
>
> Congress and appointees pay would be indexed "down" 2% p.a.
> 5- Elections and electioneering would be have to be completed in
> 3 months max.

Oct 21 03:34 PM

[Leftfield:]

Charlie J: Agreed. The problem is managements of corporations, especially in the financial sector, who run them into the ground and walk off with golden parachutes. Now including managements who are making fortunes after making OPM bets running the entire nation and planet into the ground, now costing us unaccounted-for taxpayer $trillions.
Sadly, the distinction won't likely be made in any excuse for government to grab more, and entrepreneurs, taking their own risks, stand to be punished also.

Oct 21 03:43 PM

[mna:]

You're right on the spot. The conflict of interest between managers of a financial institution and its shareholders are, in my opinion, THE problem in the financial industry.

The financial managers earn pay from the shareholders based on 2 things:
1) their ability to earn fees
2) their ability to earn returns for client capital

#1 is basically the entire reason why derivatives flourished. The more derivatives banks sell, the more money they make. The problem is that derivatives are generally opaque, and often rip the client off without them knowing. Don't take my word for it. Listen to Jeremy Gratham, of GMO fame, in this years buttonwood conference:

"Finance produces nothing of value, no widgets. All we do is shuffle money around and collect fees. The more complex and opaque the instrument, the more likely that it is ripping people off."
-Jeremy Gratham, 2009 Buttonwood Gathering

What does this mean? It means that the ability of bankers to make money is partially based on their ability to deceive their customers on the real worth of their investments. The bankers then earn their pay based on the spread between the price the customer paid, and the real value of the derivative, plus fees.

#2 becomes problematic when the financial managers make money on good bets, but don't lose money on bad bets. This encourages reckless risk taking because they have less to lose. Worse, it lessens the research going into each investment because of there's less of a personal stake. The less research done, the more likely a bad investments will be made, probably into the fee generating derivatives mentioned in #1.

It doesn't take much to see that the activities mentioned above generate no real social value. But even the non-social values of financials are a bad deal. Warren Buffet once remarked that he's reluctant to invest in investment banks because they pay the staff too much. So why are shareholders in the finance companies putting up with paying the managers so much?

IMO, it has to do with the human tendency to overvalue manager ability. You see the overvaluation everyday manifest itself in the sheer number of actively managed mutual funds that trail index fund performance, year after year. People are PAYING MORE FOR LESS performance in these funds overall. Now I don't mean to say that there are no money managers out there who are really good at what they do, it's just that there are much fewer of them than the public realizes. ON AVERAGE, the managers are not worth what they're paid. Research bear this out year after year, and yet people ignore this year after year.

There's also the problem of diluted ownership interest because of the layers of investment vehicles, that ultimately obscure the ability of the shareholder to affect manager pay. But I'll leave that topic for a later day.

I hate to say this, because I hate regulation as much as the next guy, but I think the problem requires extensive legislation to correct. To make matters worse, since financial markets are international, we would need international cooperation if we are to correct this problem, or the problem would just jump across borders and jump right back. There's no easy solution, and I'm afraid I just don't see a serious international tackling of this issue happening anytime soon.

On Oct 21 08:23 AM Edward Harrison wrote:

> You bring up a good point about the agency problem in large corporations.
> When Wall Street firms were partnerships, they were more risk averse
> in my opinion. The fact that large corporations are run by managers
> (who have some stake) instead of owners sets up a conflict of interest
> that leads to problems.
>
> That is an issue that definitely needs discussion, especially in
> regards to shareholders' rights and compensation practices.

Oct 21 04:00 PM

[kaskoosek:]

Banks should not be private companies, since they have a government garnered ability to create money out of thin air. All other corporations do not have this privilege.

This gives the government, the ability to do what it seeks fit. Dismantle them or tax them. If they cry foul then simply remove their permit to print money, in addition to the depositor insurance.

Oct 21 04:19 PM

[Mr. Ed, Jr.:]

The author states that the government "must prosecute fraud and criminality in banking"...and.....

"The teabaggers who showed up in the summer at Town Hall meetings to shout down politicians and scream ‘socialism’ at anyone who would listen because Barack Obama was going to pull the plug on granny need to redirect their anger."

Two issues here, one of which was apparently inserted into the argument for no good reason....

First, please get past the early-adolescent, sexual innuendo stage. It is unbecoming.

Second, "Pulling the plug on granny" is a strawman argument, raised not by town hall protestors, but by our President, who seems to favor such strawman arguments.

Third, when the politicians ignore the people on issue after issue after issue, there is nothing wrong with shouting at them, then voting them out. (The shouting is first, so that there is no misunderstanding by anyone of why they were later voted out). The protests were loud and sometimes rude , but generally peaceful except for the beating-- by an SEIU thug-- of a man selling American flags. Tea Party protests have been exceptionally peaceful.

Fourth, The "Tea Party" movement is separate from the town hall issue, but there is likely some overlap

Fifth, I am not sure the Tea Party protestors are in need of your instruction on where to direct their anger, but perhaps I could be of assistance in re-directing your focus, since the "fraud and criminality in banking" are now government sponsored activities....

The bankrupt AIG, using taxpayer dollars, and with the full knowledge and consent of corrupt Washington politicians, paid Goldman $13 billion, without negotiating to save the taxpayers a dime. They paid in full-- not 10 cents or 20 cents on the dollar, as might be expected from a bankrupt company trying to settle debts, but 100%.

Then, Goldman paid back the TARP money.

Some might find it interesting that the $13 billion from AIG was paid off on Goldmans hedge against the very same toxic mortgage garbage that Goldman was selling to the rest of the world.

Perhaps if the focus was on preparing jail cells for all involved in this taxpayer swindle, the matter of Goldman bonuses might resolve itself. Then we can get back to the silly debate about "pulling the plug on granny".

Oct 21 05:26 PM

[Robespierre:]

"The question again is: what should we do about it? The position that government can just arbitrarily reach into some private enterprise’s internal affairs and make individual decisions on its behalf is indefensible. That is not how capitalism should work and I am not buying into that argument."

The way I see it if it is OK for government to arbitrarily reach into some private enterprise’s internal affairs and give them BILLIONS of taxpayers dollars then it is OK for government to arbitrarily reach into some private enterprise’s internal affairs and take BILLIONS on set aside bonuses. Nobody put a gun on their heads to be bailed out, If they didn't want government reaching into their affairs then they shoulf file for BK when their were in need of money.

Oct 21 05:39 PM

[Thomas Harrell:]

The bail out just makes me sick and bonuses for people that need to be jailed just makes me sick. The whole deal just makes me want to puke. I really can't believe this could happen.

Oct 21 06:09 PM

[Robespierre:]

BTW I would not be surprise if Treasury/Fed gave billions of dollars to these firms for them to drive the stock market so people (main street) would feel better about their finances and would go on a buying spree to lift the economy. The pay out for the firms would be of course to keep any of the profits made in the process unhindered by regulators or pay czars. Too far fetched?

Oct 21 06:23 PM

[Swashbuckler:]

The arbitrary nature of awarding employee bonuses poses a problem when the company is bankrolled by the taxpayer. Goldman's most recent quarter showed a profit of $ 3.19 billion. If you subscribe to the tortured logic that the bonuses were earned and deserved, where do you draw the line on the size of the bonuses? What if Goldman decides that $3.189 billion of the $3.19 billion would be a fair and reasonable bonus compensation for their hard working, impossible-to-replace (sure) employees? The government, based on recent precedent, would likely back that absurdity. This is not Wal Mart or Mcdonald's, where there is accountability to shareholders. These bonuses are no different than me putting on a ski mask and knocking off a liquor store. A line needs to be drawn when the taxpayer is footing the bill.

Oct 21 07:52 PM

[CONK:]

Simple question. What profits do you think GOLDMAN would have posted the last 2 quarters w/out the infusion of billions directly from treasury through the TARP along w/ the AIG payout? Remember $35 OIL and SUB $2 gasoline? I am surprised that GS hasn't been out this week raising their target on oil to 95 so they could short it again. Now I have every bank doubling my credit card interest rates and everyone I work w/ is worried about losing their job. What should be elementary matematics just does not add up....

Oct 21 09:31 PM

[Moon Kil Woong:]

It's very simple. Seperate the gambling from the banking function and break them up so that if one of them fails then their failure won't be a systemic risk. That way the public never needs to bail them out again and they can't get access to public and depositors money to gamble with. If they want to gamble, let them use their own money like everyone else.

The whole reason for Glass-Stegall was to prevent brokerages risky behavior from being subsidized by banking leading to too much leverage and dragging the whole economy into another great depression. That's exactly the type of problem we have here. It's a failure of the system. The bonuses are a side issue. With or without them the banking sector is rewarding risky behavior and failing to punish people when it turns out badly because that would mean punishing themselves. And they certainly aren't masochists.

Oct 22 03:29 AM

[Living4Divi...:]

Very well put Moon Kil

It was the repeal of Glass-Stegall that got us into this mess.


On Oct 22 03:29 AM Moon Kil Woong wrote:

> It's very simple. Seperate the gambling from the banking function
> and break them up so that if one of them fails then their failure
> won't be a systemic risk. That way the public never needs to bail
> them out again and they can't get access to public and depositors
> money to gamble with. If they want to gamble, let them use their
> own money like everyone else.
>
> The whole reason for Glass-Stegall was to prevent brokerages risky
> behavior from being subsidized by banking leading to too much leverage
> and dragging the whole economy into another great depression. That's
> exactly the type of problem we have here. It's a failure of the system.
> The bonuses are a side issue. With or without them the banking sector
> is rewarding risky behavior and failing to punish people when it
> turns out badly because that would mean punishing themselves. And
> they certainly aren't masochists.

Oct 22 06:50 AM