Bonuses: An Annoyed Analysis

January 13, 2010

by Mario Rizzo  

I understand why many people feel it is unfair for bailed-out banks to pay big bonuses. But the simple truth is the banks were bailed out on the grounds that their possible failure was an issue of systemic risk. The collapse of the financial system was threatened. So the bailouts, as the story goes, prevented that. 

Thus the “American people” benefitted to the extent that the financial system was saved. And that, if accurate, is an enormous benefit to us all.  

So why now is there an issue of “fairness” in the bonuses? The bonuses are a relatively small proportion of the bailout money. The banks at issue have repaid the loans. 

Where does unfairness come into the picture?  

Bonus restrictions after the loans are repaid were not part of the original agreement. They could have been. But they weren’t. It doesn’t matter. Just punish them ex post facto.  

It seems to me that unless it doesn’t matter who works for these banks, policymakers should not want them to be at a competitive disadvantage to other non-bailed out banks or other firms.  

My hypothesis is that politicians are stoking the populist feeling that if “common people” suffer from unemployment, those bankers who “caused” the problem should too. But then they would be interested in differentiating between those individuals responsible and those not. And suppose a person didn’t work for the bailed out bank at the time? Furthermore, how many individuals outside of the banks saw the collapse coming?  

It also seems to me that if Fed policy, housing policies, and even regulatory policies were the fundamental underlying causes, then those in government should be penalized for not doing their jobs properly. Perhaps some discussion of ex post facto politician punishment is in order.  

Then, of course, there is my favorite issue: the slippery slope. I thought we had avoided bank nationalization. But now – absent the name – the bank will become something more and more like nationalized entities. We have had such good experience with quasi-nationalized organizations like Fannie and Freddie. Just keep them coming, I guess.  

The element of reasonableness in all of this is that the public knows in some vague way that the big players in the system are rigging the “rules” in their favor. But what they don’t realize is that the problem will not be solved by further corrupting any semblance of the rule of law and government forbearance that is left.  

(Addendum: I am not dealing with possible efficiency or incentive-to-take-risk issues involved in bank bonuses. To the extent that this is a problem, it is better solved by increasing bank capital requirements. In any event, I am talking above only about the fairness issue.)

8 Responses to “Bonuses: An Annoyed Analysis”

  1. Troy Camplin Says:

    Don’t forget that many of the banks were forced to take the bailout money, even though they didn’t want it.

  2. Mario Rizzo Says:

    Yes, I forgot that.

  3. Gene Callahan Says:

    “The element of reasonableness in all of this is that the public knows in some vague way that the big players in the system are rigging the “rules” in their favor. But what they don’t realize is that the problem will not be solved by further corrupting any semblance of the rule of law and government forbearance that is left.”

    Yes, Mario, this is the genuinely central political issue of our day. I am not an optimist about the possibility of the public getting this. I think Western civilization is over, and the best we can do is to try to forward whatever bits of wisdom it contained on to the unknown civilization that will follow us.

  4. Lode Cossaer Says:

    Troy,

    Could you give me some information on that? (Some links will do.) Thank you!

  5. Terry Noel Says:

    Mario,

    I would like to hear your take on some of Robert Kiyosaki’s work. He is the author of the Rich Dad Poor Dad series of books. His most recent book, Conspiracy of the Rich, deals with this issue in an interesting way. The thesis is that the financial system is increasingly rigged by government/private collusion. The result is an all-out assault on the middle-class.

    Thanks,

    Terry

  6. Terry Noel Says:

    Thanks for the links, Troy. One of John Stossel’s guests on his last show about Atlas Shrugged revealed this as well. Am I the only one who finds this horrifying?

  7. Troy Camplin Says:

    Oh, no. I am thoroughly horrified by it. I was horrified by it back in April:

    http://zatavu.blogspot.com/2009/04/obama-wants-to-control-banks.html


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 1,733 other followers

%d bloggers like this: