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Bonuses: An Annoyed Analysis

By Guest Blogger / February 16, 2010



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.

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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.)

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