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Goldman Sachs bonuses: more than just bad PR

Billions in Goldman bonuses could generate the kind of public outrage that can rewrite the very terms of free enterprise.

By John Paul Rollert / December 18, 2009

New Haven, Conn.

“The trouble with socialism is socialism. The trouble with capitalism is capitalists,” William F. Buckley, Jr., observed. His point was that free markets are underwritten by public opinion, not divine right. Bad behavior by the business elite can provoke the public to demand that the terms of free enterprise be rewritten or, in dire times, revoked.Does the leadership at Goldman Sachs get this? The firm’s recent announcement that its top 30 executives will receive long-term stock instead of cash as year-end bonuses suggests they have heeded, however belatedly, Buckley’s warning. Yet such “sacrifice” is hardly sufficient when capitalism itself is increasingly the target of public wrath.

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Take AIG. In March, the insurance giant said it had to pay some $450 million in bonuses to its disgraced financial products unit, ostensibly for the long hours it put in losing 90 times that amount the previous fall. This, after taxpayers hadbailed out the firm to the tune of $173 billion.

Public outrage prompted Congress to grill the firm’s then-CEO, Edward Liddy, who subsequently asked top bonus-getters to “do the right thing” and return at least half their bounty. This may appear like justice half-done, though since actual returns have fallen far short of pledges, it seems more like justice half-baked. Still, it illustrates Buckley’s point. Outrageous behavior by business executives undermines the public’s faith in capitalism, leading people to call upon the guiding hand of government to supplant the invisible hand of the marketplace. By June, the Obama administration had appointed a “pay czar,” Kenneth Feinberg. This week, he proposed a $500,000 salary limit for hundreds of executives at firms bailed out by the federal government.

In hindsight, the AIG bonus debacle had all the subtlety of a medieval morality play. Goldman Sachs is a far more intriguing case.

By any measure, the storied firm is having a banner year. Its revenue and stock price have rebounded handsomely from a year ago, so the $16.7 billion it has reserved for year-end bonuses seems like a just reward – at least to Goldman’s CEO, Lloyd Blankfein, who recently replaced AIG’s Liddy as Wall Street’s Public Enemy No. 1.

“Everybody should be, frankly, happy,” Mr. Blankfein said of Goldman’s success in the now infamous interview with the Times of London in which he claimed he was “doing God’s work.” These are the kind of cringe-worthy comments that Buckley had in mind when he warned capitalists that they could be their own worst enemy. They certainly have guaranteed that Goldman will remain ground zero for populist outrage, notwithstanding the firm’s bonus modification and a $500 million program to aid small businesses.

Yet Blankfein went even further. “The financial system led us into this crisis,” he declared, “and it will lead us out.”