04 March, 2013

Too Big for Bonuses

English: Wall Street sign on Wall Street
English: Wall Street sign on Wall Street (Photo credit: Wikipedia)
"Michael," of "Bankers Anonymous," does a very nice job of taking apart the argument in favor of large bonuses for Wall Street bankers.  As he points out, it makes perfect sense to have a system of bonuses regularly in excess of annual salaries in a business noted for risk, with a premium on rewarding the very best and brightest. Accept the assumptions, and the conclusions follow.

BUT..and you knew this was coming, didn't you?...when dealing with "Too Big to Fail" banks THE ASSUMPTIONS ARE NOT TRUE.  Risk is minimized and underwritten by the public underwriting of losses for megabanks.  Much as Freddie Mac and Sallie Mae were (are) ostensibly "private" institutions, set up by government, supported by government, guaranteed (formally or informally) by government, the superbanks have grown (with the regulatory and policy collusion of government) to the point that they are, in fact, not private in most important ways.

"Michael" puts it better than I:
...As long as you know the government’s got your back, you’re not really private. 
If you’re Too-Big-To-Fail, you’re Amtrak in my book.  None of you should get more than a few hundred thousand annually.  And that’s being generous. 
Now, before you accuse me of being a Communist, or a Wall Street hater, let me clarify. 
I love private enterprise. 
I applaud successful hedge fund managers, for example, and I do not begrudge their extraordinary compensation, provided they follow the rules and manage capital for willing investors. 
One of the keys to my applause, however, is my belief that any of those hedge funds could disappear tomorrow, as a result of a bad bet, misplaced customer funds, or a faulty computer algorithm, and no government entity will step up to save their bacon. 
I long for the day when the employees of Wall Street banks can reap legitimate profits, if they deserve it, or similarly disappear without a whimper, if they deserve it. 
If the Too-Big-To-Fail banks managed to break themselves into systemically irrelevant parts, I would have no problem with their executives paying themselves massive bonuses in good years.  They’d have earned it. 
But until that day, when they’re finally Too-Small-For-Bailouts, please don’t pretend that they’re anything more than a big NASA – a bunch of smart people in a big room full of flat screens, filling an important government-subsidized mission – working on the taxpayer’s dime.
Logically, you can't have it both ways. If the banks (or any other entity) are so important they function as a public utility--and that's essentially the justification for the bailout--they need to be regulated as a public utility, and their jobs need to be compensated in a way and to a degree similar to those of any other public utility.

Are Banker Bonuses Fair? - Business Insider

No comments: