Monday, November 10, 2008

How Much of the Bailout Money Will Make it into the System?

We've already detailed how Goldman is expected to pay bonuses in excess of the $10 billion equity injection provided by the Treasury. Now, according to Alternet, of the $125B paid to the largest 9 recipients of the bailout to date, only $17B is projected to remain at the institutions:

It turns out that the nine banks about to be getting a total equity capital injection of $125 billion, courtesy of Phase I of The Bailout Plan, had reserved $108 billion during the first nine months of 2008 in order to pay for compensation and bonuses.

Paying Wall Street bonuses was not supposed to be part of the plan. At least that's how Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson explained it to Congress and the American people.


  1. Banks, like any company, need to compensate employees. Bank bonuses are a way to make compensation variable and dependent on individual performance. The comparison you're making is unsound.

    If you want to make the comparison you're making, you need to consider what banks would have paid as total compensation without the bailout (a number you can only estimate) compared with the amount banks will pay out as total compensation with the bailout.

    Right now you're just throwing numbers around.

  2. without any bailout of any sort, these bonuses would have been zero. in other words, without a bailout, the systemic risk would be so great, they would have folded.

    in exchange for the right to exist for another day, employees' get to keep jobs that would otherwise not exist. this non-bonus salary is what they are entitled to. as soon as taxpayers became owners of these companies (that's what the equity injection did), they lose all rights to act in any way that is beneficial to them at the expense of a u.s. taxpayers.

    alternatives would be to work for a firm that did not receive a taxpayer bailout (i.e. hedge fund) which many of the smartest would have done and is fine by me. the fact that they are ALL paying massive bonuses (almost the same size as last year!) and banks are using the equity injection to both:

    a) acquire other banks (i.e. pnc acquisition of national city)
    b) pay bonuses at almost the same size as when they were extremely profitable

    is not only immoral, but against the intention (warped or not) of why they received the payments in the first place. you want to compensate an employee to an average bonus of hundreds of thousands of dollars in an environment that is being called the worst recession in our lifetime, that work in the industry that caused it, then you better have not signed over an equity stake to the taxpayer.

  3. What part of banks was responsible for the near collapse? Was it equity underwriting? Was it the sell-side analysts? Was it the corporate debt folks?

    What brought down AIG? Was it people writing life insurance policies they shouldn't have written? Auto policies? Catastrophe insurance?

    If employees in healthy divisions did a good job, and bonuses are based on individual (and perhaps team) performance, why should these people take a compensation hit?

    People who packaged poorly performing mortgages, yes. People who wrote CDS's against unworthy mortgage-backed securities, yes. The executives responsible for the overall corporate performance, yes.

    There are many innocents at the various financial institutions that were just doing their jobs and were doing them right.

  4. before i continue, let me say i do get your point and it is the view of many people i respect, i just don't agree with it.

    why? when a company is incorporated and owns the separate business units, the entire ship is what matters, not the various decks. shareholders (now taxpayers) own all the decks, not just the ones that aren't profitable. similarly, workers work at the firm, not just a division.

    your response is the equivalent of stating mcdonald fryers should get massive bonuses if fry sales are up, even if mcdonalds goes out of business because people stop buying hamburgers. because hey... if you don't, they'll all be hired by wendy's.

    the problem is that wendy's is now out of business too because people aren't buying hamburgers.

  5. A fair rebuttal. I think both arguments are part-right.

    I wouldn't mind seeing a lot of these healthy units sold off to better and stronger corporate "homes" to fund the liabilities of the former parent. That isn't exactly what's happening, though. Not even close.

    Based on today's news it looks like even AIG may be able to continue without selling off subsidiaries.

    Some good things are happening though, like well-run banks taking over poorly-run banks. That's precisely what capitalism is supposed to do...

  6. *directed here from your link on NakedCapitalism*

    Jake: Of course they deserve bonuses! They rooked the government into giving them free money that reversed what would have been a massive failure! How is that *not* good performance? ;-)

    Yeah, here's a barf bag in case you need it...

  7. The comment from AIG or other companies that they have to pay out huge bonuses to keep the officers who drove the companies into the ground just rings hollow. My God, LET THEM LEAVE! Send them out into the real world and insist that they be compensated for their actual abilities, not the smoke and mirrors they can surround themselves with.