Return the Bonuses Now, BofALynch

Bernard Harcourt makes the case at the U. Chicago Faculty Blog:

[T]he bonus fiasco [has] revealed . . . that those institutions cannot be trusted to use our money wisely – under any circumstance. . . . [And] [t]here is one refrain that I simply cannot stand. “If you’ve never worked on Wall Street,” we are told, you won’t understand the bonus issues. I’m sorry, that’s nonsense. I worked on Wall Street. In fact, before going into law, my official title was Wall Street Banking Officer at the bank that’s now called J.P. Morgan Chase. Those bonuses – coming on the heels of over $300 [billion] in TARP bailouts, record financial losses for the year 2008, and record lay-offs at those very same banks – are unforgivable. Entirely unforgivable. And it has nothing to do with whether you are on Main Street or Wall Street – or whether you’ve ever worked in a financial institution.

Nevertheless, the “you just don’t understand” meme persists. As one story relates,

[A] former vice president in equity research at Bear Stearns heard a lot of sarcastic comments when he went home to the Bronx for Christmas, where his family of 36 gather each year. When the story of another bank closing was broadcast on a TV, a cousin muttered, “Good riddance.”

“A lot of my family are small-businessmen who own restaurants and Laundromats,” [the former VP] said. “They just see Wall Street as overpaid and they don’t have a very clear idea of what it does. I try to explain that there’s this intimate connection between Main Street and Wall Street, that banks were created to provide liquidity for small businesses, so they can expand.” His relatives listen, but seem unconvinced . . . “It’s kind of tiring having the same conversation over and over again.”

But weren’t the banks working hard to develop exotic instruments like CDO’s, CDS’s and Heisenbergian SIVs (that could somehow be both on and off the balance sheet at once)? And might these dim small businessmen “not have a very clear idea” of what Wall Street does because the shadow banking system was designed to make its workings more opaque to regulators? It may be “tiring” to listen to the family’s launderers and restaurant managers–but I’m sure bankers’ massive economic gains of the past provide some small consolation in this time of tribulation.

This exchange gets to the nub of the matter:

Banker quoted in New York Times: “On Main Street, ‘bonus’ sounds like a gift,” he said. “But it’s part of the compensation structure of Wall Street. Say I’m a banker and I created $30 million. I should get a part of that.”

Daily Kos: So, say you’re a banker and you flushed $30 million down the toilet, which is the actual scenario we’re looking at. When can we expect you to pay a part of that back?

Of course, there are many commentators who are now saying that the bonuses are irretrievable. Congress, it seems, while intending to restrain pay in the original bailout package, “accidentally” left a loophole big enough to drive a truck through. Somehow, BofA’s agreement to purchase Merrill didn’t manage to address whether Thain could accelerate the bonuses. Our guardians at Treasury didn’t manage to stir themselves to address this small matter, either.

The entire sad, sordid tale reminds me of Scott Veitch’s fascinating book Law and Irresponsibility. Veitch shows how law, commonly billed as a method of forcing individuals to take responsibility for their actions, too often diffuses, obfuscates, or short circuits legitimate methods of assigning credit and blame. As one reviewer puts it, “Veitch asserts effectively that the legal regime itself is effective in generating conditions of extreme harm while creating a circumstance where there is almost no responsibility attributed to any party, including a state level actor.” In this whole bailout mess, phobia about “nationalization of the banks” results in a regime where no one appears to be in effective control of the situation. As Krugman puts it, a “prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration’s response to the financial crisis.”

Dean Baker’s “Plunder and Blunder” offers some ways out of the mess. I’ll quote from his roundtable discussion at The American Prospect, which is well worth reading in its entirety:

It is clear that many, if not most, banks are or will be insolvent. The obvious answer for this situation is to take over the insolvent banks. The government will then separate out the bad assets into a Resolution Trust-type entity (following the model of how we dealt with the failed savings and loan associations in the 1980s). These will be auctioned back to the private sector over time. The banks will then be restructured and sold back to the private sector. Current shareholders will be out of luck (that’s what happens when you own stock in a bankrupt company), and the current crew of highly paid executives that wrecked the banks will be sent packing.

Longer term, we have to rein in the financial sector to keep it from growing to the point where it can again wreak havoc on the economy. The best way to limit the size of the financial sector is to tax it. A modest set of financial transactions taxes (0.25 percent on a stock trade, for example) will have almost no impact on long-term investors, but they will make short-term speculation and financial engineering much less profitable and far more risky. In addition, even a modest tax can easily raise more than $100 billion a year in revenue.

It is important to remember that finance is an intermediate good like trucking, rather than a final good that directly provides benefits, like health care or housing. An efficient financial sector is a small financial sector. Furthermore, a large financial sector will be a politically powerful financial sector. It will be more likely to be able to use its political power to prevent effective regulation, as was quite obviously the case over the last 15 years.

Of course, this may well mean lower bonuses for Wall Street worthies. They might ask, as one banker does in this article, “If you just take your base [salary] home . . . why not just work at a nonprofit from 8 to 4 instead of a bank where you’re expected to work weekends and every night till 10 or 11?” To such people, it might seem altogether unnatural and unjust for those who spend their days looking at computer screens full of numbers not to make 5 or 10 times what nurses, schoolteachers, and janitors earn. But perhaps the meltdown will transvaluate more than derivatives’ values.

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