Ok, I get it. Main Street hates Wall Street. I also realize that anyone who would attempt to defend the bankers’ point of view is likely to risk facing the business end of a pitchfork himself. 
Yet, I find it impossible to remain silent in the midst of so much misinformation and confusion. In the name of full disclosure, I must admit I spent 25 years on Wall Street working for some of the firms which are now once again receiving the full wrath of Washington. I know that it would be impossible to sway anyone who has already decided that the banking industry is the devil incarnate, but let me provide some perspective to those few souls whose minds are not yet made up on this matter.
Mistakes were made, but few laws were broken. The causes of the financial/credit crises are legion, but now have been simplified for television. The short version goes something like this – bankers were greedy and made loans to people who they knew would default. Smarter bankers took these loans and dressed them up (lipstick on a pig?) and sold them as AAA-rated securities to equally greedy, but gullible investors. Over time there was so much of this sketchy debt that the system was doomed to fail. Lehman Brothers was the straw that broke the camel’s back. With the financial system near collapse, the government had to rush in and save the day. A year later, we find the greedy bankers up to their old nefarious ways, and paying themselves big bonuses while the national unemployment rate remains at 10%. The real story is quite a bit more complicated, as I tried to explain in this blog.
Regardless of whose fault it was, very few people have been indicted for breaking the law. All the aforementioned actions taken by the banks and brokers were made within the boundaries of the law. Congress itself passed the legislation allowing US banks to own brokerage operations and leverage their balance sheets in order to better compete with non-US banks which were taking market share. The people who smacked those AAA rates on bond bundles which blew up were only doing that which they had been doing for years – getting paid by the issuers of the bonds they rated. Conflict of interest? You bet. Illegal? Not at all.
Bernie Madoff broke the law. He’s in prison. Many of the CEOs who made the mistakes surrounding the financial crisis were fired. It’s odd to me that the banks and bankers continue to be on trial in the court of public opinion for “crimes” atoned for long ago.
Banks which received TARP money got a lot more than they expected. The Troubled Asset Relief Program (TARP) was the program devised and implemented by the Bush administration which allowed banks to sell to the government so-called “toxic assets” which were caused by mortgage defaults. These toxic assets had become a huge problem for the banks and were an impediment to making new loans or even settling trades. Something had to be done. Then-Treasury Secretary Henry Paulson made the TARP loans to a broad number of financial institutions, not just the ones who really needed them, in order to avoid targeting the weakest players in the industry. Bear Stearns and Lehman Brothers failed in part because they became targeted in the marketplace as being weak. So the TARP money was distributed and the crisis was averted. By now, most of the recipients of TARP money have repaid the funds to the government. In December the government reduced its estimated cost of the program from $341 billion to $141 billion.
Put yourself in the position of one of the bank CEOs who did not need the TARP money, but was forced to take it. You play along with Paulson for the good of the nation. You use the money to spiff up your balance sheet a bit. All of sudden, the rules of the game change and you are being vilified for causing all the problems and taking taxpayer money to enrich yourself (not true, by the way). “Ah ha,” you think, “I’ll just pay back the money and all will return to normal.” You pay back the money. Even-Steven, right? Wrong. The government wants to cut your compensation and impose a surtax on your profits because of your past mistakes. Banks that did not even receive TARP money are being targeted by this surtax. To me it seems as though the banks are being punished for returning to profitability as much as anything else. It’s rare to see this much success celebrated so little.
What’s a Wall Street Bonus anyway? To Main Street, the word “bonus” means something entirely different than it does on Wall Street. The public has somehow gotten the impression that a bonus is some kind of unearned windfall, reward for favors (mostly behind the scenes, of course) rendered and somehow unethical, if not downright illegal. In reality, the Wall Street bonus program was one of the best examples of a true merit pay system out there. The basic structure of the Wall Street bonus was this – we will pay you roughly half of what you’re worth in salary. We will then pay you the rest based on how well you do and how well the firm does. The firm makes more money, you make more money. If the firm makes less, you make less. This tended to encourage all involved to work hard and produce profits. Most impartial observers would agree that this structure aligns the interests of the shareholder and the employee. The real issue here I think is the level of compensation. With the median household income in the US around $46k, I suppose most folks have a hard time figuring out why anyone could do anything that would quality him or her to earn $1 million or more. If an insurance salesperson receives $100 for every policy he sells and he sells 10,000 of them, would we begrudge his $1 million in compensation? If an actor can help a motion picture gross $500 million, why not pay him or her $20 million for it? Professional sports has similar economics. We don’t mind paying big producers in these areas, why is Wall Street so different? Because the public really doesn’t understand what they do on Wall Street.
When my children were younger and asked me what I did for a living, I would try hard to explain. Their blank stares told me they didn’t get it. Eventually, I just told them to tell people that I was a fireman or a submarine captain (ha!). Anyway, I can understand how vilifying the bankers now makes some political sense. They are viewed as pariahs (or worse!) by Main Street and punishing them surely creates some cathartic pleasure by the populace, but it makes very little economic sense to me. And to the extent that it creates unease and angst in the stock market, I am against it.
This forces me to try to articulate some of my views on these things.
One of the first things to be said, of course, is that standing in front of a pitch fork emboldened crowd is not the wisest thing to do. What ever the merits of the populist response to the current transformation of the US economy, it (the response) exists and one needs to manage it rather than simply oppose it. Whether you interpret what the adminsitration is doing comes under management or fanning the fires is an individual choice.
Second, “too big to fail”, which is the central issue, is a serious and difficult matter. I come out on the side of Volcker and think that if one supports “too big to fail”, which I do, then insitutions deemed as such (and bailed out by the public purse) can quite reasonably be regulated…not interms of salaries, but indirectly in terms of ultimate profitability.
Third, the fact is that the “bonus pools” really are rather troubling (Goldman’s pool – not its profits, which can go to shareholders – is reported to be larger than NASA’s budget for 2010). Is this really where the US wants to be in terms of public policy? If the answer to this is no, then a tax on high levels of compensation (including for profesional football players) is highly appropriate. Tax incrreases are probably inevitable anyway, so it will be no surprise if changes are highly progressive.