The Bailout and the Bonuses, Part 3

Thursday, October 30, 2008

As of today, Congressman Waxman’s office has not had a response to the letter he sent to the first nine major banks to receive the $150 billion capital injection from the government, seeking information on their compensation and bonus plans for 2008 and other years, stating: "I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record."

Think about this: The people who ran these investment banks, who kept only a small amount of money in reserve, but risked a vast amount more than the reserved amount, at a leverage ratio of 40:1, were able to bonus themselves on that 40:1 that was put at risk, and now on the backside have come to the American taxpayer to, in effect, cover that risk.
How is it rational to allow people to incur hundreds of millions of dollars in bonuses for this year (and even future bonuses), when they have proven that their business model did not work; they have proven that they took too much risk and they collapsed their businesses, either it had to be sold (Merrill Lynch), or was bankrupted (Lehman Brothers), etc? They engineered and maintained a compensation model that was proven to be flawed.

The Bonus Pools: The report that Goldman Sachs and Morgan Stanley (and others) have assembled bonus pools that approach, in terms of billions, the amount of money that has recently been invested by the United States government, is astonishing. It shows the same kind of bad judgment that got us into this mess. It is time for the Boards of Directors of these companies to understand that they are alienating the public. These are the same people who told us the Wall Street bailout was necessary who are now stuffing it into their pockets as “bonuses.” If we are willing o kick out of his house the person who overreached to buy a house he should not have bought, how is it we allow somebody who nakedly went long the housing market with tax-payers’ money to keep their bonuses? Completely unbalanced.

Once you go to the taxpayer for a bailout, does not that private compensation contract become null and void, predicated upon the fact that the business has changed and the economic model has changed? The companies are busted and in need of money, had to be bailed out by the government that had to come out today and say stop hoarding the public money and lend it. Although “Companies participating in the bailout must adopt the Treasury’s standards for executive compensation,” ooops, the rescue legislation has no enforcement mechanism!

To the participating banks we say: Isn’t it obvious that the reason that we are investing in you, why we are giving you this money, is so that you can lend the money, not necessarily use it for bonus pools? It is absurd to have to state the obvious. When the government agreed to put the TARP bailout in place, to make these liquidity injections, it put limits on CEO & executive compensation, albeit weak ones---the government rescue plan merely limits the compensation of the top 5 executives at participating firms, but it does not affirmatively condition the receipt of government funds on required bank conduct. When the TARP plan was drafted and passed by Congress, who was looking out for us?

The lone survivors, Goldman Sachs and Morgan Stanley, are no longer investment banks, they ran for dear life into the regulatory embrace of bank holding companies, so their structure and charter has changed, and they are going to have to understand that they will be paid as bankers, not as the river-boat gamblers they have been for the last few years.

The Damage Done: As a consequence, the American people are going to have to forego student loans. The American people are going to have to pay more for their mortgages. The American people are going to lose jobs. The children of this country will be forced to incur a trillion dollars in debts that were accumulated without our consent by investment bankers who created out of unfathomable greed a model of risk in housing such that they were able to bonus themselves hundreds of millions of dollars. On a fundamental human and moral level, is it appropriate to keep those hundreds of millions of dollars in compensation knowing that the system that you created has bankrupted the American taxpayer, or at least has added trillions to the American taxpayers’ bill?

The bonus money is discretionary with the Boards of Directors of these companies, who can choose for their company to forgo the granting of bonuses under these circumstances where the public was told that the bailout was needed to stop the economic contagion.

Without the bailout, Morgan Stanley would have gone under. Those people wouldn’t even have jobs if it were not for the bailout, let alone bonuses.

The law protects those who benefited from this over-leveraged reckless mortgage scheme. Unfortunately, the law is set up to take the home away from the person who overreached for the home mortgage he should not have taken, but the financial engineers were able to alter securities laws and regulations such that they are able to keep the bonuses for taking risks they should not have taken. Shame on the American politicians for saying to them: “You can keep your ½ billion dollars because we screwed up the law, even though obviously you were completely incapable of handling that risk, which brought the world financial system to the brink of collapse.

Congress said there was a CEO & executive compensation limitation in the bailout bill, but at the end of the day there is neither strong nor binding protection against abuse, more of the same abuse by the same abusers who brought us to this point. The deeper you get into the bailout bill the more troubling it becomes. The politicians were just selling it to us, and the banks just had their hands out again, played one more confidence game. The audacity of the investment banks’ endemic, unrepentant avarice, and in plain sight for all to see, is withering.

Credit, which is seized up around the world now, is a word from the Latin, meaning money. It also means faith and confidence. What is really at stake today is the faith which citizens of the free countries have in their societies. Our trust and security in the world as is seems, and our ability to control the circumstances of our lives predicated upon following the rules, have been stolen by the moneysharks and replaced with anxiety.



DOBBS: David Smick, you recently wrote that -- let's go to this, your editorial published in the "Washington Post" Sunday. You compared the global financial markets to a, "rich, generous, but occasionally paranoid great uncle."

You said, "Normally this benevolent great uncle sprinkles money calmly and wisely throughout the family, taking a careful reading of risk and potential investment reward. But every so often, a deep paranoia overtakes him." Do you see any sign that that paranoia is subsiding, the panic is weakening?

SMICK: Well, I think the fact that, you know, that Bernanke has got 12 fire hoses shooting liquidity into the system, I think we've talked about this before, Takes depression off of the table. We're talking about recession.

I think the paranoia still exists about credit card debt and auto debt next year, about this crisis moving from the banks to personal -- the personal balance sheets of the average American. But I think the greatest paranoia is international. When you look at what's happening internationally, the model has been for the last several decades, the U.S. is the consumer of last resort. And the world sets up export platforms to send their exports to the U.S. and build up excess savings.

And now with the global economy collapsing, that model is just crumbling. And we're going to see emerging markets. Now they're weakening very, very quickly. And the surprise has been that the European financial exposure to emerging markets is six times the U.S. bank exposure to the subprime. So you know the paranoid great uncle is paranoid right now because of global reasons.

DOBBS: And globalization itself right now, so-called, you know, you just laid out the model. The model is that United States has been financing these other economies. And doing so while, frankly, jeopardizing -- not jeopardizing, I mean we have literally squandered this nation's wealth in so doing.

[L]et's listen to, what Henry Waxman, the chairman of the House Committee on Oversight and Government Reform, had to say today about the nine financial institutions receiving taxpayer money in the Wall Street bailout: "I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the worst financial -- one of the financial industry's worst years on record."

We have talked with Congressman Waxman's office. They haven't received a response from anybody.…[I]n addition to this, half of the money spent so far on these banks will go over the next three years to dividends to their shareholders, as things stand right now. That is unconscionable, is it not, Professor Morici?

MORICI: Absolutely. We haven't seen hubris on the part of aristocrats like those in New York since just before the French Revolution. It's absolutely absurd that Vikram Pandit [Citigroup CEO], who himself was paid $155 million to sell a bogus hedge fund to Citigroup shareholders and put the money in his pocket, is now prepared to dole out millions and millions more in bonuses to his executives for the privilege of running that bank into the ground, and then borrowing tens of millions of dollars from the American taxpayers.

It's not just Pandit, it's Stan [O’Neill] over at Merrill Lynch and all the others. This is what destroyed Lehman Brothers. They took half the profits of Lehman Brothers, put it into the pockets of the executives, and essentially declared the place bankrupt. It's obscene, it's beyond reproach.

SMICK: Lou, I talked to a number of Japanese officials and bankers in the last week or two. And I've said, you know, you -- went through this experience in the '90s of a financial crisis. What did you learn? And I was surprised that quite a few said, we made the mistakes of giving the banks the money and not requiring anything.

And in fact, I said, what would you have done? He said, we would have basically -- we would have -- not privatized it. We would have taken the banks over, had a workout team essentially... temporarily nationalizing....

DOBBS: As a matter of fact, we heard from the treasury secretary, we've heard from the Democratic leadership of this Congress, that they were dealing with the issue of CEO compensation. They're going to constrain it….There will be no golden parachutes. Now we find out that they're lying through their teeth….Democrat or Republican….both of them.

DOBBS: Can we talk about $200 billion in taxpayer money, floating into the pockets of shareholders, who should be bearing the brunt and the responsibility of the failures of these institutions and the executives who are taking down billions of dollars---when they drove these institutions into the ground?

MORICI: These executives have quite simply purchased the United States Senate. Folks like Dodd and Schumer from New York. They've collected enormous campaign contributions from these guys. So now they're willing to turn a blind eye.

All the bailout bill did was keep them from giving golden parachutes to the five top executives and limit tax deductions on their pay. But the vast majority of executives at these institutions [will walk away with] millions of dollars in bonuses.

DOBBS: Bruce, [y]our thoughts on what in the world happened to -- I thought the Republicans were supposed to have some compunction about prudence, responsibility, moral hazard. I thought the Democrats were going to actually be serious about constraining excess compensation to CEOs and executives. Both of these parties are frauds, are they not?

BARTLETT: Yes, absolutely. What we're doing to the entire financial sector is turning it into Fannie Mae. We're making -- we're going to have a kind of public-private kind of partnership deal, where the risks are all borne by the government and all the profits go to private executives, as was the case with Fannie Mae.

And I think that that is fraught with risk. I think we need to sell off the government's share of these enterprises as soon as we possibly can and privatize them and have a true free market. But I don't think it's going to happen any time soon.

SMICK: But, the deal was -- when the Congress said, we'll give you the money, to the banks, if you lend. They're not lending. That's the tragedy.

DOBBS: …I don't know who -- you know I suppose both of these parties, the House, the Senate, the White House -- they all think that they fooled someone. The only people they did fool certainly were those who they bought off with $150 billion. And of course, they took care of their contributors, both of these parties, on Wall Street.


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