Banks Paid $32.6B in Bonuses Amid U.S. Bailout (2009)
bloomberg.com
bloomberg.com
Waaat. I think the government should stop bailing out businesses. Either you let the company go bankrupt or you nationalize.
Also I clearly need a job in banking...
I vaguely agree with that sentiment, but the problem in practice is that government sucks at running things. They introduce layers of infrastructure that business doesn't and turn things into political footballs.
Although thinking about that for a moment, its a big problem on its own...
Because a company that needs to be bailed out was doing a great job...
Anyway, this is pretty clearly about politics, so... article flagged.
Edit: I can't reply to you for some reason, but I didn't downvote you. However, saying "downvote" instead of just doing it, and then flaunting your karma score and elevating yourself to the position of de-facto moderator seems much like saying "here is MY political opinion, and now I will work to shut down any further discussion on the subject."
Also: I don't really care about your downvotes, because I've accumulated more than enough of this otherwise useless 'karma' that I'm happy to spend in order to make HN better by keeping politics and 'outrage stories' off of it.
As a result of this Norway now has the largest sovereign wealth fund in the world. It's pretty hard to make direct comparisons given the differences in their populations and economies, but a fairly broad range (i.e. left and right [1][2][3][4]) of people seem to think that this was a wasted opportunity and that if it was managed better they'd have a lot more to show for the last 3 1/2 decades. I'd tend to agree.
[1] http://www.theguardian.com/commentisfree/2014/jan/13/north-s... [2] http://www.bbc.com/news/business-19871411 [3] http://www.economist.com/news/special-report/21570842-oil-ma... [4] http://www.newstatesman.com/politics/2013/04/thatcher-and-no...
edit: A little more digging seems to indicate that I was painting with slightly broad strokes. Norway do indeed operate some sort of licensing scheme according to the "North Sea oil" wiki page (http://en.wikipedia.org/wiki/North_Sea_oil), so it is not entirely operated by Statoil.
I believe the licensing system also takes into account investment and effects on local economy to an extent that creates substantial capital inflow beyond what you'd otherwise see.
In fact the UK government is expected to make a tidy profit when it privatises RBS again.
Have you ever had any interaction with any large business? They are bureaucratically indistinguishable from governments.
I can only conclude that the people saying things like "think healthcare sucks now, wait 'till the government's in charge!" have never actually had to personally deal with the healthcare system.
Actually, the only thing that's hit the "1/4 as bad" mark is the health care exchange, and my problems with it are chiefly attributable to 1) no standard Internet-Age-friendly national ID card or similar, so identity/citizenship issues are still ad-hoc "send us a fax and mail us a copy of your drivers license, social security card, and birth certificate" nonsense, which is a problem with far more than just interactions with government, and 2) private health insurance is still a major part of the picture.
It's like a machine to generate stress and take your money, with treating illness as a side effect. I'd gladly take single-payer over the dubious and mostly not practically available "freedoms" our current system affords me.
Actually, there is no evidence of this. See this report that compares the Govt run industries before and after privatisation: http://www.psiru.org/reports/public-and-private-sector-effic...
"The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient"
Even if it was more efficient, $31 billion of corrupt bonuses on top = no different from an inefficient government.
Exactly this. I've spent years in both sectors. People suck at running things, not governments.
Government departments will often be more bureaucratic for the simple reason that they have many additional roles to their primary ones: They are subject to openness and audit criteria that no private business is; they're subject to leadership systems that need to be resilient to far more frequent and drastic changes than in most businesses; they're subject to performance measurement across a far wider set of criteria than most private businesses etc.
The government could be no worse than a management team that has already proven its dedication to running the company into the ground.
Seriously, Nevada's state government couldn't turn a profit running a brothel.
The problem is, that currently nationalization is only possible in most countries, if you fully pay the owner. Changing this would in some countries require constitutional changes. I think having a special rule for banks and the option to split would be a feasible change.
Just, you know, the taxpayers are not the owners, because .
Hm, maybe it doesnt really matter if taxpayers would have become the owners, because in any case they would have payed for their losses but the profits would not magically find their way into taxpayers pockets, instead it would be some new term instead of owners like "facilitators" "workers".
In the end, money doesnt really matter, what matters is which people take decisions concerning all other people, power.
For starters, the government can go to the banks shareholders and tell their shares are going to be worth $X or they won't put money in and the business will go bankrupt.
If the shareholders manage to find another investor, then great.
In the UK, this happened with e.g. Royal Bank of Scotland, where the government gradually acquired a larger proportion of the bank as it provided capital until it owned the vast majority (in 2012 it owned about 82% - I don't know what it stands at now). While nationalisation of RBS was certainly not cheap in terms of pounds, it was firesale prices in terms of the size and turnover of the business, because the government took on massive risk as well.
But the key part is that by providing the cash infusion in return for shares, the government is also participating in the upside if they manage to turn the bank around, and shareholders took a substantial hit in the form of massive dilution (though they are set to recover quite a bit as the bank recovers).
And in a way, the big banks are effectively nationalized in the U.S. We do maintain parallel governance structures because fully nationalized banks ( like the Bank of England in Britain's Mercantilist heyday ) are ... well, mercantilist.
Is this supposed to be a figure of speech suggesting Canadian banks policies are so similar they are essentially the same bank? The three largest of the Big Five (RBC, TD and Scotia) are so similar in size none of them can even be said to lead the market.
Thank you for the correction, Joel.
The pertinent EconTalk is here: http://www.econtalk.org/archives/2014/02/calomiris_and_h.htm...
What you need is to be a partner.
> Also I clearly need a job in banking...
If you want to become a good cook, get a cooking job. If you want to earn good money, get a money (banking) job :)
Nope. Explanation here:
http://www.interfluidity.com/v2/2587.html
Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.
...
After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they control (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)
I do think, however, that after having been "bailed out", a business should have a very high tax rate on profits (90 - 99%) for a number of years/decades.
Yeah, towards the big banks I definitely would.
EDIT: I believe that the bailout was needed and it did (IMO) prevent significant negative ripples from flowing through our financial system. What I really despise is the lack of discipline and regulatory oversight during the bailout process. This left a very sour taste in many struggling Americans and demonstrated that our political structures are incapable of focused, regulated, and disciplined action.
You can make a heck of a lot of money if you kill the economy, get bailed out and get to keep the properties and houses of the little guys that don't get the same benefits.
If you really wanted the economy to recover quickly you would be bailing out taxpayers not big corporations.
Also the regulatory situation in Europe is still much more stringent than in the US. In US banking there are a load of utter time wasting rules that provide little sanity to the issues suffered
I would be interested in legislation that changes this. If a private bank (I don't think there are many truly private banks anymore) wants to give whatever bonuses it wants, I really don't care.
But once public money is involved, I agree we need some strict controls.
Isn't the point of the article that this is demonstrably untrue?
Part of the reason for the discrepancy at the time of the crash is that, until the liquidity crisis gummed everything up, most of the catastrophic losses where in a relatively niche area. A lot of the other parts of the banks did continue to make money.
Then when the liquidity crisis hit, the view was, generally, that significant parts of the businesses were still fundamentally sound so there was no point losing good people as they'd be needed to build things back up again.
I happen to think that all this is sensible up to, but not including, the bit about losing good people. This was fundamentally self serving and tended to define "good" as those who were successful is a overly risky environment.
What doesn't make sense is that anyone involved with the losses or in the management chain of anyone who was should still get any bonus at all. That, obviously, includes the CEO. If the CEOs of these companies still received large bonuses -- and my impression is that they did -- that is fucked up.
To my mind the worst of those was Stan O'Neill. He got kicked out when it was just a disaster but not yet a catastrophe (when the mortgage losses were known but before the liquidity crunch) so he walked away with something heinous like $160mm.
This is short-term thinking; it gets you out of the mess you're in today, but it encourages more of the behavior that caused the mess to begin with.
$614 billion was disbursed
$667 billion was recouped
For a difference of $53.1 billion, i.e. 8.6%. [1]
8.6% is insultingly low compensation to use taxpayer money that, by the way, could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. FWIW the average junk bond yield in 2009 was above 20% [2].
[1] http://projects.propublica.org/bailout/ [2] http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bond...
> 8.6% is insultingly low compensation to use taxpayer money
So, money was made?
> could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance.
Why couldn't it still be used on infrastructure, education, or healthcare?
Also the country would survive a depression if it really came down to that, the bank wouldn't survive a bankruptcy.
So the playing field are fairly even when it comes to having leverage.
But when reviewing the decision afterwards, I think we need to reject lines of argument that the government did really great on the deal so it's not that bad what happened. We don't want it to happen again, we don't want to be in a no-other-options situation.
http://2.bp.blogspot.com/-nkdzCkw8Rr0/U-qiPe1Tf-I/AAAAAAAARS...
I'd suggest that's a much more direct and obvious economic impact than some maybe-perhaps about driving investment overseas. (How, exactly? Do you think money would suddenly stampede out of the US if regulators developed a spine and jailed the delinquent operators who caused the crash?)
Anywway - clearly the decision was political. It was made for the benefit of the banker caste, and not for the general population.
The underlying problem is unearned privilege.
There's no rational reason for these bonuses. But bankers pay themselves these sums because they know they can, irrespective of the incredible damage they cause to the rest of the economy.
Thats not what happened when the banks regardless of contracts still gave out large bonuses many times more than the return to the taxpayers.
That simply doesn't add up.
Example: The gov only made 8.5%, but if the US costs have increased 16% over the same period (because of a depression), the overall return is more like 24.5%, ignoring the additional costs of a depression.
I don't know the details of when the money was disbursed and when the money was recuperated, but if it were disbursed in 2008, and recouped in, say, 2014, there was a 10% rate of inflation, which devalues the currency to the point that no, money was not made.
If 2013, the rate of inflation was 8.2%, which leaves a .4% "profit", assuming no other costs.
If 2012, the rate of inflation was 6.6%, leaving a 2% profit, etc.
Of course, this assumes the money wouldn't have performed in any way just sitting in the government coffers, and I honestly don't know enough to even begin to evaluate whether it would have.
http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt
edit: computation done by comparing Jan 1 2012 to Jan 1 2013, etc.
It is certainly a better deal than the Irish bailout, which will never be paid back and amounted to 100% of GDP.
For the government's balance sheet, getting paid back 8.6% is a lot more reliable than your gut instinct of infrastructure or education or (especially!) health care.
The point of the bailout was to throw all the might of the State behind the sector, in a "ye shall not pass" stance that basically stated that either we cut these banks some slack or our current civilization would burn in flames.
It worked, because people got the message and business eventually went back to normal. We can disagree on whether it was "good enough" (I thought the opportunity for deeper changes was ripe, but I'm just an old-school eurosocialist myself), but I don't think any other entity could have done it except Nation-States.
Wait a minute, just a minute. The way I see it, the US government didn't disarm a nuclear bomb, it just saved Goldman Sachs (and it's creditors AIG) and let Lehman Brothers die. Smart choice by Henry Paulson, I'd expect no less by a former senior GS manager.
It used tax-payer money and I'd be angry if I were an American. I'm angry at the Greek government who did the same thing (among many other things), but then again. I live in Greece, I get a choice (More than 30 parties run in the elections last time I checked...). In the US I get the feeling that you can vote Democrats or Republicans. Largely disputable policies like this, are never going to change.
I was wrong. It's largely regarded as a bone-headed move today. It was the start of the meltdown.
Greece is another matter; the problem there was not with the bailout, but with stupid terms imposed by the troika to cover debts. In fact, if the troika had behaved with Greece in the same way the US government did with US banks (putting up cash right away, no questions asked), Greece would not have suffered what it did.
quickly tabs over to lookup Apple's balance sheet
nope. but give it another few years. ;-)
None but no single institution needed that much. Private investors, especially when working together, could have certainly stumped up funds for individual institutions. In fact, in the case of AIG such an overture by Chinese investors was rejected: http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bom...
[1] http://www.washingtonsblog.com/2008/10/the-problem-was-never...
I'm not sure the argument applies here, since I'm not sure how many companies were hiring executives during the time frame.
I remember an instance in the past where a executive organized a 'hack day'. All he did was drop in email to the company cafeteria to have a tea and biscuits arranged. The dude didn't even show up to the event. At the end of the quarter I remember him getting a neat cash reward for 'thought leadership' regarding that hack day.
A lot were fired, they hired back, then fired again. Not sure what the overall impact had been, but for the ones I know, after the crisis it has been like a continuous Christmas. Lot of cash/cheap money to buy cheap flat/houses all around, kids and early retirement at 32.
What, like General Motors?
http://influenceexplorer.com/politician/andrew-cuomo/d83c545...
Doesn't have much to do with the bank bailout though.
Note: Andrew Cuomo is a name I'm only vaguely aware of. I don't know anything about him outside of what I've learned from the article, and these comments. I have no opinion on whether he should or shouldn't be elected. So the above would apply to any given politician who behaved similarly.
1) Why do you want to retain the executive that helped run the business into the ground?
2) What other corporation in their right (collective?) mind would hire one of these executives (given their inflated salaries and poor performance).
I still think the right way to fix this would have been to send those who propagated the whole financial scam to jail.
The pseudo-democratization of credit availability was something explicitly wanted by the government as a means of stimulating consumption. That this policy was completely misguided wasn't really the fault of the banks themselves who mainly took advantage of the admittedly ridiculous situation.
In many ways, banking hiring is more "meritocratic" than tech hiring. There is less emphasis on "fit" and "culture" and because new hires are viewed as tabula rasa there is less emphasis on criteria that might be gender-biased (e.g. high-school extra-curricular activities).
Also, the banks that failed were typically sold off to banks who healthy. The government was strong arming banks into buying weaker banks with gov loans. Goldman, Chase, BoA all didn't get trapped in the subprime mess.
2) Talent will flee to the money. I've seen this in law firms. Firms that don't properly pay their "rainmakers" lose them to firms who will.
The banks laid off tons of people.
It's not just "executives." Most of the staff gets paid bonuses, essentially as part of their salaries.
And there was a desire to keep these companies as on-going concerns. If you suddenly ax their pay, they quit. You can say "good riddance, they caused the problem!" But you still want to leave these companies as on-going concerns, by definition: they got bailed out.
It's not simply a matter of sweeping out all the old traders and bringing in new traders to decode the books. You need people with direct experience, if for no other reason than to unwind the deals. And you need to pay them market wages. You can point out, correctly, how high those market wages are. That still doesn't mean you can keep the company running by trying to cram down their wages.
This ESPECIALLY goes for a company that is going out of business. No one wants to work at a company that is going bankrupt; they'd rather look for a new job instead. You need to pay people extra money to stick around while the ship is sinking.
Not to mention that the Fed made available and lent up to $7T to banks (without telling Congress) right before TARP was rushed through.
Smoke some weed, go to jail.
Do it three times, go to jail for life in CA. MANDATORY. Especially if you're black.
If these and other ongoing similar "crimes" don't convince you that we're living in an oligarchy, and our precious democracy/republic is a farce at best, well, I don't know what will.
Our drug and sentencing laws are the result of democracy, not oligarchy.
If a democracy and majority rule were the true rule of the land, we may still have segregation, slavery, illegal mixed-race marriages, and so on, and so on...
Now look at what class our electorate is largely made up of. Mix that with a little Citizens United and it becomes clear again that money controls government (and now rather blatantly) and it's not often that decisions are made that benefit the weakest among us - drug policy and the war on drugs being just one example.
That has nothing to do with what agenda is moved forward by the oligarchy.
Please.
The majority is rarely well educated about anything. Pretending their support on the war on drugs is somehow more informed than on bank bailouts is silly.
Unedited previous comment:
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I don't understand your comment, friend. I said nothing about the 'war on drugs'. Uninformed participants in a political or economic system should not be making decisions that affect others in any way. Random citizen John Smith will, out of a sense of righteous indignation, decide against any useful regulation for banks because he is upset that they get recapitalized while his mortgage terms do not get favorably renegotiated, irrespective of the intellectual value of his decision.
Banking and financial activities are fundamental to a healthy and growing economy and everything from home mortgages to credit cards to IPOs are driven by a bank's ability to extend credit and deliver banking services to the citizenry of a country. Bonuses are generally speaking a direct function of a bank's PROFITABILITY, not its ability to cater to every individual's whims and desires to become some rockstar 'rich person' or even the populace's desire to remain middle class. Services are provided, and profits are distributed accordingly.
If affecting political policy is beneficial to shareholders, decisions like Citizens United are logical and the exact type of decisions I'd want my board of directors to make, as an investor, and if that contributes to maximal economic growth then it is optimal for human society, with the exception of environmental concerns which need to be taken more seriously then they have been in our immediate past.
http://www.businessweek.com/the_thread/economicsunbound/arch...
So what was the right rate of return? If it was 10%, that's 2% marginal rate not captured. How long was the term of the loans? 5 years? That works out to roughly $70B over 5 years.
I'm not claiming that's a small number (!) but if we are calling it theft, we should qualify the theft more concretely.
The bailout is the problem. If there was no bailout, these banks would have totally reduced the payout. They would feel the hit and have to adjust accordingly to keep the company afloat. Bailout gave them the go ahead to disregard all the losses.
It is extremely cynical for the same players to be crying for free enterprise, woe is regulation and the market always work its magic. But hey it's not their problem. We just had to be the sucker, pony up and bail them out.
- If the bailouts didn't happen, it would be mayhem, "too big to fail", etc.
- You got your money back with interest. It was all payed back (disregard economic theory and value of money in hand).
- Why are you complaining, you banjo-playing hippie? You can't be in OWS if you have an iphone! (In Erin Burnett's voice)
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Many people will talk situations that forced the banks to hand out these bonuses and maybe they're right but the deeper problem is that when companies/banks/people suffer no consequence (and even worse, benefit from) doing illegal/harmful things then they're going to keep up doing them. profit vs "cost of infraction".
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_...
In particular, the orderly liquidation authority created a legal framework to liquidate a broader range of financial institutions:
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_...
Dodd Frank is at least toothy enough that banks are constantly whining about it now (and working to dismantle it).
As such, front office Wall Street bonuses are primarily based on personal and desk performance. In 2008 a handful of desks 'blew up' which took down the entire firm. Meanwhile equity and govie desks had a banner year. Does every desk deserve to get shafted? Do the back-office developers deserve to get shafted? I'm not here to defend the banks, but I can understand both sides of the argument. The Government should have just nationalized the banks if they wanted to control this.
One thing about financial markets is that if everybody thinks you're doing badly suddenly they don't want to lend you money and this might do you in even if your problems had been survivable. And Lehman Brothers waited until the very last moment before telling the Fed they had a problem. So the Fed insisted on throwing money at every financial institution - even the ones that were hugely profitable during the crisis.
And if your company is short on money or dying the last thing you want to cut is bonuses. If your employees smell blood they'll be thinking about jumping ship. If you stop paying salary but leave bonuses intact you'll do better at keeping people at their desks until until they've finished wrapping the company up. And if somebody screwed up in a way that contributed to the crisis they should be fired and replaced, not have their bonus cut.
THere were a lot of things that should have been done differently in the crisis. Investors in insolvent companies really needed to be wiped out to encourage them to take better care in the future. Interest On Reserves was really not needed to prevent the economy from overheating the way the Fed feared (the Fed works with numbers months out of date and they still thought the larger economy was fine and that inflation has highish when the crisis hit). The bonuses are at best a distraction but one that's easy for politicians to make sound bites out of.
that stuff needs some regulating. its all well and good making everyone richer and deregulating to encourage it, but if the gap widens, because of how the economy works, the poor get poorer in real terms :(
also we have big explosive crashes...
This is such a bizarre argument. You don't think there were/are oodles of prosecutors frothing at the mouth to throw some bankers in jail? Look around the internet! They'd be heroes! The public would rejoice, yet it hasn't happened, because proving that some of the perceived corruption and missteps are actual crimes is, apparently, more difficult than you think. And I don't want to live in a country when the government can decide, willy-nilly, to throw corporate executives in the slammer.
Second, tthrowing here are far more effective means of "punishment" than some low-ranking employee in white-collar prison (which costs us MORE money). Fines have been used, which punish earnings, executive pay, and shareholders.
135 comments and not one mention of Bitcoin?