New York State Attorney General Andrew Cuomo delivered a report to Congress on the bonuses paid to the employees of nine recipients of the TARP bailout money. He called it “The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.” (July 30) AG Cuomo concluded that even “in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.” The report is only about banks, of course, since all the investment banks and brokerage firms changed their status to “bank” to become eligible for TARP bailout money last fall.
Some of the banks that took the TARP money, like JP Morgan (NYSE: JM), Morgan Stanley (NYSE: MS) and American Express (NYSE: AXP), did what they could to return it as quickly as possible, including buying back the warrants. It will be very hard, indeed, for the financial institutions to change the public perception now that we have seen their willingness to take any risk, to make money at any cost – only to take a handout from the public coffers when things go badly so they can continue to “make money” for themselves. The banks are entities but they are run by people who have jobs and get bonuses and perks. Former-Treasury Secretary Hank Paulson’s plan to plunder the US Treasury on behalf of his former Goldman Sachs (NYSE: GS) mates on Wall Street set these banks up as the target of public scorn.
Late Friday, July 31, the House of Representatives approved a bill that would allow regulators to limit executive compensation at financial institutions with assets greater than $1 billion if they find that the programs would “induce excessive risk-taking” behavior among bank executives. This comes a full eight months after Bank of America (NYSE: BAC) was first subpoenaed by AG Cuomo about executive bonuses. It is a far cry from anything that would create a sense of justice out of a system where two TARP recipients, Citigroup (NYSE: C) and Merrill Lynch, operated in a way that lost $54 billion in 2008, took $55 billion in TARP bailout money, and then paid $9 billion in employee bonuses.
Despite the hue and cry of the public, these bonuses have continued. In my view they will continue into the future. Although we may think that sticking labels on the banks behavior, or asking Congress to legislate some discipline, will make a difference, it is unlikely to change anything. After the early 2009 bonuses were revealed, the banks claimed that the bonuses were required by contracts and could not be broken without violating the rule of law. They got away with this claim even as contracts with the United Auto Workers were being revised. It’s like a modern version of a folk story by Joel Chandler Harris. “Bred and born in a briar patch, Brother Fox, bred and born in a briar patch!” And with that Brother Banker skipped out just as lively as a cricket in the embers.
Thanks to David Friedman for bringing the FT article on the report to our attention.