Bashing Bankers Is a Political Duty

Bashing Bankers Is a Political Duty. By HOLMAN W. JENKINS, JR
But don't overlook the fact that taxpayers are making out on the bailout too.
WSJ, Jan 13, 2010

If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller's Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."

"Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve).

That $50 billion may seem odd in relation to Wall Street's reported bonus pool of $90 billion, but compensation isn't paid out of profits, it's paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money.

Bonuses are a dominant part of compensation because Wall Street firms pay a large chunk of compensation as variable comp, for which the word bonus has been used. Now some firms are paying larger fixed salaries just so the public won't hear the word bonus.

But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion. Much of the nation's paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.

Do bankers deserve it? Of course not. Do you deserve your good looks, good health or good luck in choice of parents and/or country you were born in?

Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition. A firm's management, with its own interests strongly in mind, ultimately decides how much of a firm's revenue to spend pleasing the highly mobile employees who do the work of pleasing the firm's highly mobile clients and investors.

But didn't taxpayers bail out the financial system, so don't taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren't doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).

What's more, despite a casual imputation that taxpayers were the suckers at the table, taxpayers did not, as commonly alleged, "spend" money to bail out the banks. They traded one claim for another. Mostly, they traded claims they printed (dollars) for claims on real assets, such as housing, commercial property and industrial equipment.

Taxpayers effectively acquired these assets on a bet that taxpayers' own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn't intervene. That bet has proved a good one so far (as bets often do when you control the outcome). Even the most notorious of the exchanges that taxpayers engaged in—dollars for securities held by Goldman Sachs that had been guaranteed by AIG—are accruing profits on the balance sheet of the Federal Reserve.

In fact, yesterday the Fed, whose balance sheet is about the size of Citigroup's, reported whopping profits for 2009 of $52 billion—just a few billion shy of what Wall Street as a whole is likely to report for the year. (All this throws a mocking light on the Obama administration's claim yesterday that a new tax must be imposed on banks to "recoup" bailout costs.)

None of this means Americans don't have an ancient and abiding interest in subjecting bankers to scorn. A rough socialism is fundamental to civilization: The most beautiful virgin must be sacrificed to make the other virgins feel better—a service politicians are especially keen to provide when the alternative might be looking at their own role in the reckless risk-taking of banks and homebuyers.

Still, looking at Washington's own role would be a good idea, since taxpayers' success (so far) in catching the falling knife is certainly no reason to repeat the experiment.