Banks Paid $32.6B in Bonuses Amid U.S. Bailout (2009)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHURVoSUqpho

by sjcsjc • 11 years ago

172 159 11 years ago

sjcsjc• 11 years ago

OP here. Given the current story re HSBC's misbehaviour, I thought it worth reminding everyone of the scale of the theft that took place during the bank bailout.

themartorana5• 11 years ago

This, HSBC lending money to rouge nations and drug cartels, the LIBOR scandal, and not a single person is in jail.

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.

rayiner6• 11 years ago

California's three-strikes law was supported by a 72-28 vote in a public referendum. At the time of the vote, nation-wide, the public supported keeping marijuana illegal by an over 70-30 margin: http://www.people-press.org/2013/04/04/majority-now-supports....

Our drug and sentencing laws are the result of democracy, not oligarchy.

cones688• 11 years ago

appreciate the sentiment but HSBC didn't take a dollar, pound or Euro of bailout money.

desdiv• 11 years ago

HSBC got $3.5 billion from the AIG bailout:

http://www.businessweek.com/the_thread/economicsunbound/arch...

sliverstorm• 11 years ago

If it was all paid back though, what was the magnitude of the theft? If we say 8% return was too low given the risk, the value that was stolen from the public is the marginal interest the public missed out on.

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.

mathrawka• 11 years ago

This is also some good reading material: https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

tormeh4• 11 years ago

“When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well,” Cuomo’s office said in the 22-page report. “When the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.”

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...

jheriko2• 11 years ago

Either you let the company go bankrupt or you nationalize.

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...

cowsandmilk• 11 years ago

government sucks at running things

Because a company that needs to be bailed out was doing a great job...

TomGullen• 11 years ago

I don't see why governments can't nationalise industries such as oil extraction. Seems like a lot simpler of a business model than banking and very lucrative as well.

JetSetWilly• 11 years ago

The UK government nationalised RBS and thus far RBS does not seem to be particularly badly run or more bureaucratic when compared to other banks, so I'm not sure there's any real evidence for this statement.

In fact the UK government is expected to make a tidy profit when it privatises RBS again.

matthewmacleod• 11 years ago

They introduce layers of infrastructure that business doesn't and turn things into political footballs.

Have you ever had any interaction with any large business? They are bureaucratically indistinguishable from governments.

mattgibson• 11 years ago

the problem in practice is that government sucks at running things. They introduce layers of infrastructure that business doesn't

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.

crdoconnor4• 11 years ago

I vaguely agree with that sentiment, but the problem in practice is that government sucks at running things.

The government could be no worse than a management team that has already proven its dedication to running the company into the ground.

maxlybbert2• 11 years ago

It's not the federal government, but my favorite example was a (legal) brothel went bankrupt in Nevada a few years ago. The state of Nevada took it over until they could find a buyer, and lost money on the deal.

Seriously, Nevada's state government couldn't turn a profit running a brothel.

quonn• 11 years ago

This is an excellent point. I would put a system in place that makes it clear that banks have a choice of a) Splitting before they get to big to fail or b) Accepting that if they grow larger, they can always be nationalized if they make a mistake that would cause them to go bankrupt.

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.

josteink• 11 years ago

If the company/bank goes bankrupt, the value of the company is by definition zero. What is there to pay the owners?

ArkyBeagle2• 11 years ago

Calomiris and Haber ("Fragile By Design") have run the natural experiment between the U.S. and Canada over the 2008 bubble period. The conclusion is the opposite of yours - Canada really just has the one bank, and sailed right through the crisis because they didn't hold as many rotten mortgages.

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.

CmonDev• 11 years ago

"Also I clearly need a job in banking..."

What you need is to be a partner.

tomp5• 11 years ago

I don't mean to detract from your point, but you have to keep in mind the fact that those were loans, and the government actually made money on those loans (AFAIK). Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense, as long as they are accompanied by legislation that makes hem less likely in the future (which, sadly, hasn't happened yet).

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 :)

crdoconnor4• 11 years ago

the government actually made money on those loans (AFAIK).

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.)

javiramos3• 11 years ago

Yeah, but when the bank needs loans to stay in business it shouldn't be paying out bonuses. Particularly so if the government (i.e. taxpayers/us) went through giant efforts and took a significant amount of risk to hand out these 'loans'.

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.

MichaelApproved• 11 years ago

Also, the payment of "bonuses" in the banking industry are essentially an extension of salary. It's not what you'd typically think of as a bonus for hard work during the year. Bonuses are often pre-negotiated and pre-determined, just like a salary is.

fnordfnordfnord• 11 years ago

Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense

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.

marcusgarvey5• 11 years ago

On the fallacy that the U.S. taxpayers made money on the bailouts, note that in finance deals get judged by how much money they make given the risk that had to be assumed to make it. In the case of the bailouts:

$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...

quaffapint• 11 years ago

I work in banking as just another cog. We suffered wage stagnation and no bonuses. The executives on the other hand still got at least a 10% bonus each year, because they had contracts. So, please keep that in mind when it says 'employees'.

easytiger2• 11 years ago

Still happening. Especially people working in IT in banks are getting almost nothing in bonus and no pay increase for many years. The number of jobs is significantly reduced also.

maxlybbert2• 11 years ago

Not to defend the banks, but this reminds me of when a company declares bankruptcy and pays its executives bonuses. The argument is always that, no matter how flawed the executives' judgment is, it's better to have somebody doing the job than to have the executives jump ship.

I'm not sure the argument applies here, since I'm not sure how many companies were hiring executives during the time frame.

kamaal• 11 years ago

People sitting in high places benefit every where, not just banking. It pays to be higher authority, regardless of your performance. Generally because the definition of good performance is fuzzy you can always twist it to your advantage.

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.

gutnor• 11 years ago

I work in banking. For trader, M&A and other related positions, the contractual bonus rate is/was(?) often 100%.

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.

gadders• 11 years ago

>Waaat. I think the government should stop bailing out businesses. Either you let the company go bankrupt or you nationalize.

What, like General Motors?

lmm• 11 years ago

Yep. That worked out pretty well, on the whole; government gets to keep the upside rather than just throwing money at the same management that failed and getting nothing to show for it.

jheriko2• 11 years ago

an industry driven by greed is greedy... why am i not surprised.

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...

tomp5• 11 years ago

I think a better analogy would be, an industry that makes money has money. Just like a baker wouldn't go hungry and a shoemaker will have shoes.

collyw2• 11 years ago

Or a Foxconn worker wouldn't go without an iPhone. Oh, wait.

neonhomer• 11 years ago

It was properly regulated before, see https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legisla.... Until people go to jail for the crimes (see Iceland) nothing will get fixed.

hnnewguy• 11 years ago

Until people go to jail for the crimes (see Iceland) nothing will get fixed.

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.

smoyer• 11 years ago

At the time these banks were claiming that they had to pay the bonuses to retain these employees ... I think this is logically false for two reasons:

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.

javiramos3• 11 years ago

Also, the job market for bankers was pretty bad circa 2009 so I am sure bankers would have held up a year or two until business bounced back again. Everyone in the banking industry knew that 2008/2009/2010 were going to be bad years so bonus expectations were low. Bankers/traders find loopholes and opportunities in systems (stock market, real estate, etc.) and exploit them for profit. Of course any poorly orchestrated bailout was going to end in this.

orbifold• 11 years ago

Unless I'm mistaken it is not like the people handing out bonuses and the people who screwed up are completely separate. Also it is safe to assume that any organization of a sufficiently large size will have a fixed amount of incompetent people at any level, simply as a matter of statistics. Maybe the percentage will be less where the people come from field with a (different/harder) selection process like the natural sciences/law/medicine as opposed to business administration. The banking crisis also seems more of an institutional / regulatory failure than a failure of individuals.

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.

collyw2• 11 years ago

Are banking jobs given out based on meritocratic ideals, or who your dad knows?

rhino369• 11 years ago

1) Bank bonuses aren't just paid to executives. These losses were from one department of the bank and that one department could have losses so large that it destroyed the whole bank. Even if you got rid of the people who fucked up, you'd have a lot of people left who didn't.

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.

danielweber4• 11 years ago

1) Why do you want to retain the executive that helped run the business into the ground?

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.

daenz• 11 years ago

Hey, wealth redistribution is OK if it's going from bottom to top.

uptown• 11 years ago

While the data is accurate - the messenger, in this case, is Andrew Cuomo - a politician who aspires to run for President in the near-term. He had very little problem accepting campaign contributions from the financial services industry - they were his second-largest contributor by-sector.

http://influenceexplorer.com/politician/andrew-cuomo/d83c545...

eli• 11 years ago

Well, hey if we're just going to ad hominem attack Andrew Cuomo, it'd probably be much more effective to point out the recent scandal where he disbanded an anti-corruption task force because it was too effective and started questioning his friends, and that there's allegedly an active federal investigation into his affairs.

Doesn't have much to do with the bank bailout though.

shawn-furyan• 11 years ago

The criticism usually goes in the other direction: that a politician is too soft on an industry that contributed significant campaign contributions. In the era of the Koch brothers / Super PACs, everybody has contributions from one industry or another. Unless there's something I'm missing, it would seem a positive thing overall that financial industry contributions to Andrew Cuomo's campaign didn't keep him from analyzing and stumping over their bonuses later.

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.

motters• 11 years ago

In other words taxpayers money was redistributed into the personal bank accounts of some of the richest people.

hawleyal• 11 years ago

Well, we all gave it to them. :/

isaacremuant• 11 years ago

IIRC, The official narrative from politicians, news anchors and think-tanks was that:

- 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)

------

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".

maxerickson• 11 years ago

Significant new regulations were enacted:

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).

Symmetry• 11 years ago

I don't really think that this is that surprising or the worst thing about the recent financial crisis.

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.

bborud• 11 years ago

Well, this is obviously the way we want it since we keep electing people who make this possible.

JoeAltmaier• 11 years ago

Its simple. People in the money chain-of-custody always take some. Corporation board members vote one another stock. Company executives (originally normal positions like secretary and treasurer, paid a normal salary) pay one another exorbitant sums. And bank employees always get paid.

jostmey• 11 years ago

Funny, that's about the same amount of money as the budget for the NIH. Sadly, their research budget has remained stagnant for years as inflation has gone up.

harmonicon• 11 years ago

I don't think the bonuses is a problem per se. Companies should be allowed to pay their employee however they want, being true to the contract the employee signed, of course.

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.

oooooops• 11 years ago

It's only a matter of time until the scheme crashes again.

135 comments and not one mention of Bitcoin?

oldpond• 11 years ago

Because bitcoin is no different. Virtual currency speculation is not the answer.

RRRA• 11 years ago

Everyone should watch this documentary by Adam Curtis about the history of extremism and the rise of the banks...

http://en.wikipedia.org/wiki/Bitter_Lake_%28film%29

jim_greco• 11 years ago

Banks are a collection of loosely related business that are only tied together by their participation in the capital markets. The equities derivatives desk has little to do with the mortgage desk which has little to do with the health care investment banking group.

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.

Banks Paid $32.6B in Bonuses Amid U.S. Bailout (2009)

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