The news that Merrill Lynch paid out $15 billion in bonuses is sure to ignite new questions about the wisdom of bailing out Wall Street. Merrill Lynch took $10 billion from the TARP, allegedly to fill holes in its balance sheet. But instead of using that to repair its financial health, it simply put the money into the pockets of its employees. There is no way to defend this disgusting payout.
But that won’t stop Bank of America, which now owns Merrill, from defending the bonuses. And across Wall Street there are lots of people who actually believe that Merrill did the right thing.
How can so many smart people be so dumb?
Easily. There is a sick psychology of entitlement on Wall Street that was created during the bubble years. Many simply cannot believe that they do not deserve huge pay packages. Their brains have not caught up with the idea that they are working in broken institutions that would be unable to pay to keep the lights on if not for the fact that Washington has given them billions of taxpayer dollars.
Of course, smart people are very good at rationalizing their fantasies, especially when the fantasy serves to make them money. There are three rationales they’ll offer when pressed on this. Each one is easily skewered.
- “We made money. It was just one part of the firm that lost it all. So we deserve to be paid.” Sorry, buddy. That’s not the way capitalism works. Ask the guy who just lost his job installing seat belts in GM cars. He was really good at that but since no one is buying those cars, he’s out of a job. Being really good at what you do doesn’t matter if your firm is broke—and your firm is broke. It’s now on taxpayer supported life-support.
- “We didn’t use taxpayer money to pay the bonuses.” This is the most ridiculous idea ever. Money is fungible. If you use billions to pay bonuses and then need to ask the government for money to stay alive, you are using taxpayer money to fill in the hole you dug by paying the bonuses.
- “We’ll lose all the greatest people if we don’t pay them.” Oh really? Where will they go? Who, exactly, is going to hire them? Also: so what? That’s how capitalism works. Failing firms that cannot afford to pay for talent lose that talent to successful firms. That’s an important part of market discipline.
- “If we don’t pay bonuses when firms take the TARP, they won’t take it.” This is the most sophisticated argument for huge bonuses. In Germany, this actually happened. As it turns out, executives would rather risk their firm collapsing due to lack of capital than give up their big paydays. But there’s an easy solution to this: throw the bastards out. The boards of every single financial company that turned down bailout bucks with a bonus limit could demand a full accounting of why a bank’s executives think it is healthy enough to forego a bailout. And if they aren’t satisfied they should just fire the management.
Look. We’re not hysterical opponents of paying big bonuses. Actually, I’m on the record as defending huge bonuses from a couple of years ago. If your firm makes money, it can decide how to reward its employees. If it loses money, it can still decide to pay bonuses if it still has cash on hand. But when you pay yourself a bonus with taxpayer money you are simply taking money from someone who earned it and giving it to someone who didn’t. If the government hadn’t supplied the means for redistributing that money, you’d just be a mugger.
It was only a few months ago that we were being told that Merrill Lynch, among others, desperately needed billions of dollars to survive, that without injections of new capital the financial system would come crashing down around us. If any of this was true, it should have been impossible for Merrill to pay out $15 billion in bonuses. Even the sharpest critics of the bailout never imagined that it would be used to make wealthy idiots even wealthier.
All of this is a reminder of why it is very, very dangerous to allow the government to rescue firms instead of allowing the market to decide who should survive. Perhaps instead of a bailout, we should have confined the TARP to overseeing the orderly disolution of failed financial institutions.
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