Bank lobbyists launch lame defense of taxpayer funded bonuses
Mar 20th 2009 8:30AM
Updated Dec 4th 2009 11:23AM
Bank lobbyists have a job I would not want. Their clients need them to fight a tide of populist revulsion against the use of taxpayer money to pay out billions in bonuses to bankers who pushed the global financial system into bankruptcy. More specifically, those bank lobbyists are buttonholing Senators, trying to convince them to vote against a House bill that passed by a vote of 328 to 93 that would tax bonuses paid to bailout recipients at 90%. These lobbyists are making arguments that lack substance.
First, they suggest that restricting bonuses will put the companies at a competitive disadvantage. That argument is content-free because the bonus tax would apply to 500 firms that have received $200 billion from the government. This means that all those financial institutions will face the same bonus restrictions and thus on the same playing field. Moreover, these so-called talented individuals the lobbyists are seeking to reward with bonuses are the very same ones who made the money-losing deals in the first place. I am not sure how much more of that kind of "talent" we can afford.
Second, the lobbyists argue that the bonus tax will force banks to return the government money so they won't be subject to the tax. Further, the lobbyists argue that the return of the money will lead to less lending -- lending is the reason the banks were getting the government money in the first place. This argument is silly since banks are not lending out the money due to their weak capital positions, they're hoarding the taxpayer cash and paying it out in bonuses.
As I posted, there are fundamental flaws with the banker bonus system -- it rewards deal volume rather than profit. Why is this important? Because it drives bankers to load up on big deals so they can get their commissions. If those deals later sour, they still get paid the colossal bonuses. This is what allowed American International Group (AIG) to justify paying $165 million in bonuses to the very executives whose derivatives deals lost $28.6 billion. Those multimillion dollar bonuses for 2008 were based on 100% of 2007 bonuses -- regardless of the performance of the operation.
It is business operating profit that ought to be the source of a bonus. If a business makes a profit, then the people who generated that profit should expect a reward. If it loses money, those responsible should take a hit. But these bank lobbyists have a different idea -- they like the idea of rewarding bankers who make a profit, even if that profit is just a temporary accounting fiction. And if the bankers lose money, they expect the hard-working American taxpayer to foot the banker's bonus bill.
I may be the only American who thinks that's not what free markets are all about. If you agree, now is the time to let your Senators know. That's because lobbyists are funneling campaign cash to Congress, and the only way to neutralize that power is to convince Congress that if it preserves the use of taxpayer money to pay bonuses to the people who drove the financial system into a ditch, you will vote them out of office.
The choice is clear: preserve the very system that has gotten us into this financial crisis or end it.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares.