Of course, headlines like this, from today’s Wall Street Journal, fuel the belief that TARP and the stimulus were unnecessary: Wall Street Pay: A Record $144 Billion Whatever financial and legal rationales support this record compensation, it proves Wall Street is tone-deaf.
The Troubled Asset Relief Program — TARP — expired yesterday, having cost nowhere close to its original sticker price of $700 billion. (See, e.g., TARP Bailout to Cost Less Than Once Anticipated) $700 billion was a guesstimate born of political expedience, more than the $500 billion Treasury officials targeted in their initial bailout plans but less than $1 trillion, which Treasury officials feared might be required to slow the economy’s September 2008 death spiral. As the NYTimes reports in the linked article, taxpayers may even make money of the deal. Maybe.
Remember September 2008? 25 months ago? The government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy, AIG and Merrill Lynch were going down, Morgan Stanley and Goldman feared they were days away from collapse? Wall Street had gone off the rails and crashed into the world economy like the train in The Fugitive? No? Apparently you are not alone:
Fewer than three in 10 Americans say they believe [TARP] was necessary “to prevent the financial industry from failing and drastically hurting the U.S. economy,” according to a poll in July for Bloomberg News. (NYTimes)
I understand the rage against Wall Street’s excesses, but denying that the U.S. and world economy were hanging by a thread in fall 2008 ignores the facts. Which brings to mind Derek Bok’s quote: If you think education is expensive, try ignorance. The gleeful embrace of ignorance is the political Special of the Season; look no farther than Sarah Palin and the Tea Party’s enthusiastic embrace of Christine O’Donnell, the Republican nominee for Governor of Delaware. Rage against Wall Street, rage against TARP, rage against Obama’s stimulus package brought us the Tea Party, a “populist” movement financed by billionaires. If you deny the existence of evolution, it’s easy to deny the plain truth about the need for TARP.
New York’s financial firms paid about $18.4 billion in bonuses for 2008, an amount the New York Times reports as the “sixth-largest haul on record.” These are the same financial firms that lost billions of dollars, the same firms whose disastrous investment and risk management practices propelled the world economy into the worst downturn since the Great Depression. Did these firms use Troubled Asset Relief Program (TARP) bailout money to pay bonuses? Money is fungible. It’s a red herring to ask whether bonuses were paid with taxpayer money. Any firm that accepted a dollar from TARP should be prohibited from paying employee bonuses. The government should sue to recover any bonuses paid. One theory of recovery is that the companies hold TARP funds in a constructive trust for use only in connection with disposition or workout of troubled assets. Another theory is that the executives whose companies received TARP funds owe a fiduciary duty to taxpayers to ensure the funds are used for TARP purposes. The companies and their employees lost any right to privacy in bonus compensation when they took TARP funds.
New York attorney general Andrew Cuomo is investigating these bonuses. He issued subpoenas to former Merrill Lynch CEO John Thain and other executives at Merrill-acquirer Bank of America “asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.” The Wall Street Journal notes that Merrill incurred a net fourth-quarter loss of $15.31 billion. The finance industry claim “that they need to pay their best workers well in order to keep them” is hollow, clueless, and insulting to everyone outside the finance industry.