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Smaller Bonuses for Bailed Out Bankers?

Britain’s deputy prime minister Nick Clegg has a good idea: banks bailed out by the government should pay their executives smaller bonuses.  Bloomberg reports that Clegg said in an interview that “If it was left up to me, we wouldn’t have any bonuses, particularly in the state-owned banks while they’re still being repaired.”

This seems right, and not just because it makes taxpayers fume with impotent rage to know that taxpayer money is stoking multimillion dollar bonuses for Wall Street fat cats who survive on government bailouts. It’s right because we want bankers to manage their affairs in ways that minimize their need for government help — and the best way to do that is to make sure that bankers who fail at this task take a huge and painful hit in the wallet. Perhaps bonuses given in the three years before the bank has to turn to the government might be clawed back as well.

Regulation will never solve all the problems of the banking system; lawyers are very good at helping their clients find ways around annoying government rules.  But if bankers know that getting a bailout meant huge hits to their personal wealth, I suspect that a certain amount of prudence would enter their calculations.

That would be a good thing.

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  • John from Iowa

    It’s high time to reclaim real capitalism, where people can get rich if they risk their own money, but not if they risk the taxpayer’s money. Sensible reforms the whole political spectrum should be able to agree on include reinstating Glass-Steagall, making the big investment banks revert to their former existence as partnerships, so they risk their own money and will do real risk management rather than just give it lip service, banning all off-balance-sheet liabilities (these are just dodges for regulatory capital arbitrage to get the ROE up artificially), and reforming the rules for swaps and derivatives so sufficient capital and collateral are set aside for them to avoid a cascading counterparty defaults that threaten to bring down the system absent a bailout.

    Conservatives, moderates, and OWS types should be able to agree on this rather than the current mess of privatizing profits and socializing losses.

    I also like Nassim Taleb’s idea that no institution in line for a potential bailout should have employees that make more than that of an average employee for a regulated utility.

  • Mrs. Davis

    How about real capitalism where the government simply makes and enforces rules and is not a player?

    Because every time the government seeks to insulate one player from risk inherent in the market (think FDIC, flood insurance, social security, etc.) one of the players will have a greater incentive to protect its interests than the others. And it will use political process to protect those interests. Regulatory capture is a fact of life. Privatize, privatize, privatize.

  • John from Iowa

    Mrs. Davis, while my default position in general is for less regulation rather than more, in the real world deregulation of the financial sector is a disaster. This is because the big banks have figured out that by marrying the crucial payments system part of finance (boring old banking) to the prop trading and casino capitalism of the investment banks, they can have the best of both worlds. No government can let them fail because it would destroy the economy and the average Joe’s savings with it. This brilliant (if evil) strategy where they say save me or I’ll shoot the hostage (the savings of every American) means that the cost of allowing them to fail would be too much to bear for any politician of any stripe. This is why the current system as well as deregulation, deregulation, deregulation won’t work.

    This is of course because of regulatory capture as you say, which caused the repeal of Glass-Steagall in the 90’s and the unbelievable decision not to regulate derivatives (like they regulate every other financial product). Reversing those 2 huge mistakes is a good start.

    Finally, simple rules based regulations such as 8-10% capital held against all assets, and no ducking this rule by using off-balance-sheet entities and derivatives to mask their leverage would be much better than the thousands of pages of BS regulations that have loophole after loophole for the connected ones with good lawyers and accountants.

  • Kris

    “If it was left up to me, we wouldn’t have any bonuses, particularly in the state-owned banks while they’re still being repaired.”

    Plausible scenario: Too Big To Fail bank is run into the ground by its executives (who pocket large bonuses). Government decides bank absolutely must be saved, and bails it out. Besides the infusion of cash, TBTF Bank needs new and more-than-competent management. Wanted: executives who can turn around a bank in great difficulties. Compensation: No or small bonuses.

    Makes sense?

  • Mrs. Davis

    What is called deregulation of the finance industry was just re-regulation.

    Deregulation would mean the end of the FDIC, Comptroller of the Currency, Office of Thrift Supervision, etc. Deregulation would mean banks would have their balance sheet painted on the windows each quarter just as they did when I was young. It would mean that no one would necessarily bail out a failing bank and if one failed, depositors would get pennies on the dollar, just like other BK creditors. It would mean picking a bank would depend on more than convenience but solvency as well. It would be part of re-establishing personal freedom and responsibility and ending the fiction of government assumption of all risk.

  • cubanbob

    Clegg is half right. Any bank bailed out by any government shouldn’t be paying any bonuses. Those affected bankers should be content with the fact they still have a job.

  • John from Iowa

    Mrs. Davis. Going back to the Wild West would be quite an experiment. With all of the opacity of the “financial innovation” of the last 30 or so years, good luck figuring out which banks are solvent since the balance sheets of the big boys mean almost nothing, what with all of the off-balance-sheet entities and derivative footnotes and such. Without the Fed to supply them with liquidity in a rough patch they all would be out of business in a hurry.

    In such a world, only the otherwise rather nutty gold-centric portfolio of Ron Paul starts to make sense. It would be a change, but I doubt it would put us in a better place than the financial world was in circa 1995 before Glass-Steagall went away and derivatives went unregulated.

    Anyway, no regulation at all is a fantasy. The gov’t regulates who can produce currency. Do you advocate doing away with the laws against counterfeiting?

    I subscribe to William F. Buckley’s saying that idealism is fine, but as it approaches reality, the costs become prohibitive. Thus, I won’t demand the (nonexistent) perfect instead of the merely good.

    And I do think we can agree that much of the financial regulation of the last decade or so (Sarbanes-Oxley and Dodd-Frank) have been public relations by both parties to come down hard on the little guys with carveouts and exemptions for the connected big boys that write the big campaign checks. We need to get back some sense in the regulations we do have by guys like Paul Volcker and the late William Seidman. Alas, the public-minded eminence grise seems to be almost extinct. How tiresome that we must deal with the world as it is and not as wish it was, but then that is our collective task.

  • Mrs. Davis

    @John, Go back and compare the period 1813-1912 to 1913 to 2012 and ask one question. Were we really better off over the century with the Federal Reserve than the century without? One thing is for certain, the value of the dollar has been eroded by about 92% in the last century whereas it pretty much held its value over the century before.

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