Bonuses: Not all Banks are the Same

by Odysseas Papadimitriou on February 3, 2010

BonusesIt is frustrating that American banks, post bailout, are paying out record bonuses given that many of those banks would not be in business if they hadn’t received a handout at the tax payers’ expense.  In response, President Obama is now threatening to heavily tax these bonuses to send the banking industry the message that the American people will not stand for such behavior.  The depiction of these banks in the media and by the government, however, is far too simplified.  Not all banks are the same.  Some banks simply didn’t need the bailout and other banks received aid indirectly when the government bailed out their debtors.

For a company like AIG, the issue is quite clear.  They would have failed had we not bailed them out.  As a result, we now own most of their company.  AIG clearly shouldn’t give their executives a bonus.  Moreover, as shareholders, we have every right to demand that those executives don’t get a bonus.  On the other hand, some banks didn’t need a bailout.  Capital One, for instance, was forced to take the government’s money so as to help stabilize the economic disaster.  Their cooperation helped conceal the real problem areas (i.e. Citibank and Bank of America), thus preventing investors from cutting and running on companies that desperately required the bailout to stay afloat.  Those banks which didn’t need the bailout repaid that money almost immediately and they shouldn’t be penalized.  If anything, they should be rewarded for helping the American economy stay afloat and for having a sustainable business model when, all around them, other giants of their industry were toppling.

Where the issue becomes less clear cut, I think, is with banks like Goldman Sachs which received an indirect bailout and were allowed to change their charter overnight.  Had AIG not been kept afloat, it could not have repaid its obligations to Goldman Sachs.  We can’t be sure what this would have meant, ultimately, for Goldman Sachs, whether they would have been in danger of bankruptcy or whether they could survive the default, but it is clear that by getting more than $13 Billion from AIG, the government indirectly helped the company to survive and flourish.  Should the government now have the right to restrict bonuses for Goldman Sachs?

I am of two minds about how to deal with those banks that benefited from the bailout without becoming publicly owned.  After all, one of the main complaints people make about the bailouts is that the government shouldn’t have interfered in the first place.  Businesses that fail, in a free market economy, ought to be allowed to fail—it’s simply not the government’s job to step in, change the “rules of the game”, and save them.  Part of me thinks that the same holds true now that things are improving—that the government should not step-in and once again change the “rules of the game” by creating laws specifically targeted to banks.

On the other hand, like most Americans, I think it’s an outrage when a company that would be in trouble had it not been for the government’s assistance pays out bonuses.  Professional incompetence should not be rewarded, especially when the money is earned through the public coffers.  Like many Americans, I too want justice for the near crippling of the American economy by these banks and their risky business decisions and I realize that this wrong cannot be righted without the government stepping-in, yet again, to change the “rules of the game” and get our money back from companies that received indirect bailouts.

Ultimately, the problem is difficult to solve since justice requires a new set of laws that will only be targeted to specific institutions…  I realize that it is a bit uncharacteristic of me to leave the discussion open ended like this, but there are strong arguments for both sides.  What do others think?


It is clear! Our stupid government should had taken all these companies to prepackaged bankruptcies. They did not and now we paid the price!

Also tax the hell out of the Goldman guys for their arrogance to take $13 Billion of our money + become a commercial bank overnight and then pay themselves record amounts!!
February 3 at 11:27 am

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