The Bonus Debacle

The post below is about a pretty controversial topic. I'd like to hear from readers what their thoughts are and if you agree with me. I think there will be some interesting opinions out there.


Among the biggest issues of the recent economic crisis is the debate over bonuses paid to financial professionals. Finance is a very well paying industry, and it has been for a long time. In fact, before the economic crisis, the average employee at Goldman Sachs was paid approximately $650,000 a year! Furthermore, most of this money was paid year-end bonuses instead of base salary. The idea is that employees are paid based on both his/her performance as well as the health of the company. However, as was proven by the economic crisis, somewhere along the way the tying of employee compensation to performance was loosened. Instead it became a competitive practice where employees were paid more and more to dissuade them from leaving to a competitor.


Enter TARP

As we discussed on InvestingDecoded earlier, almost all of the biggest banks in the country received government assistance in late 2008. Although the money was designed to provide assistance to the banks and stabilize the system until the economy recovered, it ended up having some unintended consequences.

As the banks received their money, they were put under scrutiny from the government about employee pay. There was a populist uproar from the Obama administration that bankers were excessively paid. If banks were being supported by the government, then they shouldn't be paying their employees excessively with taxpayer money, and I agree with that sentiment. Eventually, a commission was created (headed by Ken Feinberg) to monitor employee compensation for companies under TARP. All executive pay would have to be approved by Mr. Feinberg as long as the company was receiving government assistance.

Exit TARP

Obviously, having the ability to compensate your employees limited by the government is a challenge. Remember, compensation became a competitive tool. If you can't pay as necessary, then you're at a competitive disadvantage. Some could make a good argument that the government was essentially shooting itself in the foot by limiting the compensation for TARP companies. TARP was an investment in these companies. Why would someone invest in the companies and then take steps to limit their competitiveness? It's a valid argument, but not the point of this post.

Instead, most banks did whatever they needed to to exit TARP. They essentially scraped the cash together to get out of Ken Feinberg's umbrella and free themselves of the constraints of TARP.

But Wait A Minute

Yes the banks were able to escape TARP. But that doesn't mean they escaped the Obama administration's populist scrutiny. Soon after exiting TARP, the banks announced huge bonuses for their employees - many at similar levels that were paid in 2007 and 2008. The government, angry that bankers were still paid handsomely while the country struggled with 10%+ unemployment, is now looking into a tax on bonuses paid in the financial sector. President Obama has said he wants to tax the banks until the cost of the TARP is recouped (to the tune of $90 billion over 10 years)

This has essentially become a war between Wall St. and DC, and I have the inkling that there will be no winners.

My Take on This

This is one of those topics where I actually have some strong opinions. Some of you that know me may think I side with the banks. I don't. I side with the open market. I actually think the banks made some DUMB mistakes in this process and are really getting punished for their stupidity more than anything.

Here are the reasons why I think the government is just pandering a populist agenda through this tax:

1. Arbitrarily taxing compensation for a specific industry I think is just posing a class warfare that isn't good for anyone. I've supported the Obama administration since the elections began, but this is just getting to be ridiculous. This retro-active approach to punishing the banks is just pandering to the masses and unnecessary.
   
2. Most importantly, the Obama's justification for the tax is to make the banks pay the government back for the TARP money the received. Usually, that would make sense. However, what most people don't understand is the banks already paid the government back IN FULL for the TARP....PLUS INTEREST. Where did we lose money? THE AUTOMAKERS and AIG! That's where a vast majority of the money is being lost. However, the tax is specifically geared towards the financial sector. In essence, Wall St. is paying for GM, Chrysler, and AIG's losses

So those are the reasons why I think the tax is laughable and a political maneuver of the most outrageous type. But I don't think the banks are off the hook here either. The fact that they had the audacity to announce bonuses similar to pre-crisis levels to me amounts to a 'screw you' to uncle Sam after escaping TARP. The one thing they could've done, but collectively chose not to (with the exception of Wells Fargo), was tying bonuses to long term performance - i.e. not paying cash but paying bonuses in stock that vested over time. I think it's just ridiculous that they would dare paying bonuses the old way after all that's already happened.

Overall, like I mentioned earlier, I don't think there will be any winners from this war between the government and Wall St. It's taking focus away from the country's real problems and shows irresponsibility on both sides.

What are your thoughts?

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.