Blaming Wall Street on bonuses is hypocritical

By Steven Pearlstein
Friday, January 15, 2010

I can have as much fun as the next guy fulminating about Wall Street bonuses, but it's time to move on.

There's nothing new to say, nor is there much that can or will be done about them.

It should be some consolation that nearly half of the bonuses will get siphoned off in state and federal taxes.

And while the sums are undeniably outrageous and undeserved, the same could be said of the pay earned by professional athletes, rock stars and corporate chief executives.

One reason for the populist backlash is that people assume the bonuses are going to the same Wall Street wise guys who caused the financial crisis. Not true. Many of those who made the worst decisions have been fired, while many of those who will earn bonuses work in divisions that had nothing to do with the financial debacle. But it's also important to remember that culpability for the crisis extends well beyond Wall Street bankers to asleep-at-the-switch regulators, conflicted rating agencies, sleazy brokers, greedy mortgage bankers, reckless money managers and millions of clueless homeowners, along with an entire country that insisted on living beyond its means.

The other misconception is that somehow Wall Street got all the benefit from the government's rescue efforts while taxpayers got stuck with the bill. In fact, nearly everyone benefited to some degree from a rescue effort that prevented the collapse of the global financial system -- every business, every hedge fund, every community bank and credit union, every insurance company, every worker, every homeowner, every pensioner and anyone with any savings or investment.

Some of this rescue took the form of direct cash injections into the big banks, and most of that money has already been repaid with interest. Equally important, however, were guarantees of bank bonds, commercial paper and derivative counter-party risk, mortgage mitigation subsidies, continuing support for the mortgage market and highly subsidized zero interest rates at the Federal Reserve's discount window. It's populist poppycock to argue that it was only the big banks that benefited from this wide-ranging rescue effort, and that they alone should be responsible for paying the bill.

At this point, it is also disingenuous for President Obama to complain about the "massive profits and obscene bonuses" at the big banks, as he did Thursday in announcing his plan to collect a $90 billion Financial Crisis Responsibility Fee from the biggest banks over the next decade.

It was Obama's secretary of the Treasury, after all, who readily allowed many of the biggest banks to repay the money they had taken from the Treasury earlier than anyone had anticipated. The repayments not only let banks escape government oversight of their lending, their hiring and their compensation plans but also prematurely capped the returns that the taxpayers could earn on their investments in the banks once those institutions returned to profitability. If the government still owned all that stock in Goldman Sachs, Morgan Stanley and J.P. Morgan, it wouldn't be just the bankers who benefited from "massive" profits and the run-up in share prices -- the taxpayers would have as well.

Thursday, the president took pains to deny that his proposed fee was in any way a "punishment" for the banks, but the rest of his rhetoric suggested otherwise. He framed the fee as a repayment to the taxpayers for losses sustained under the Treasury's rescue program, conveniently overlooking the fact that virtually all of the loss is likely to come from two bankrupt auto companies, an insolvent insurer and two government-sponsored mortgage finance companies.

The more intellectually honest approach would have been for the president to avoid the questions of cost and culpability and support the idea of a small tax on every financial transaction. This is an old idea that European leaders took up last fall and in the past was embraced by none other than Larry Summers, who is now Obama's top economic adviser.

Since it would be imposed on every trade involving every instrument and every type of financial institution, the transaction tax is a much fairer way of raising funds for broad-based financial rescues. And it has the added advantage of discouraging the kind of speculative high-frequency trading that has come to dominate Wall Street and generate most of its profits. A transaction tax could raise $50 billion to $100 billion a year -- more than enough to create a permanent financial rescue fund, with plenty left over for other uses, such as financing new infrastructure or reducing the federal deficit.

The blame game for the financial crisis has been going on for two years now, and it is getting tiresome. The money's long since been lost, the first crop of books has already been published, and regulators are well along in hammering out new rules to make sure it doesn't happen again. For the rest of us, the best approach to Wall Street might be to simply ignore it and turn our attention to those parts of the economy that can create real economic value and broadly shared prosperity.

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