Friday, October 16, 2009

Wall Steet Bonuses: To Demagogue or Not

Bonuses on wall street are about to set a record according to the wall street journal, potentially $140 Billion. Some people are not happy about this, count me one of them. On the other hand I'm not real big on government telling private businesses how much they can pay their employees - that is the job of the shareholders. Which brings me to my point - WE OWN WALL STREET. Wall street would not exist without the American people and the massive government bailouts of the past two years. I'm a capitalist at heart, however we do not have capitalism in our banking and financial services sectors, we have a hybrid of Capitalism and Socialism where bank profits goes first to the elitists running the company, then to the shareholders but big losses accrue to the taxpayer. This is the same thing that happened with Fannie and Freddie - there is a moral hazard that companies that know they can't fail will take on extra risk in order to obtain extraordinary profits and that risk is financed with low interest rates by institutions who also feel the government will bail out these institutions (and hence themselves) if anything ever went wrong. Why do you think so much effort was made not to wipe out the bondholders or at least force the bondholders of these large firms to take the first losses, instead of the taxpayers? There is a wink and a nod that if you can build your company to be so big and intertwined that you will not be allowed to fail - this is at the heart of our financial problems.

So when Wall Street is patting themselves on the back for a job well done, when the reality is that they have helped to destroy the very fabric of America (along with their friends in the government) the rest of America settles in to whether the first depression since the Great One. We have 17% unemployment and Goldman Sachs is set to pay on average over $500,000 per employee in bonuses. Goldman Sachs would not be standing today without the government bailouts of AIG, TARP and the allowance of them turning into a bank holding company. Privatization of profits, socialization of losses is not capitalism and it will destroy our financial system (it already did, its now on life support and in reality needs a blood transfusion).

Capitalism is based on failure, without failure there is no capitalism - just socialism and communism. Our financial services sector needs a massive amount of reform. If a company wants to pay huge bonuses, great, I encourage that and am happy for the people who receive those long as those bonuses are based on an insurance policy that WE have to pay out on when that company fails. We don't need a pay czar, we need to separate out institutions that are too big too fail and break them up. We need to have rules for entities that rely on the government (FDIC deposit institutions) and rules for those that don't and be firm that the USA will no longer come to the table and bail out companies when they get into a mess. We need to ensure that if they do overleverage that it will not cause taxpayer bailouts.

I've got so much more to say on this, but I think you get the point - being against Bailout Bonuses is not anti-American, its pro-America - we must destroy To Big To Fail to save a country that the world knows is too big too fail.

Scott Dauenhauer CFP, MSFP, AIF