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April 20, 2009

Comments

I would love to hear the Voñata's take on this one.

No one complains when ... A-Rod has a $300 million guarantee.

Really? My sense is that people complain all the time about athletes' salaries. The big difference between professional athletes and Wall Street (at least last year), was that many professional athletes actually generated income for their employers.

Oh, if only we would listen to those wizened few who can recall the bleak and despairing economic vistas that were the Clinton Administration, back in the mists of time when no-one dared contemplate making a lot of money lest that extra 3.6% of top-margin income tax completely remove their volition ...

If you want to say that whatever the free market in its wisdom dictates that people are paid is fair, then the fair wage for people at AIG, Citi, and any other firm that would not have survived without government assistance is zero.

The free market isn't "fair." There is no "fair" in life.

The free market, however, does provide the correct incentives to the majority of folks, in aggregate, and has worked awfully darn well for an awfully long time -- particularly when compared to the alternatives. (And that's the only basis for saying whether something is worthwhile or not: what's the alternative? I don't see any alternative spelled out in Hilzoy's lament. I see only the ritual invocations.)

By the way, Goldman Sachs didn't need the government bailout -- it took it because our government technocrats thought it would make the system look good. Now, the government doesn't want GS to pay it back -- all while bloggers bemoan GS's purported inadequacies. I'm not asking you to be fair. These kinds of things happen. But I do ask you to consider what kinds of incentives you're creating.

(Does that satisfy, el Pinko Punktito?)

The free market, however, does provide the correct incentives to the majority of folks, in aggregate, and has worked awfully darn well for an awfully long time -- particularly when compared to the alternatives.

This confuses me greatly. I thought the free market was an abstraction that could never be implemented in reality, only approximated. I don't think there has ever existed a market large enough to care about in which all parties had perfect information. And to the extent that every major market economy depended heavily on vast state interventions to keep markets functioning, I don't think it makes sense to chalk up all those good outcomes exclusively to the free market. Those positive outcomes should accrue to the combination of a not-very-free market and various state interventions. I really don't think we can pretend that the courts, the legal system, the police, the government's monopoly on force, and various central banks never existed or were not significantly responsible for the success of market economies.

By the way, Goldman Sachs didn't need the government bailout

You mean TARP specifically, right? Because it certainly seems like GS benefited massively from the government's propping up of AIG. I thought the whole point of the AIG intervention was that it allowed the government to funnel vast sums of money to major institutions that desperately needed cash but posed system risk. To the extent that AIG was simply the vehicle by which the government bailout AIG's counterparties, it seems silly to pretend that we haven't bailout GS massively via AIG.

Hilzoy,

Thank you for the post. I enjoyed it. I agree with it.

I have a small quibble. As far as I know, Obama (and congress) has not raised taxes yet. He has lowered them. He has said his intent is to lower them for about 95% of taxpayers and only raise marginal rates a little on the remaining 5%. Fine.

That means that no taxpayer has paid for AIG, et al yet. How then has it been paid for? It has been paid for by new US Govt debt and by the fed swapping newly printed dollars for bank assets that are probably worthless.

Someday, that debt will be paid. Who will pay it?

You say: "They don't get the fact that because of their greed and stupidity, we had to rescue those firms -- which means that their lifestyles are being supported by truckdrivers and pharmacists and primary school teachers across the country, many of whom would love to try to scrape by on $75,000 a year." as if they are currently paying it.

Thread after thread on ObWi advocate that the rich should pay even more. My appeal to you is that you use consistency in your language.

If you advocate for the rich to pay more and claim that Obama is going to decrease taxes for 95% of people then do not say that ordinary people are paying for the bailouts.

By the way, Goldman Sachs didn't need the government bailout -- it took it because our government technocrats thought it would make the system look good.

Goldman didn't need the TARP loan. That is not at all the same thing as saying that they didn't need the bailout. How much money did they get from:

1) The government bailout of AIG counterparties?

2) TALF?

3) The decision by the Fed to start taking mortgage backed securities as collateral at the discount window?

4) The Fed setting overnight rates at zero, which gives them a huge spread on money they loan out?

That's not an exhaustive list of all of the government bailouts, and we know that Goldman has benefited from some of them. Honestly, I think that the government has a point in telling them that they can't avoid the restrictions by paying back one portion of the bailout, while keeping the government's money from all the other portions.

Further, there is another problem. Goldman executives have a fiduciary duty to work for the benefit of the shareholders. If they don't pay the government back, they could use that money to pay back Warren Buffet. Their preferred shares to him pay twice the interest that the TARP money does. There is a clause in the TARP money that they can't pay back other creditors before they pay off the TARP loan, but, if the government is waiving its right to be repaid first, there's nothing stopping them. It is illegal for them to pay a loan that costs half as much as another loan for their own benefit. They have a responsibility to do otherwise.

"And that's the only basis for saying whether something is worthwhile or not: what's the alternative? I don't see any alternative spelled out in Hilzoy's lament. I see only the ritual invocations."

"The free market" isn't some binary existing/non-existing thing. It's a continuum. Every country does it somewhat differently, if it does it at all.

I'd rather live under any of the systems in Western Europe, myself, where I wouldn't have to go without health care beyond an ER, and a clinic that will only see me for fifteen minutes every three months, and where there's a vastly strongly social safety net than the one that's more or less non-existent for single males under the age of 65 (at least in most, if not all, states) that we have in this country.

it seems silly to pretend that we haven't bailout GS massively via AIG.

Indeed it does. Von, why such silliness? Why the make-believe? GS has benefited MASSIVELY from the government bailout of AIG. It's publicly stated it wants to return the TARP money so that it can a) up its derivatives bets, b) pay its employees whatever it wants, and c) bury those of its competitors who cannot yet repay the TARP funds (further weakening the US financial system). Von: Your credibility on finance just dwindles and dwindles...

That said, the repetitious hand-wringing over what those who work on Wall Street "don't get" does get a little tiresome. The quotations in question will help to demonstrate to the public just what kind of people we are dealing with here, but I would expect the writers at this blog to move beyond incredulity. The people quoted in the article are sociopaths. It's time to talk about what we should do about/to them.

von: I'm cool with markets, generally. I don't care for the 'free market/non-free market' distinction, because I think that markets don't work well without regulation (see, e.g., Russia, Somalia), but that's not relevant here. I don't think that it yields compensation that's particularly "fair", but then I also don't think that's its job.

That said, I prefer government intervention to the collapse of the economy. (And I second the comments about the various non-TARP forms of intervention.) When the existence of your job depends on it, you don't get to say that your salary is set by "the free market".

Hilzoy,

The "collapse of the economy" meme is bunk. The only things that would really have collapsed are the lives of the goons quoted in your original post.

Hilzoy is trying to do two things simultaneously that are impossible - IF you can say that "someone is paid too much", then, ultimately, the wise (not the unwise masses who make up the marketplace) knows what is valuable and what is not. And that ultimately means that not only are markets irrelevant, but that democracies are too - the masses don't know what's valuable and what's not (if they don't know what is valuable in the marketplace, then it's hard to see how they can know what is valuable in politics), so it's irrelevant what they do in the marketplace AND in the voting booth.

That is, the homo politicus of the American regime is based upon the exact same foundations as the American homo economicus, and the two are inseperable conceptions. If you posit the homo politicus we need to make our regime work, the homo economicus of the Chicago School is the necessary result.

The free market isn't "fair." There is no "fair" in life.

There actually is no free market in life. Unless you use free market to mean "it's OK if corporations or Republicans do it". Which, more and more, is the technical meaning of the term, but there used to be a tad more rigor in it.

The free market, however, does provide the correct incentives to the majority of folks, in aggregate, and has worked awfully darn well for an awfully long time

There used to be a LOT more rigor in it. Folks? Awfully darn well? Who died and made you Matlock?

By the way, Goldman Sachs didn't need the government bailout -- it took it because our government technocrats thought it would make the system look good

Given the duty of GS management to the owners of the corporation, how is that not a defamatory statement? Do you believe shareholders in GS would be able to seek compensation for the actions of GS in taking bailout money, given that you claim they were taking into account only the wishes of government technocrats rather than shareholders?

Now, the government doesn't want GS to pay it back

The government has rights under the agreements it made. You are implying that GS management is completely incompetent. No doubt you will also turn around and argue that they deserve billions in dollars of taxpayer money as bonuses for their superlative efforts.

JMN- Kevin Drum had something about the GS payback- I think they are not allowed to payback Buffett before TARP.

Well, if a studio fired hundreds of workers while simultaniously paying Julia Roberts that 25 million would complain quite a lot, especially if that movie turned out to be a financial disaster. Also, Von's free markets have often been a disaster for everyone but the super rich, but that's just the market correcting itself, isn't it?

As of about ten years ago, you could live in NY for under $20,000, 'cause I did.

As a bachelor, tho. With a family to support, it would be a lot harder.

One elephant here is the self-perpetuating effects of the 1980s "white flight." Why private schools? Because otherwise your kids go to public school with the ghetto kids. After decades of the privileged fleeing from the public schools and shorting their upkeep, you do not have to be racist to find that prospect terrifying.

(why $40K for private school is another question. Ironically, the schools have to charge that much so that they and their employees can pay their mortgages :) )

JMN- Kevin Drum had something about the GS payback- I think they are not allowed to payback Buffett before TARP.

Sure. That's why I said, "There is a clause in the TARP money that they can't pay back other creditors before they pay off the TARP loan," but there was a but in that sentence, "but, if the government is waiving its right to be repaid first, there's nothing stopping them." Goldman can't pay back Buffet first if the government enforces that clause. If it doesn't, and Goldman wants to pay off some debt, they can pay back someone. If the government says it doesn't want it, they have a choice of what to do.

"If you posit the homo politicus we need to make our regime work, the homo economicus of the Chicago School is the necessary result."

And thus Sweden, France, and Germany, just to name a few countries, are proven not to exist. Poof!

From the comments at the Monthly:

"I work for a company that would be dead without the TARP money.

One of the junior workers is constantly complaining about 'when is someone going to help me with my mortgage? how come no one is helping me?'

Go back and read my first paragraph."

Who died and made you Matlock?

It's been a while since I've seen a writing mannerism flame. Well done, sir!

Dear Hilzoy: I hope you are well.

And that you dont mind this note is not about your current blog.

I'm by NO means the professional scholar of philosophy you are. Having read merely a smattering of Plato, Aristotle, Marcus Aurelius, Boethius, St. Thomas Aquinas, Edmund Burke, Jacques Maritain, Russell Kirk, etc. But have you ever met the late Dr. Harry A. Wolfson? Or read any of his books? Mind, I only have one of his works: the truly awesome THE PHILOSOPHY OF THE KALAM.

So impossible to read EVERYTHING.

Sincerely, Sean

"You used to be big."

"I am big; it's the proftis that got small!"

Sean: his name is familiar, but I can't place it.

Nell: darn, I wish I had thought of that!

Nell wins the thread (they just don't make movies like they used to).

People at firms that would not have survived without government assistance might have been Julia Roberts a couple of years ago.

Thing is, I doubt they were ever Julia Roberts and very much doubt they were A-Rod. I have known a few very highly paid CEOs in my life and they were relatively bright guys. I even went to school with a few fellas who did exceptionally well for a while in the financial industry. They aren't stupid but nothing on the level of a guy who can throw a 95 mph fastball or play in the NBA. That is, their intelligence is not some sort of exceptionally rare commodity and they should know better.

I am a pretty good programmer and I make a comfortable living off of what I charge for my services. If I had made a coupe of different choices and decided to approach my career differently, I could have made a lot more - something more along the lines of some of my old college buddies who are now multi-millionaires. But I am under no illusion that there aren't about 100,000 people who can do pretty much what I do. Indeed there are probably about 1,000,000 Chinese programmers who are willing to do it for 1/3 of the cost. Its honestly difficult for me to believe that these guys are so ridiculously deluded as to think they are getting paid what they are because they have some rare world-class talent.

Heh. Not Julia Roberts. Not even Marg Helgenberger.

Jorja Fox, maybe.

That is, their intelligence is not some sort of exceptionally rare commodity and they should know better.

I think that you're right on for a lot of the executives. The actual traders, though, is a different story. Yeah, you have to be smart, and the room I worked in was full of the smartest group of people I've ever known. You also have to be able to make important decisions RIGHT NOW. The markets don't have a Pause button, and if you take thirty seconds to analyze the situation and figure out what you want to do, you can get killed. It isn't like that all the time; it probably happens maybe once or twice a week, but it can happen anytime between the opening and closing bells without warning.

You also have to be able to let go of things. You aren't going to make all of those decisions right. You are also going to do something stupid. When you do, you might lose hundreds of thousands of dollars at a time. That will happen to you, and you had better be able to learn what the experience has to teach you, and forget about it.

In total, it's a rare skill set. And the difference between a good trader and a bad trader is large enough that it justifies the money they make.

The real problem with a lot of the financial companies is that, since the traders are the most obviously successful employees in a P&L sense, they tend to get promoted. Actually, traders make terrible managers and executives. Yet, they are consistently put in charge of huge companies. The big financial firms were all run by guys who came off the floors. What we got is exactly what you would expect would happen.

Dear Hilzoy: thanks for your reply.

Dr. Wolfson was a Jewish scholar (1887-1974)who specialized in Jewish (Philo of Alexandria), Christian (the Church Fathers), and Muslim (the Kalam school)philosophy and theology. I wondered if you had ever met him in your youth--due to Dr. Wolfson working and studying at Harvard University.

Far too briefly, Wolfson's posthumously published THE PHILOSOPHY OF THE KALAM concentrated on how the early Muslim theologians reacted to Classical and Christian philosophy and theology. I highly recommend it to you if you have the time. The book was recommended to me by a Catholic theologian who thought very well of Wolfson.

Sincerely, Sean

If you advocate for the rich to pay more and claim that Obama is going to decrease taxes for 95% of people then do not say that ordinary people are paying for the bailouts.

Now that is a reasonable point. I was making the same point myself, years ago, about the Iraq War. So when I criticize d'd'd'dave's logic, I am also criticizing my own.

Here's the criticism: money is the most fungible commodity there ever was or will be. Dave can argue with some justice that rich future taxpayers will bear the cost of the bailouts, but I can claim with equal justice that no, they will bear the cost of invading Iraq and it's future not-rich taxpayers who will bear the cost of the bailouts.

We can play this shell game forever, or we can decide that identifying which class of taxpayers is paying for what gets a bit silly. We can also decide that it's servicing the debt, not "paying" it, that taxpayers do. Rich and not-rich, all of us are already paying for both Iraq and the bailouts.

So I, at least, respectfully decline d'd'd'dave's request.

--TP

You can also argue that while taxpayers will indeed pay fewer taxes, so you could think that they won't be paying the bailouts, the truth is that they *will* be paying for the bailouts, in the form of that money not being used for something else, i.e. not getting as much bang for the buck on their taxes.

Even though it's a sin to pile on:

The free market, however, does provide the correct incentives to the majority of folks, in aggregate

So, everything is for the best in the best of all possible worlds? Or, to put it in more popular terms, we meant to do this?

It's not exactly controversial to note that performance and compensation ceased long ago to have even a nodding relationship. The officers of public companies are not entrepreneurs, reaping the rewards of risking their own funds; they're rapacious hirelings, incestuously hired by their equally rapacious peers.

Profitability is at best an afterthought for the mercenary manager; while they talk up such speculative measures as EBITDA, the only number they care about - the one that puts cash in their pockets - is the stock price, and for them the long term is two quarters hence.

It ought to be a warning sign that executives think in terms of entitlement. Then, when they deliver disaster but they think they deserve enrichment, we ought to worry what we've done to permit this.

Can we just retire the Efficient Markets Hypothesis and the Rational Investor cult-theories once and for all? I'm tired of University of Chicago cup-bearers and the Acolytes of Friedman telling me that the Market Sees All, Knows All, Benefits All, the evidence of our eyes and recent events notwithstanding. Could we maybe admit that the market screws up sometimes and that being at its mercy isn't a good idea? Please?

Further, there is another problem. Goldman executives have a fiduciary duty to work for the benefit of the shareholders. If they don't pay the government back, they could use that money to pay back Warren Buffet. Their preferred shares to him pay twice the interest that the TARP money does. There is a clause in the TARP money that they can't pay back other creditors before they pay off the TARP loan, but, if the government is waiving its right to be repaid first, there's nothing stopping them. It is illegal for them to pay a loan that costs half as much as another loan for their own benefit. They have a responsibility to do otherwise.

Yes, but Warren Buffett doesn't interfere in Goldman Sach's business to the extent that the government does.

As for GS indirectly receiving government money by, say, setting a low funds rate; dropping money from helicopters; and/or the Government's efforts to prop up AIG: Unless the critique is of everyone who receives such indirect benefits, I don't see this argument as having much merit.

von: I'm cool with markets, generally. I don't care for the 'free market/non-free market' distinction, because I think that markets don't work well without regulation (see, e.g., Russia, Somalia), but that's not relevant here. I don't think that it yields compensation that's particularly "fair", but then I also don't think that's its job.

All free markets have regulations. Indeed, the premise of a free market is regulation -- in the form of the enforcement of contract rights and the illegality of fraud. The issue here is government control of the means of production.

That said, I prefer government intervention to the collapse of the economy. (And I second the comments about the various non-TARP forms of intervention.) When the existence of your job depends on it, you don't get to say that your salary is set by "the free market".

I don't get why you second the comments rgarding "various non-TARP forms of intervention". GS, and hundreds of other firms (including, e.g., GM, various suppliers, and you and me) are indirect beneficiaries of these government programs. Heck, some of us are direct beneficiaries of these programs. Does that mean that my salary is set by the government? That if the government decides I'm earning too much, it can instruct me to draw less income -- on pain of not "dropping money from helicopters" or allowing me to take advantage of the current low interest rates? Can it instruct you?

I don't think that's what you (or the other commentators) intend. Rather, I think that folks are annoyed with GS for reasons that have a lot to do with an internal sense of fairness and very little to do with the economic realities. FWIW, I think it's important to keep that sense of fairness. But I think the ad hoc application of a general sense of fairness is a lousy way to run a country.

Yup. A free market where GS executives are in the room deciding with the Fed and the Treasury to bail out AIG in part because the failure of AIG will screw GS. I love this kind of capitalism. It's the sort of free market Mussolini used to love and that Putin is fond of right now. Maybe Simon Johnson is right - maybe we are just a developing country with financial oligarchs in charge. What did Helmut Schmidt call the Soviet Union? "Upper Volta with rockets." Maybe we're Indonesia with even smarter and more connected bankers.

It's not exactly controversial to note that performance and compensation ceased long ago to have even a nodding relationship.

One of the bigger problems with libertarianism and free market ideology is the unstated belief that nobody is going to try to game the system. So when highly compensated and powerful people spend a lot of time and effort to remove themselves from any accountability and establish a closed self-reinforcing system that exists only to give each other more and more money, the ideologues don't have much to say.

Does that mean that my salary is set by the government?
You're setting up a false dichotomy here: do you believe that one of your major investors should have absolutely no say in how much you get paid? Do you think that the government should hand out money to corporations with no say as to how it is used?

It's probably a bad idea for the government to mess with compensation below the CxO level, since those tend to be competitively set and have some working feedback mechanism to control them. Executive salaries in large companies are quite literally out of control: corporate governance has been deliberately manipulated to remove any real ability of shareholders to put downward pressure on executive compensation.

I don't think that's what you (or the other commentators) intend. Rather, I think that folks are annoyed with GS for reasons that have a lot to do with an internal sense of fairness and very little to do with the economic realities. FWIW, I think it's important to keep that sense of fairness. But I think the ad hoc application of a general sense of fairness is a lousy way to run a country.

Posted by: von

To the contrary, von, they are perturbed at the state of affairs because they are capitalists. No one that I can see are particularly incensed at the compensation of an A-Rod or a Roberts; they have objectively verifiable skills that few people have, or a demonstrated ability to put Butts in Seats. If you have seen evidence of these people here, post it.

No, 'fairness' has a lot less to do with it than the fact that there has been a market failure of brobdingnagian proportions in regard to the compensation of certain individuals. This comes down to logic and arithmetic, not some liberal wishy-washy 'fairness' as you would have us think. As hilzoy says, "But you do not get to appeal to the marvels of the market to justify your exorbitant salary when times are good without accepting its conclusions when it implies that the fair value for your work is nothing."

Just what is your problem with that reasoning? Specifically?

No one that I can see are particularly incensed at the compensation of an A-Rod or a Roberts; they have objectively verifiable skills that few people have, or a demonstrated ability to put Butts in Seats.

It's more than that: especially in Julia Roberts's case, she's a private party contracting with another private party for services with no funding from or guarantees from the government. If her movie bombs, she gets paid, the studio eats it and it has nothing to do with Joe Taxpayer. A-Rod's a little dicier: MLB is a legally-sanctioned monopoly and the teams have been pretty good at picking state and local governments' pockets to build stadiums, so you could say he's being indirectly supported by taxpayer money and government fiat. So, people sometimes bitch about A-Rod but accept that he's got to perform or he's out.

If Julia Roberts made a movie so unbelievably bad that it not only bombed but completely destroyed the entire entertainment industry, essentially forcing the Federal government to provide hundreds of billions of dollars of funding to stave off the collapse of the US economy, then demanded that she be paid her salary by goverment bailout since great actresses are so difficult to find, then we'd be pissed at Ms. Roberts.

"And thus Sweden, France, and Germany, just to name a few countries, are proven not to exist. Poof!"

The problem with this is that Sweden, France and Germany are facing the exact same problem: they all posit a highly rational homo politicus for their political systems, yet turn around and simultaneously argue for a significantly less rational homo economicus. Now, that may be workable for temporary current conditions, but will it last over the long term?

In total, it's a rare skill set. And the difference between a good trader and a bad trader is large enough that it justifies the money they make.

I will take your word for it. I don't know much about the day to day tasks of high value traders so I really can't argue. None of what you describe strikes me as involving particularly specialized skills but I will take you at your word that they are rare enough that they are worth some significant remuneration.

My point is more that, in my experience, I have not seen any special correlation between quickly acquiring wealth and highly specialized intelligence. Back when I lived in Miami a few years ago, I must have met 2 or 3 people a month who had just made their fortune on the Florida Real Estate market. They were ambitious and somewhat forward thinking and happened to make some choices that worked out. I doubt many of them were under the impression that making a few good moves in a booming market could reasonably be compared to possessing the qualities of an A-list movie star and if they were, I am sure they have been quickly disabused of such a notion now that the bottom has fallen out of the market and a lot of the same people are facing severe losses.

"The issue here is government control of the means of production."

I call BS on the idea that these financial firms are or have been "means of production."

They're Means of Rich People Skimming Off Money As it Goes Somewhere.

von: in this piece, I say that people whose entire livelihood depends on government assistance do not have the right to defend their salaries by citing the free market. This is an accusation of inconsistency, not a proposal for how to run the country. -- It isn't even a claim that there's anything wrong with the free market claim about merit; just that if one accepts it, one should accept it across the board, not just when convenient.

Had I been proposing a general view on compensation, I would have had to think a lot harder about it, and would have provided something resembling an argument.

I remember reading somewhere a quip to the effect that people will not defend their liberties or rights but will turn suicidal in defense of their privilages. I didn't want to think there might be something to that, but this article and other news means i'm forced to reconsider.

I have to add that the hard line free market people sound more and more like the barbers of the middle ages: "if we just bleed him a bit more the humors will balance and he'll be right as rain."

Could we maybe admit that the market screws up sometimes and that being at its mercy isn't a good idea?

"The Market" is a lot of people making decisions based on whatever information they have in front of them. It is nothing more or less than that.

If you can't imagine a lot of people making, in the aggregate, bad decisions, I suggest you need to get out more.

It's the sort of free market Mussolini used to love and that Putin is fond of right now.

And that, my friends, is the real dog tip.

I call BS on the idea that these financial firms are or have been "means of production."

That too.

The role of financial firms is to allocate capital to places where it is likely to be well used, and to accurately measure and account for risk.

That's valuable, but it's not inherently productive.

To JMN's point, yes, traders are smart, hard-working people. They work in a very high-pressure environment, and a lot rides on the decisions they make.

They get paid a lot, and in normal times, most folks are not only not really bothered by that, they don't even think about it that much.

The problem arises when our clever friends do things like sell the promise to make very large payments if certain things happen, where "very large payments" is a significant multiple of, frex, the GDP of the entire country, and the possibility of "certain things" happening is larger than zero.

That's when we have a problem.

This is an accusation of inconsistency, not a proposal for how to run the country. -- It isn't even a claim that there's anything wrong with the free market claim about merit; just that if one accepts it, one should accept it across the board, not just when convenient.

This is exactly right. And - perhaps I'm biased - this is exactly why 'conservatives' fare so poorly. It's not that their ideas are bad per se (or rather, not just because their ideas are bad), it's because of the Sargasso of contradictions, the tremendous amount of special pleading they have to engage in to fit everything into some approximation of a coherent whole.

An aside:

If I have to adopt twenty poor families, I want a thank-you note and an update on their lives.

If we have to give you billions of dollars with a "b", we want to you come over the house on Sunday and wash all of our cars.

Mow the lawn, too.

@sshole.

"You're setting up a false dichotomy here: do you believe that one of your major investors should have absolutely no say in how much you get paid? Do you think that the government should hand out money to corporations with no say as to how it is used?"

Which investor is that? The government that forced GS to take the money when they didn't need it so it wouldn't embarass other banks who did? That isn't exactly a traditional investor.

And it is a little bit weird to complain about paying AIG counterparties like GS while simultaneously talking about European successes. An enormous portion of AIG counterparties were European banks.

Now was it necessary to pay off counterparties in order to avoid a world-wide banking disaster? Probably. But we might want to be a wee bit careful about lionizing European banking regulations vis-a-vis the US and Goldman Sachs considering that the European banks were in the exact same position as GS.

"You used to be big."

"I am big; it's the proftis that got small!"

Nell: Great turn of phrase on Desmond's line that it was the pictures that got small, more true today than ever. I wonder if "Sunset Boulevard" could get made today. Billy Wilder = genius.

J.Michael Neal:

I think that you're right on for a lot of the executives. The actual traders, though, is a different story. Yeah, you have to be smart, and the room I worked in was full of the smartest group of people I've ever known. You also have to be able to make important decisions RIGHT NOW. The markets don't have a Pause button, and if you take thirty seconds to analyze the situation and figure out what you want to do, you can get killed. It isn't like that all the time; it probably happens maybe once or twice a week, but it can happen anytime between the opening and closing bells without warning.

You also have to be able to let go of things. You aren't going to make all of those decisions right. You are also going to do something stupid. When you do, you might lose hundreds of thousands of dollars at a time. That will happen to you, and you had better be able to learn what the experience has to teach you, and forget about it.

In total, it's a rare skill set. And the difference between a good trader and a bad trader is large enough that it justifies the money they make.

Of course, this ties in with the study that the best traders focus only on money, and not the moral or ethical repercussions of their choices. When you take out those dimensions, it is easier for them to focus on what makes the most money, regardless of the circumstances. Which is also probably why they make poor managers and leaders.

Which investor is that? The government that forced GS to take the money when they didn't need it so it wouldn't embarass other banks who did? That isn't exactly a traditional investor.

Seb, correct me if I'm wrong. For all practical purposes at the time, "the government" was former GS CEO Hank Paulson, no? Are you telling us that his former colleagues at GS took a few billion dollars off his hands as a favor to him?

--TP

"Had I been proposing a general view on compensation, I would have had to think a lot harder about it, and would have provided something resembling an argument."

Um, but that's precisely the problem. That you don't have a general view on compensation is curious when you're regularly writing about politics (after all, the distribution of wealth is a major topic of philosophy from at least Plato's Republic onwards, if not before). Not having a general view on compensation would tend to imply you also don't have a general view of economics.

Again, I remember that you spent a lot of time teaching us John Locke, who has some opinion on economic matters. I remember us spending a great deal of time in class studying members of the Scottish Enlightenment like Hume and the Scottish Enlightenment is where modern economics comes from.

So, it then becomes unclear WHY you wouldn't have at least some general opinion on economics (and, thus, compensation).

No. I'm saying that the government decided that even healthy banks had to take the loan money so that it wouldn't cause additional problems with unhealthy banks.

Then the government tried to tie all sorts of conditions to the money.

The unhealthy banks just have to deal with it because they obviously won't survive without the money.

But the healthy banks want to give the money back now rather than later because 'not embarassing the unhealthy banks' isn't worth all the strings to them if the government is going to use that to take away their important decisions.

Note that it is trying to take away the important decisions from the healthy banks. Not just the unhealthy ones.

Arguably the executives in the healthy banks really did earn much of their salaries. They bucked the trend of the unhealthy banks, who were looking more profitable than many of the currently healthy ones.

Um, but that's precisely the problem. That you don't have a general view on compensation is curious when you're regularly writing about politics (after all, the distribution of wealth is a major topic of philosophy from at least Plato's Republic onwards, if not before). Not having a general view on compensation would tend to imply you also don't have a general view of economics.

Shorter burritoboy: "Let's not talk about their problems. let's talk about yours." Hilzoy didn't say she had no general views on compensation, she said that writing down one of her own would take a lot of work. And she is not writing about compensation per se; she is writing about the meta issue of consistency. I don't have to have an opinion about a particular set of principles in order to opine that, whatever they are, they at least need to be applied consistently.

What do you find disagreeable or wrongheaded about this? I confess to a certain mystification.

But the healthy banks want to give the money back now rather than later because 'not embarassing the unhealthy banks' isn't worth all the strings to them if the government is going to use that to take away their important decisions.

Just to be clear, is it "banks" who "want to give the money back now", or is it bankers? Are the "strings" constraining "important decisions" about banks' profits, or about bankers' pay?

If it's true that execs at "healthy banks really did earn much of their salaries", how did they do it? Was it possibly by placing winning bets with AIG?

--TP

I am not a Wall Street person, though I am suddenly "wealthy" in the eyes of Obama (who I voted for), and I will give less to charity if the charitable deduction is limited. I like giving to charity, but I like it even more when it means I pay less in taxes. On the flip side, I will like it less when it has no effect on taxes but a negative effect on my bank account balance. I tend to do things I like more more often and things I like less less often.

Say what you will about the tax increase, but limiting charitable deductions is short sighted. My donation money variously goes to helping hungry families, battered women and children's shelters, an AIDS clinic, and similar causes. I simply don't understand who really thinks the government does enough in these areas and that donations to charity should be discouraged.

Burritoboy: Not to be nitpicky here, but hilzoy said that she was not proposing a general view on compensation, which is a little different from not having a view on it at all. Which is to say that she probably does have one (as you alluded to in your comment), but if she were to present it here, she'd rather take the time to shore up her defenses before the eve of internet battle.

God knows there are enough commentors here ready to storm the gates at a moment's notice. =)

This is actually illuminating, and will serve as a response to SoV (and others).

If Julia Roberts made a movie so unbelievably bad that it not only bombed but completely destroyed the entire entertainment industry, essentially forcing the Federal government to provide hundreds of billions of dollars of funding to stave off the collapse of the US economy, then demanded that she be paid her salary by goverment bailout since great actresses are so difficult to find, then we'd be pissed at Ms. Roberts.

Yes, you'd be pissed. But you would be pissed out of a sense of unfairness rather than economic reality. If this hypothetical government bailout involved having Ms. Roberts star in a new movie that is likely to make substantial profits, long term, and is viewed as important to revive the rest of the movie business, I guarantee you that Ms. Roberts would still demand -- and receive -- a considerable salary, her prior bomb notwithstanding.

This is something that is very difficult to grasp, but most markets don't value the present. Most markets -- including, specifically, the labor market -- value the future. The present (and past) can be valuable as signals of future performance, but they are ultimately sunk costs.

von: in this piece, I say that people whose entire livelihood depends on government assistance do not have the right to defend their salaries by citing the free market. This is an accusation of inconsistency, not a proposal for how to run the country. -- It isn't even a claim that there's anything wrong with the free market claim about merit; just that if one accepts it, one should accept it across the board, not just when convenient.

But this argument is wrong on two fundamental levels, Hilzoy. First, the "entire livelihood" of a hypothetical trader at GS "depends on government assistance" only in the sense that thousands of other non-GS employees "entire livelihood" depends on government assistence. Yes, GS would be hurting if AIG collapsed or if the Fed did not increase the money supply. So would countless other firms, pensioners, and employees -- many of whom have nothing to do with GS, much less the financial sector.

Second, as noted above, any labor market reflects the future (not the past) and reflects a comparative (rather than absolute) judgment regarding merit. These folks are demanding (and getting) high salaries because of the expectation that they will make more money in the future than the next best option.

von's diagnosis of the market's discounting of present and past performance is as damning an indictment of the myopia of the market as you could imagine. What sort of "economic reality" dictates that I hand over lots of money to people who have catastrophically screwed me in the past and who show no signs in the present of having learned any lessons from the experience? If the market cares less about that than the speculative possibility of a big score, than the market is pretty stupid.

"This is something that is very difficult to grasp, but most markets don't value the present. Most markets -- including, specifically, the labor market -- value the future. The present (and past) can be valuable as signals of future performance, but they are ultimately sunk costs."

But the markets have NOT correctly valued the future, as evidenced by the present, which just months ago, the markets didn't believe it could happen.

Dismissing the present and past as "sunk costs", while ignoring the markets earlier "values" of the present that was the future back then is silly. And it's also proof that markets don't reliably predict the future, since everything they did wrong can be waved away as sunk costs.

Was the "labor market" correctly valuing the future work of these yahoos six months, a year, two years ago? Obviously not. If it had been, these guys would have owed their companies massive amounts of money due to the future costs they'd inflict on their companies. So either a) labor markets are not actually reliable predictors of future employee value, or b) these guys were not actually in any kind of honest market.

Or both. I'd say the pay offered my the labor market is much less a valuation of the future and more the result of negotiation and struggle between the people doing earning the money and the people paying it out. Or, in more classical terms, labor and capital.

If Julia Roberts made a movie so unbelievably bad that it not only bombed but completely destroyed the entire entertainment industry, essentially forcing the Federal government to provide hundreds of billions of dollars of funding to stave off the collapse of the US economy, then demanded that she be paid her salary by goverment bailout since great actresses are so difficult to find, then we'd be pissed at Ms. Roberts.

Yes, you'd be pissed. But you would be pissed out of a sense of unfairness rather than economic reality. If this hypothetical government bailout involved having Ms. Roberts star in a new movie that is likely to make substantial profits, long term, and is viewed as important to revive the rest of the movie business, I guarantee you that Ms. Roberts would still demand -- and receive -- a considerable salary, her prior bomb notwithstanding.

This is something that is very difficult to grasp, but most markets don't value the present. Most markets -- including, specifically, the labor market -- value the future. The present (and past) can be valuable as signals of future performance, but they are ultimately sunk costs.

Posted by: von

This is something very difficult for you to grasp, von, but really, it's just economic hardheadedness. You can try to say that something is 'likely' all you want; you haven't provided a shred of proof that this is true, and certainly one doesn't have to have any sentimentality or sense of justice either way to reject your notion of likelyihood.

And while we're reading so much into others mental states despite any claims to the contrary, it seems that you're delusional, with the delusion of the hard partisan, and therefore, not someone to take seriously. Certainly I can't think of any possible evidence that would make you change your mind, and you have shown zero inclination to provide any of your own.

You're like someone who is wanting seed money from me, but if I ask you how this business plan could possibly work, your rejoinder is to say that I - the investor - has to prove that your scheme won't work, and that if I can't, why, I have to give you my money.

That's about as far away from economic reality as it's possible to get von. Why don't you come back to planet Earth. And while you're at it, kindly refrain from patting me on my head and explaining to me why what I think is 'what I feel'. You've given little evidence that you are anywhere near as intelligent as me . . . and quite a lot that you aren't. M'kay?

"You're like someone who is wanting seed money from me, but if I ask you how this business plan could possibly work, your rejoinder is to say that I - the investor - has to prove that your scheme won't work, and that if I can't, why, I have to give you my money."

Except you are really like someone who is forcing seed money on them and then believing that should mean that you get all sorts of control.

"But the markets have NOT correctly valued the future, as evidenced by the present, which just months ago, the markets didn't believe it could happen."

Hard to argue with that statement, although Von might try.

I'm with Nate -- let's not give the all-powerful "market" more credit than it deserves.

The market is indeed forward-looking. But if it we're an accurate predictor of the future, stocks would be risk-free, and we all know they ain't.

"But the markets have NOT correctly valued the future, as evidenced by the present, which just months ago, the markets didn't believe it could happen."

Whoa! Nobody ever said that markets were perfect.

Von's statement is "The free market, however, does provide the correct incentives to the majority of folks, in aggregate, and has worked awfully darn well for an awfully long time -- particularly when compared to the alternatives."

And remember we are talking about the bankers who did NOT cause the mess, and who DID end up guiding policies that caused their banks to be in good shape.

We aren't talking about the AIG whackos or the Countrywide crazies, or even bankers at Washington Mutual (which I think was really a victim of the interaction between mark-to-market and capital requirements, but I could be wrong).

Except you are really like someone who is forcing seed money on them and then believing that should mean that you get all sorts of control.

How exactly was this "forced" on healthy banks - made them an offer they couldn't refuse? It seems that the banks thought they were getting a free lunch, I guess they skipped that day in econ 101.

Further it is irrelevant whether GS was paid directly by the gov't or though AIG shipping off billions of government money to pay off GS - in the free market if your trading partner goes under you don't get paid - that's why most companies monitor the financial condition of their trading partners and ask for more up front or proof of solvency if they think there are problems.

von clarified: "Second, as noted above, any labor market reflects the future (not the past) and reflects a comparative (rather than absolute) judgment regarding merit. These folks are demanding (and getting) high salaries because of the expectation that they will make more money in the future than the next best option."

I call BS on this, as well. These people are demanding, and getting, high salaries not because anything in their skills, past success, or other traits, gives any reason to expect they will "make more money in the future than the next best option". They're getting huge salaries because there were huge amounts of money flowing through Wall Street, and skimming off even a tiny bit of that in fees (for the broker, or the corporation) meant a LOT of money. Which supplied the money for these paychecks, and made it easy for people to seem to be bringing in a lot of "profit" even when they were, for example, selling bets on sliced up mortgages. Neither of these required any world-class skills.

And the labor market doesn't even accurately represent the future, because a year ago, the same yahoos who let to this crash were raking in obscene paychecks.

sebastian: And remember we are talking about the bankers who did NOT cause the mess, and who DID end up guiding policies that caused their banks to be in good shape.

No, we're not. You pulled out a quote I wasn't responding to. von said "any labor market", and I contested his point, not just with the example of Wall Street crooks. Prices for labor are NOT set based on "future earnings", but on many other variables, most of which I would say outweigh the "future earnings" potential of a worker. Both in the example of the Wall Street fraudsters who lost billions, and in the example of minimum wage workers.

"I don't have to have an opinion about a particular set of principles in order to opine that, whatever they are, they at least need to be applied consistently.

What do you find disagreeable or wrongheaded about this? I confess to a certain mystification."

The question of inconsistency is comparatively trivial, and, in fact, hardly the only point Hilzoy made in her post. Of course people are going to defend their class positions - they might prefer to make consistent arguments in order to do so, but they'll make inconsistent ones as well if they need to. That's not exactly a penetrating or novel statement.

What I'm pointing out is that there seems to be a deep inconsistency in what I believe to be Hilzoy's positions - that, simultaneously:

1. we should have a regime of democracy because the mass of individual citizens can make rational individual political choices

2. that, in a large number of cases, people are economically irrational, that they cannot make rational individual economic choices. We should base our economic regime upon this knowledge.

Now, Hilzoy can object that she does not believe in 1, or she does not believe in 2, or she believes in neither of these. Either of these three possibilities of belief is viable. What seems to me to be much less viable (or plausible) is asserting that 1 and 2 are both true.

It's true that Hilzoy's post actually seems to me to be more about class than anything else, but I'm somewhat dubious about her conception of class as well.

burritoboy: I can think of quite a few alternatives to the choice you're trying to force hilzoy to make. For example, one could agree with proposition 2 above, but also, in the place of 1, assert that we should have a "regime of democracy" because people have a fundamental human right to choose their own leaders, regardless of whether they make really great or really horrible decisions about the matter. Or you could say that there is a massive difference in the comparative level of informed-ness an average person needs to make decisions that would qualify as "rational" regarding politics as opposed to decisions regarding economics. Or you could make a utilitarian argument that the "greater good" is best served by behaving as if both your propositions were true, even if one or both are false. And these are just what I came up with off the top of my head.

So, um, yeah. You're right that it's pretty darn hard for someone to actually defend both of your propositions simultaneously on principle. But you're wrong to rule out the fact that there are quite a few other options.

"How exactly was this "forced" on healthy banks - made them an offer they couldn't refuse? It seems that the banks thought they were getting a free lunch, I guess they skipped that day in econ 101."

The government insisted that all the major banks take the loans so that people wouldn't be spooked away from the bad banks.

I guess I don't understand your question.

Nothing about democracy ensures rational political choices. George W. Bush was elected in 2004, for pity's sake! Michelle Bachmann still has a job! Joe Lieberman is still in the Senate. Nothing about democracy ensures that individual, or even mass, choices are going to be "rational". They often aren't. "Rational Voter Theory" fails miserably.

But everything else is worse.

Democracy allows everyone to have some input, and to try and change things if they can convince enough other people. It allows for feedback and changes of course, eventually. But the functional benefits of democracy aren't the main thing with it, the main thing is it allows everyone to have a say in how their country is run.

But democracy and "the free market" are not really THAT much alike, no matter how many times people say they are. And even to the extent they are, there's a LOT of incentives in the way our markets are currently set up that push people away from making rational decisions at all levels. And there's far far less information easily available and understandable in regards to many products on the market than there is on most politicians. So the whole rational consumer with perfect information idea is impossible.

The question of inconsistency is comparatively trivial, and, in fact, hardly the only point Hilzoy made in her post.

Perhaps. But without going into detail about readability, Hilzoy clarified what she meant later on:

von: in this piece, I say that people whose entire livelihood depends on government assistance do not have the right to defend their salaries by citing the free market. This is an accusation of inconsistency, not a proposal for how to run the country. -- It isn't even a claim that there's anything wrong with the free market claim about merit; just that if one accepts it, one should accept it across the board, not just when convenient.
This seems to be the big takeaway point, and how I read her initial posting.

Of course people are going to defend their class positions - they might prefer to make consistent arguments in order to do so, but they'll make inconsistent ones as well if they need to. That's not exactly a penetrating or novel statement.

First von and now you. You might actually consider the idea that there is no hidden agenda or partisan axes to grind, and that the ones who bring up 'class positions' aren't people like me. We're arguing that people who insist on a particular set of Monopoly rules and who benefit by them are in no logical - that's logical, not ethical or moral or otherwise - position to change the rules in mid-game. Why you would think this is some sort of 'class' thing is, again, mystifying.

What I'm pointing out is that there seems to be a deep inconsistency in what I believe to be Hilzoy's positions - that, simultaneously:

1. we should have a regime of democracy because the mass of individual citizens can make rational individual political choices

2. that, in a large number of cases, people are economically irrational, that they cannot make rational individual economic choices. We should base our economic regime upon this knowledge.

Now, Hilzoy can object that she does not believe in 1, or she does not believe in 2, or she believes in neither of these. Either of these three possibilities of belief is viable. What seems to me to be much less viable (or plausible) is asserting that 1 and 2 are both true.

This one looks like it came out of left field to me. Where did this come into the conversation? I'm not saying it didn't, but if it did, I sure missed it. Looking up above, I still don't see it.

It's true that Hilzoy's post actually seems to me to be more about class than anything else, but I'm somewhat dubious about her conception of class as well.

Posted by: burritoboy

Could you explain your reasoning? Again, it's not something that's obvious to me. If there's any 'class consciousness' here, it seems to be on the part of people who can say things like this:

It's fair to say you ran your companies into the ground, your risk management is flawed -- that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it's fair to say Wall Street is paid too much.

IMHO, saying that yes, running your company into the ground while being paid hundreds of millions dollars means you should be paid less is hardly an expression of class consciousness. Saying that people who make those statements are being 'class conscious', would seem to be providing far more fodder for that sort of accusation.

It could be that a seemingly rational set of individual choices among any number of economic actors could lead to an irrational economic outcome.

It might seem rational for 5 million individuals (from five million points of view)to jump simultaneously (the rational and maybe incentivized choice, chosen individually 5 million times but simultaneously) into the Atlantic Ocean for a swim, but that could cause an irrational tidal wave to hit the west coasts of Africa and Europe.

As to democracy and rationality, I don't think anyone has ever claimed the results would be rational.

The results might turn out to be irreparably stupid, but some would hail that as freedom, as determined by the majority.

Except for the tidal wave. We end up with a whole bunch of wet socialists, wet free marketeers, wet libertarians, etc, with their equally wet attorneys arguing over who pays for the damage.

Like we're doing right now.

I'm going for a swim.

The government insisted that all the major banks take the loans so that people wouldn't be spooked away from the bad banks.

I've seen speculation to that effect, but it's never been confirmed, AFAIK.

From Geithner's testimony today, one Treasury concern is that TARP money, intended to loosen credit, isn't being loaned by the banks. Based on the chart here, that's especially true of Goldman.

Life, liberty, and the pursuit of rationality is not what it says.

Maybe democracy is the most rational way (avoiding the hacking and the butchering of the other alternatives) of arriving at the least irrational outcome.

The government insisted that all the major banks take the loans so that people wouldn't be spooked away from the bad banks.

Seb, I guess I'm asking what if the "healthy banks" told Paulson "Bailout? we don't need no stinking bailout? Cram it, ugly" What consequence could government impose?

I mean I'm sympathetic to the bait and switch argument regarding conditions on the money - and if treasury won't let them pay it back even if they can then that's messed up. But I have a hard time seeing how the money was "forced" on banks that didn't need it, rather than the banks taking free money, because, hey, free money - but get second thoughts once utterly predictable strings are attached for political cover.

Did they not see the initial public reaction to Paulson's $700B ransom note?

CorbettAL: Your link did not provide a chart. Here it is.

"and if treasury won't let them pay it back even if they can then that's messed up."

Well apparently they won't, so...

As for forced, allegedly on October 13, Paulson met with the large bank heads and told them to sign into TARP whether they needed it or not for the good of the country. See here What was the implicit threat? I don't know.

"Seb, I guess I'm asking what if the "healthy banks" told Paulson "Bailout? we don't need no stinking bailout? Cram it, ugly" What consequence could government impose?"

Andrew Napolitano reported last week on Fox News that he had spoken to the head of a $250-billion bank the night before who said Washington forced him to take TARP funds last September.

Napolitano said this bank "has no subprime loans, it has no bad debts, wasn't involved in credit default swaps. It didn't need any money. It didn't ask for the money and didn't want it. . . . officials from both the Federal Deposit Insurance Corporation and the Treasury said if you don't take this money, we will conduct a multi-year public audit of you."

The government has a lot of weight to throw around, if it really wants to lean on you.

What is Plan B if TARP does not work?

Banks, as evidenced by the Wall Street Journal link above, are not loosening credit. Unemployment keeps rising. So what do you call a recession that keeps getting worse?

GS has received at least $23 billion in taxpayer funded bailouts so far. They are "thinking about" paying back less than half that amount. They have yet to pay back anything. What horrible burden is it that GS is suffering under by being able to walk away with at least $13 billion in taxpayer funds with no strings attached?

"The problem with this is that Sweden, France and Germany are facing the exact same problem: they all posit a highly rational homo politicus for their political systems, yet turn around and simultaneously argue for a significantly less rational homo economicus. Now, that may be workable for temporary current conditions, but will it last over the long term?"

Those "temporary current conditions" have been ongoing for a lot longer than I've been alive, so I'm not worried for the foreseeable future. Depending on how one defines "the long term," there are no sure things, and certainly no eternal things, but right now we seem to have some tens of millions of people suffering far more economically than any of those countries, so I'm still quite enthusiastic about the idea of preferring to live there, if only I had a choice, rather than under the almost non-existent social "safety net" of America.

I also think helping those in economic need become better able to become productive, or more productive, citizens, where possible, is eminently rational.

Except you are really like someone who is forcing seed money on them and then believing that should mean that you get all sorts of control.

Damned gummint!

By way of establishing context, I'd just like to point out that corporations exist in the first place as a legal structure for limiting liability. They operate under a charter granted by -- who? -- the government.

If people don't like the state interfering in corporate governance when it quite plainly goes off the rails, I invite them to surrender their government-sanctioned guarantees of protection from personal liability for their stupidity.

We'll see how many folks sign up for that.

The terms of the TARP plan were set to try to keep the whole shooting match from blowing up. That's what everyone, including the geniuses on Wall Street, insisted was necessary.

If you dance, you pay the piper.

There's no inherent right, in the constitution or anywhere else, for corporations to even freaking exist.

If they'd like to put their personal fortunes up to guarantee the billions and billions of dollars they've pissed away, I'm all for giving them complete freedom from government interference.

Thanks -

officials from both the Federal Deposit Insurance Corporation and the Treasury said if you don't take this money, we will conduct a multi-year public audit of you."

Sounds like something a certain Republican administration would do, doesn't it? Who kept electing those a**holes?

officials from both the Federal Deposit Insurance Corporation and the Treasury said if you don't take this money, we will conduct a multi-year public audit of you.

The sheer horror of the threat. Well, if you haven't done anything wrong you have nothing to worry about.

Meanwhile, the CFO of Freddie Mac was found dead of an apparent suicide today.

"By way of establishing context, I'd just like to point out that corporations exist in the first place as a legal structure for limiting liability. They operate under a charter granted by -- who? -- the government.

If people don't like the state interfering in corporate governance when it quite plainly goes off the rails, I invite them to surrender their government-sanctioned guarantees of protection from personal liability for their stupidity."

Are you talking about the banks that needed the TARP money or the ones that didn't need the TARP money? You are making sweeping statements that appear to be well out of proportion with what we are talking about. Does that fact that 'corporations' are created by government charter mean that if banks screw up, the government should be able to tell Microsoft how much bonus to pay to its engineers? If not, maybe we should draw distinctions a little tighter than 'corporations'.

Are you talking about the banks that needed the TARP money or the ones that didn't need the TARP money?

Did "If people don't like the state interfering in corporate governance when it quite plainly goes off the rails" not provide sufficient context?

Phil, no it didn't. Because we are in the context of a discussion where the government strong-armed at least some banks into taking the money when they didn't need it (see for example Wells Fargo).

"Are you talking about the banks that needed the TARP money or the ones that didn't need the TARP money?"

What I'm talking about, I suppose, is the presumption that the government must never interfere in corporate governance, or more generally in the operation of the market.

To me that seems kind of unsupportable, since corporations are the creature of, and only exist in, the context of law and contract that is established and enforced by the government.

They don't grow on trees.

So, yes, a more sweeping statement than is required by the question of willing vs reluctant participants in the TARP program.

To be honest, I find myself surprised and amazed on an almost daily basis by the sense of entitlement and outrage expressed by traders and bankers when they are faced with more or less any constraint whatsoever on their actions.

There are lots of aspects to the current economic mess, but the thing that turned a problem into a thermonuclear meltdown was the unregulated CDS market. These guys bought and sold promises to pay multiples of the national GDP if certain circumstances occurred, circumstances that a 10 year old could have predicted happening.

Seriously, a show of hands: how many people on this thread had a conversation along the lines of "What's going to happen when the ARMs reset?" sometime in the year or two preceding the big meltdown last fall?

Any hands not up?

In other times and places, absent the polite and government-enforced guarantees of limited liability, the folks selling CDS that they could not pay on would have been sold into bondage.

In quite recent times, they would have spent the rest of their lives in debtor's prison, at their own expense.

Now they complain because they are only getting a great deal of money, and not the obscene amounts of money they signed up for.

I'm not sympathetic.

Here's a synopsis of the draconian limits they will be subjected to:

Top executives will not be eligible for exit bonuses. Pensions yes, exit bonuses no.

Bonuses for all top executives can't be more than 1/3 of total compensation.

If you received $500M or more, "top executives" are the five most senior and next twenty highest compensated employees.

If you received $250M -> $500M, it's five most senior and next ten highest compensated.

And so on, down to those who got less than $25M, where the rules apply only to the highest paid employee.

No limit on salaries.

That's what they are bitching about.

My two cents, the folks who ran the banks that needed the TARP bailout should have been on the street by the end of the week, possibly to face criminal charges for malfeasance shortly thereafter. So, no tears for them.

If there are, truly, banks who did not need the TARP money, objected to receiving it at the time it was handed out, and were forced to take it under threat of messy public audit, I agree they have a complaint.

But frankly, I'd appreciate it if they would sit on their hands and take one for the team until the money is paid back. No doubt, the bonuses will flow once again shortly thereafter.

Thanks -

russell,

And recall that one of the reasons that bonuses were outsize to salaries is that that practice is a tax loophole. They knew that their "bonuses" were actually part of their "salaries", but was named differently to avoid tax law.

More to be looked into, but I guess from the IRS side--if they can be distracted from auditing people making under the median income.

If there are, truly, banks who did not need the TARP money, objected to receiving it at the time it was handed out, and were forced to take it under threat of messy public audit, I agree they have a complaint.

Yes, *if*.

"Sound banks were coerced into taking TARP money."

"Torture produced useful intelligence."

Lots of assertions get made in this world. Some of them turn out to be self-serving lies. I'm not prejudging: both those statements could be true. But I am such a leftist commie pinko that I suspect they could both be false.

--TP

What they're bitching about is that the terms of the loans they weren't given much choice about taking were changed after the fact, which logically leads to the conclusion that they've got no way of knowing the terms won't be changed again. And again. And again.

This week it's retroactive changes in their pay. Next week, the government tells them who to loan their money to, on what terms. Maybe the week after that Obama fires their board of directors and appoints some cronies.

They're quite sensible in wanting to get out of that kind of deal.

Brett,

Maybe the banks should read their own credit card and loan contracts with consumers periodically; they're allowed to change those terms and conditions with effectively little notice, sometimes ruinously.

The banks are very upset about being dealt with in the way they have dealt with consumers; I guess they feel it is better to give than receive.

While there's enough truth to that analogy to moderate my sympathy a little, I have yet to be told by a credit card company that I HAVE to take the damned card, or that they won't let me pay off the balance. Or that they get to run my entire life because I've got a $23 balance.

True, but think of a situation where, as a short term expedient, you make a major purchase on the card (or even a 0% transfer from a high % card), right after which they change your terms because you closed the prior card (which they could do). You want to pay it off, but you just missed the expected bonus from your job, and now you're stuck with some major payments until you can get to a clear spot. And they won't change you back to your old terms, and the new new % rate almost, but not quite, makes it impossible to pay off the balance in a timely fashion. Heck, they may even drop your limit and charge you overlimit fees because it's now lower than your balance, tacking on late fees for good measure when you don't pay enough to bring yourself below the new, rapidly receding, top. Then when you think you're getting below the limit, they drop it again. All legally, because they retain the right to change terms and conditions.

All of the above, in one form or another, has happened to my wife and myself in the past year or so. But the banks didn't need the TARP/TALF/whatever funds; they're just gouging as much as possible from cardholders because they can.

Been there, done that, still clawing my way back into solvency. But to the extent that what banks do to people with credit cards is truly objectionable, it follows that they've actually got a sound basis for complaining if considerably worse is done to them.

"But the banks didn't need the TARP/TALF/whatever funds;"

Or, in some cases, WANT them. They were forced to take them on the theory that, if some banks took the funds, and some didn't, it would reveal which banks were unsound, and cause a run on them. And threatened with abusive audits if they refused.

Chase didn't threaten to sic a team of lawyers on me if I cut up that card they mailed me instead of using it. Or tell me that it was up to them, not me, whether I was allowed to pay the card off.

" Heck, they may even drop your limit and charge you overlimit fees because it's now lower than your balance, tacking on late fees for good measure when you don't pay enough to bring yourself below the new, rapidly receding, top."

I hate credit card companies and their policies, plenty, but has this ever really happened? If so, with one of the majors? And was it found legal?

Sebastian,

Yes.

Wife: Capital One, Providian (WaMu, Chase)
Myself: Citibank controlled Kohl's

Legality. Hell, if I could afford the payments, I wouldn't need the lawyer I can't afford.

Additionally, updates to the contracts require that disputes be settled via binding arbitration, which is pretty much a boiler plate for most card contracts today. I also believe that judgement can only be for the amounts in dispute. This means I can get a credit back for the fees, but that the bank will charge interest and further penalties if I lose (I have to find the stat, but IIRC, banks win 95%+ of disputes via arbitration).

In the end, this means that I can hire an attorney, out of pocket, to assist with a arbitration case that will require me to fight for possibly a few hundred $ in fees; do you see a losing trade-off on my side?

Win-win for the banks, however.

Wow. Lowering your limit and then charging you overlimit fees is crazy!

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