A (Somewhat) Logical Argument Against Bank Bonuses

With banks reporting record bonuses this year off of billions in taxpayer bailouts, there has been much populist outrage over banker compensation.   The main argument that is being spewed by the masses is that they wouldn’t have made that money hadn’t it been for the bailouts.  Banks, on the other hand, argue that if they don’t pay this compensation they will face a talent drain.

The problem with the populist argument is that it is fueled by outrage.  It is intellectually hollow and doesn’t really beg the question are the individuals getting paid what they’re worth. I will take this argument to another level though, more classic logic.

The banks who are claiming that their employees are worth what they are being paid are also claiming that the losses were exogenous to the business model that they employ – a systemic crisis.  It was a system that failed that they happened to be a part of.  Fair enough.

So now that the system is back under way, and banks are starting to earn money again, they claim that it is the individuals themselves who are making the money.  A bonus is by nature a reward for an individual for work performed, and thus it is fair for that individual to be rewarded for his contribution to the success.

This is where I see a logical fallacy.

A bank or any institution can not credit failure to macro and success to the micro.  If the system dictates your failure, then it must also dictate your success.  Surely they wouldn’t argue that homeowners in New Orleans should be getting huge premium reductions on their insurance because they were smart enough to avoid a hurricane the past 3 years.  That would be asinine to suggest as everyone knows a complex weather system dictates the profit/loss on the insurance not the homeowner itself.  Thus, if banks are to recognize the system for their failure they must also recognize it for its success.

If you take the other side of the argument and say that banks don’t credit the system for their failures, then it implies that the employees were responsible and, well, the argument for bonuses is much more flimsy.

I could care less whether a Goldman Sachs banker is buying with his money, but I do care about having a banking system that is well capitalized.  Goldman Sachs is set to give over $20 billion in bonuses this year.  Their “conduit” bailout through AIG was $12 billion.  While I realize not all of that is in cash, if they recognized that the same system that gave them that wealth in the good times could fail, exercised some thrift and socked away some money, bailouts would not be necessary.

If we have a cartel of banks that is given systemic advantage and ability to literally print money, we must refrain from the temptation to “capitalize” labor in this money factory.   They are given free money at a time when it is scarce, of course they will make money.   While there is some talent, for the most part this is serendipity. The system’s ability to make or lose money is far beyond the talent of the individual and until we recognize this, we will allow the workers in our money factory to take all of the profits it needs in order to keep operating when the rainy day does indeed come.

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  1. 1 Sunday links: blog stars Abnormal Returns

    […] Washington set the stage for this year’s Wall Street bonus bonanza.  (NYTimes, Clusterstock, Zero Beta) […]




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