How the Government Missed All Those Wall St. Bonuses

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Jonathan Ernst / Reuters

U.S. Secretary of State Henry Paulson ran Goldman Sachs before going into public service.

There is a scene in the film classic Casablanca when Captain Renault, the head of the local police, finds out that there is gambling going on in the cafe owned by Humphrey Bogart's character. Renault's reaction was to say that "I'm shocked, shocked to find that gambling is going on in here!" Of course, Renault knew about the activity and was taking a few dollars on the side.

President Barack Obama blasted Wall Street for shameful and irresponsible behavior after reports that Wall Street paid $18.4 billion in bonuses in 2008. These numbers were from New York State where payouts were 44% below last year. The common man, the government, and the press felt that no bonuses were the only right thing.

Investment banks have been paying out bonuses for decades and in many years those sums were astronomical. Certainly Mr. Paulson, who ran Goldman Sachs before going into public service, knew about it as did everyone in the New York Federal Reserve. Paulson had, after all, had his years of big bonus payments. (Read TIME's story on whether Paulson can save the economy.)

When the major banks and brokers got their first chunk of TARP money in October, everyone intimately involved in the process was aware of how Wall St. compensation works. But, the only conversations about salaries and bonuses were directed at the CEOs of the big firms. The cognoscenti knew that top traders and investment bankers often made much more than their bosses.

It is almost impossible to believe that there was any malfeasance in the decision that left the bonus management of the highest performing employees at these companies to the boards and senior managers. But, the government elected to avoid getting into a series of disputes over how thousands of people should be paid. Federal regulators chose to hope that the banks would use discretion when they made compensation decisions during this unprecedented credit crisis.

The government walked away from the entire matter because it was complex and time consuming. This is the same reason that the Treasury Department wrote checks to the banks instead of buying their toxic assets even though Congress had been told that the TARP funds would only be used to buy toxic assets. It was quicker and easier to just give the banks money because of the worsening crisis.

Paulson says that he acted as expediently as he could. The financial and credit system probably was days from collapse when he received the first $350 billion of TARP funds. Paulson would probably agree that his actions were not based on careful plans, but the time for careful plans had passed.

Debating what bankers should be paid would have taken weeks and perhaps months. Wall St.CEOs claim that a number of their key managers and traders did make a lot of money for their companies and would argue that these employees should not be responsible for the problems of the failing financial industry. CEOs have said that talented people who don't get paid well will leave. That is a good argument but it should have been clear, even then, that there would be nowhere for these highly paid people to go.

President Obama has a right to be incensed. Paulson and the Congress could have said that no one employed on Wall St could be paid more than $100,000 for the work they did in 2008 no matter how remarkable the results. It would have, in effect, put the Treasury in a position where it was running banks at a granular level. In October ,however, the government was not nearly as close to running the banks as it is now.

The only way to reverse what is now viewed as bad judgment on the part of the compensation committees is to try to get some of the money back. NYS Attorney General Andrew Cuomo says he may try to use legal action to recover some of the money paid to Merrill Lynch employees. Senator Chris Dodd wants to go into court immediately.

The genie is out of the bottle. He is not going back in. Most highly paid bankers have used their money to fund their expensive lifestyles. In other words, the money is gone.

Paulson and Representative Frank could have put in a number of rules the day the TARP cleared Congress. Frank agreed to an oversight commission that would review how the money had been spent, after it was spent. By doing that he simply wasted the time of this commission. It became nothing more than witnesses to recent history.

Paulson stayed away from the bonus issue for two reasons. The first is that fighting with the banks over which investment banker should be paid what amount would have taken too long. The second was that he did not want to appear to be the de facto CEO of all the companies which got TARP money. He decided that in this crisis the banking executives would have to use their own discretion in the use of the money. He chose to leave this decision to their boards and not the Treasury. And as it became clear that the government would have to put up more money, Paulson did act behind the scenes to make sure that bank CEOs received no bonuses for 2008.

Cuomo, Congress, and the public are angry that these bonuses were paid. It made no sense that the most highly paid people on Wall Street continued to make extraordinary amounts of money with the bonus payments, when their companies had to bailed out by taxpayers. In an ideal world, they would not have been given those bonuses. But, Paulson was not willing to push that point. He did not have the time to make the effort.

The money is gone. There won't be a mulligan on this one.

Douglas A. McIntyre

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