Execs at "too-big-too-fail" AIG got fat bonuses this week, despite the fact that their company has in reality failed and would be out of business were it not for a massive infusion of federal (tax) money.
And people on Wall Street and in Washington seem caught off-guard by the populist outrage spawned by these bonuses. The legal obligation claimed by Tim Geithner to use tax dollars to pay large sums of money to failed execs has apparently enraged large numbers of people who live outside of NY and the Beltway. They simply do not understand why, at a time when the economy is in the toilet and millions of people have lost their jobs, the people who played a role in the collapse of the economy are being rewarded with millions of dollars in bonuses.
And it is puzzling. We keep hearing that bonuses for performance are an integral part of how Wall Street does business. These struggling firms need to pay large sums of money to "the best and brightest" in order to retain them and they can't afford to lose these brilliant people who are so desperately needed to help unravel the mess they made.
The theory behind the bonuses, apparently, is that the bright minds at these firms will go elsewhere unless bonuses are paid, guaranteeing an even greater competitive disadvantage for these already crippled firms, threatening their frail existence even further.
Thus the holes in TARP. Hank Paulson, Treasury Secretary under Bush, devised a bailout that understood these issues. Crippled banks are at a competitive disadvantage. No question about it! So apparently, he shoved billions of dollars into the coffers of healthy banks - or so claim the leaders of some banks who've received billions in bailout funds (Northern Trust, as an example) - so that the TARP recipients wouldn't look completely sick in comparison.
And apparently, he understood how vitally important bonuses are to employees of these firms - because he did nothing to ensure TARP money didn't go to fund bonuses of execs at bankrupt firms.
(Making me wonder just how those legally obligated bonuses would have been paid if the feds hadn't handed over all those tax dollars to prop up these firms.)
And what we've come to understand, those of us who don't inhabit Wall Street, is that bonuses have nothing to do with performance. Performance has nothing to do with success. Good business practices are typically rewarded with profit.
But on Wall Street, bad business practices are propped up and rewarded with a big fat federally funded bailout. Under Paulson's TARP, devised to rescue the crippled financial industry, the feds must prop up mortally wounded banks - no matter what the cost, no matter what the logic, no matter what.
The people who don't get the concept behind TARP are the ones whose jobs are threatened by this economy - the people who don't even make $100,000 a year, so can't understand the pinch that comes from living on just half a mil income. Who don't remotely understand what one family can do with ten million bucks. Who don't see TARP as being anything but a blanket of bucks covering the already wealthy. They simply don't understand the argument that the economy would collapse if these firms weren't saved.
Because in their minds, facing layoffs and foreclosure and bankruptcy - without the comfort of a fluffy federally funded TARP at their disposal - the economy is already crippled - and the ones who broke its back are the ones now profiting most from the rescue.
All of which leaves me with a key question - how much can we afford to spend to prop up dead companies? And what do we get out of this bargain in return?