Are Wall Street Bonuses a Form of Theft?

Michael Lewis is probably best known these days for two great sports books, Moneyball and The Blindside. But he originally made his name with Liar's Poker, a book based on his experiences selling bonds at Salomon Brothers in the 1980s. With his latest book, The Big Short, Lewis revisits Wall Street in an effort to understand and explain what led to the recent financial crisis. Lewis ultimately blames the crisis on an incentive structure that rewards bankers for behaving recklessly, without making them face serious consequences when their bets go bad. It's the same structure that allows bankers to pay themselves large bonuses with bailout money—bonuses that are, in Lewis' words, "a very elegant form of theft."

Lewis is right. As he told "60 Minutes" recently, the very people who made the deals that brought down the economy walked away from the crisis with huge sums of money. "Stan O'Neal at Merrill Lynch, and Chuck Prince at Citigroup are the most obvious examples," Lewis said. "They were paid not tens, but into the hundreds of millions of dollars to run their firms into the ground." Now not only are many of the people who caused the crisis actually being paid to clean up their own mess—since after all they are the ones who understand it best—but those who remain on Wall Street are also paying themselves large bonuses out of taxpayer money.

Bankers will tell you that they've earned those bonuses, because they've done so well since the bailout. Besides, if they didn't give out large bonuses they would lose the top tier talent they need to run their businesses. But the fact is that they've paid themselves billions of dollars in bonuses throughout the crisis. And much of their recent profits are little more than direct payouts from the federal government. Consider Goldman Sachs. As Matt Taibbi points out, Goldman reported $13.4 billion in profits last year, after paying out some $16 billion in bonuses and compensation. But if the government hadn't bailed out AIG, Goldman probably would never have gotten much of the $19 billion it says it was owed—in effect, the rest of us assumed the enormous cost of Goldman's bad risk. Moreover, Goldman and other banks have borrowed billions of dollars from the government at zero interest as part of the bailout. Rather than lend the money to businesses—and actually stimulating the economy—they lent much of that money back to the government by buying treasury bills that pay 3-4% interest. You don't have to be a financial genius to see that's a can't-lose proposition—in effect free money. In essence, they gave the money right back to the government, but took a cut, even though they did nothing of any real value. And take out the bailout money and it's not clear that Goldman—or most other banks—actually made any money at all last year.

So that bonus money doesn't come out of money the banks made. It's taxpayer money. The main thing the banks did to earn it was lobby Congress. And it's unlikely banks would lose much talent if bonuses were trimmed. Not many people left the companies where compensation was actually cut back. Where else would they go, after all? No one is going to pay them anything like that much money anywhere else. Wall Street banks are bidding only against themselves for all that supposedly top talent. And doing it with our money.

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