WHOSE BONUSES ARE THEY ? / THE NEW YORK TIMES EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

January 15, 2010

Editorial

Whose Bonuses Are They?

Maybe bankers do know a little bit about shame — or at least about public opinion polls.

Their objections have been muted to President Obama’s decision to impose a fee on the country’s largest banks, insurance companies and broker-dealers to recover some of the money spent bailing them out. And they are so panicked by talk in Congress about taxing their enormous bonuses (the industry is expected to reward itself with tens of billions of dollars this year) that they have decided not to take all of that money in cash.

Banks, instead, are bending over backward to ensure their windfalls fit the prescriptions of Kenneth Feinberg, the White House pay czar. The government’s goal is to reduce incentives to reckless risk-taking. The bankers clearly just want to get the money any way they can.

JPMorgan Chase is scheduled to be the first to report its bonuses on Friday, and other big banks will be following suit beginning next week. Some are forcing their highest-performing executives to accept only stock shares. Others are conditioning payouts to future performance criteria. This is all good for the stability of the banking system — where pay has typically been rigged to encourage high-risk, fast-reward schemes that paid bankers handsomely, regardless of the long-term performance of their investments.

It is unlikely to quell the furies on Capitol Hill, where House Democrats on Thursday proposed imposing a 50 percent windfall tax on bankers’ bonuses. And it is unlikely to satisfy taxpayers. It shouldn’t.

For the sake of fairness, Congress should pass a one-off windfall tax on bonuses. After all, what profits the banks had in 2009 were largely underwritten by taxpayers, who pumped in billions of dollars of capital, covered losses from the collapse of the American International Group and guaranteed the debts of Fannie Mae and Freddie Mac. The Federal Reserve lent hundreds of billions against shoddy collateral that no one else would touch and the Federal Deposit Insurance Corporation guaranteed loans worth hundreds of billions more.

And for the sake of long-term financial stability, Congress should also pass President Obama’s proposed big bank fee — intended to recover, over 12 years, the $117 billion that the administration estimates it will spend on financial bailouts. That should discourage banks that are already too big from getting even bigger and posing a larger threat to the overall economy.

Goldman Sachs, where compensation for 2009 is expected to near the record $20.2 billion it paid out in 2007, has said its top 30 executives will receive their entire bonuses in stock that cannot be sold for five years. It has assured regulators that cash will make up only a small share of bonuses for executives further down the ranks.

Others are said to be reducing the size of their bonus pools. Morgan Stanley is reportedly conditioning the payout of bonuses to meeting a set of criteria for future performance. Bank of America plans to pay part of bonuses in some sort of chit that would fluctuate in value according to the company’s performance.

That’s better than how the game has been played. But we would find it more persuasive if the boards of the banks disclosed clear guidelines on how performance-related bonuses are determined. And we would like to see clear clawback provisions to recoup bonuses if the investments they were based on tank in the future.

Ideally, these provisions would be part of the reform of financial regulation winding its way too slowly through Congress. Congress should strengthen that legislation, and it should require the banks and bankers to send more money back to the public coffers from whence it came.

Copyright 2010 The New York Times Company