Don’t Blame the Bonuses

With jobs in jeopardy and investments limping, it’s understandable that Main Street takes comfort in finding a bogeyman to blame for the country’s current economic miseries. And last month, when the New York State comptroller announced that Wall Street handed out $18.4 billion in bonuses for 2008, Main Street didn’t even have to get up from its easy chair to find a suitable villain. The White House amplified the chorus of boos, as Barack Obama scolded bankers as “shameful” and Joe Biden snarled, “I’d like to throw these guys in the brig!”

One can’t blame President Obama and Vice President Biden for taking target practice at that $18.4 billion. It’s probably a relief to unload some ammo, as a distraction from the gut-wrenching business of administering a $900 billion (why can’t we just admit it’s going to be a trillion?) taxpayer-funded stimulus package. But both Obama and Biden know, better than most, that  compensation on Wall Street is structured so that banks pay low base salaries and that bonuses are generally considered part of one’s “true” salary, so the $18 billion number is overstated anyway. Moreover, the 2008 bonus figure represents a drop of 44 percent from 2007, and thus can be said to accurately reflect the wider economy. And the top executives of several banks—most notably Goldman Sachs—did in fact forgo bonuses to serve as an example, despite having proven their worth by navigating their firms through treacherous waters.

One wishes, therefore, that Mr. Obama and Mr. Biden had not gone for the easy political points. Already they are facing a Congress whose members have floated the idea of punishing bankers by taking back money they’ve already been paid. Fairness—such as putting a cap on future compensation of executives at firms that receive government assistance—is one thing; punishment is juvenile and counterproductive.   

Wall Street has always attracted risk takers; the rough-and-tumble culture of the Wild West is an intrinsic part of the securities industry. Sizable payouts help attract and retain the top talent—the men and women who generate wealth in the U.S. economy. The collapse of the credit and stock markets was largely due to obsolete and inadequate regulations, plus a loss of fiscal prudence among the rating agencies and investment banks. Bonuses were not the problem. Moreover, Wall Street bonuses play an integral part in New York’s economy, generating hundreds of millions of dollars in tax revenue, and funding no small portion of the city’s retail, restaurant and philanthropic activity.