Let the Good Times Roll

By Brian Beutler

David Cho reports:

The Obama administration has finished drafting the central elements of its plan to rescue the financial markets and is gathering feedback from regulators and Wall Street executives, sources familiar with the matter said yesterday….In finalizing the plan, officials have made a policy decision that could dismay lawmakers. The administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid but instead retain looser requirements initially included in the Treasury’s $700 billion rescue program, a source familiar with the deliberations said. Officials are concerned that harsh limits could discourage some firms from asking for aid.

Meet the new boss. You’ll recall that the “looser requirements initially included in the Treasury’s $700 billion rescue program” are the same ones that allowed bailed out banks on Wall Street to hand out $18 billion in bonuses to the very people whose combined efforts drove those banks into the ground. It’s worth repeating that $18 billion is a significant percentage of the total funds the government distributed to them, and that if the money had been loaned to other banks — for brief stretches at high interest — it would still be there, keeping them afloat. Instead, it’s gone.


Of course, there could (and should) have been stricter compensation requirements written in to TARP in the first place, to make it something like an opt-in emergency fund. That would have discouraged (at least to some extent) solvent banks from walking away with unnecessary taxpayer money, and had the ancillary benefit of isolating zombie institutions from those in greater health. Instead, Paulson forced all the major banks to take billions and billions of dollars. He sunk the cost. And now Obama officials believe (or say they believe) that imposing pay restrictions will lead executives to run their institutions (further) into the ground.

TARP could have been better in many ways, obviously, but this underscores once again one of the obvious advantages of short-term nationalization — that if the government controls the bankrupt companies, there’s no real need to hash out the terms of compensation restrictions, and, therefore, no cottage industry dedicated to finding loopholes in those provisions. But, in the words of our new Treasury Secretary, “we have a financial system that is run by private shareholders, managed by private institutions”. And that’s true, it seems, even if those institutions’ only value lies in the hope that the government will green light billions of dollars in upward wealth redistribution to their executives and shareholders.