Eighteen billion dollars doesn't go as far as it used to.
In the first year of Barack Obama's administration, the U.S. government will add that much to the national debt about every six days. (And on the seventh day, He won't rest.) In Ottawa, the Harperites' new budget proposes, for the first time in Canadian history, to spend more than $18-billion (Canadian) on programs every month. And $18-billion (U.S.) is less than one-third the estimated size of the fortune (premeltdown) of a single man, Carlos Slim, Mexico's richest person and financial saviour of The New York Times.
But put that figure - $18.4-billion, to be precise - on the front page of that venerable newspaper and tell readers that it's what Wall Street paid out in bonuses in 2008, and watch the rhetorical fireworks fly. Have they no shame? Is TARP nothing more than a recession shelter for well-fed financiers? How dare they! "There will be time for them to make profits, and there will be time for them to get bonuses. Now's not that time. And that's a message that I intend to send directly to them," U.S. President Obama said.
"President decries 'shameful' bonuses for Wall St. CEOs," said the Washington Post, which described Mr. Obama as "clearly irritated." It makes for a zippy headline, but it's an inaccurate one. Wall Street CEOs received but a tiny portion of that money and they are not even the biggest source of the problem. It's the people underneath them.
If anyone in high finance is wearing a hair shirt, it's the people at the very top, Merrill Lynch's John Thain and his $1,400 wastebasket excepted. Bank of America's Ken Lewis, who was tempted to wheel Mr. Thain and his fancy office chair out a 55th-floor window, gave up his bonus and said some other senior executives at the Bank of the American Taxpayer would do the same. Citigroup's Vikram Pandit and Morgan Stanley's John Mack will also take no bonus money - in Mr. Mack's case, for the second straight year.
Cue no violins for these men, who are receiving exactly the amount of bonus they deserve. But if they got zero, who got the $18.4-billion? About 165,000 survivors did, for an average bonus of $112,000 - which makes it sound slightly less outrageous. The money, you can be sure, was spread in the usual Wall Street tradition: Top investment bankers and traders received millions; junior associates got the shaft, but still more than they'd probably earn if they were designing bridges or doing something else of use to society.
The President's sense of outrage at the payout may be genuine. But if he's as astute as people say he is, he can't have been surprised. Merrill, which paid $4-billion in bonuses just before closing its sale to Bank of America and revealing huge new losses, has long behaved this way. It's in the culture. Remember, the firm had a terrible year in 2007 as well, losing nearly $8-billion - and still paid its average employee $247,000. Morgan's much the same. Shareholders have always been the junior partners on Wall Street, the last ones to see a profit and the first to suffer the losses.
Still, other than force of habit, what's the explanation for the $18.4-billion? (If they didn't pay up, their talent would go to the firm across the road? Please. Surely most financial CEOs, other than the clueless Mr. Thain, aren't blind to optics.) They would have known that with the economy in the sewer, it would look bad. But they paid the money anyway. Here's the cynical explanation: They did it because they knew this would be the last hurrah. U.S. financial firms have a new, grumpy and powerful shareholder in the U.S. government, now controlled largely by liberal Democrats.
The U.S. Congress, in its panic and haste last fall, used the TARP legislation to place caps on executive pay. They're now realizing that had symbolic value but nothing more. But if you really want to have a financial impact, you have to cut into non-executive pay. You have to say that the Wall Street practice of dishing out 45 or 55 per cent of revenue to staff - just because it has always been done that way - is over. (To show how ingrained this is, consider: Morgan Stanley nearly collapsed in 2008, and it still paid staff 50 per cent of total revenue.) You have to begin to compensate them on the basis of profit, or return on capital. You have to pay people in finance not just less, but differently.
The thought of any government micromanaging the pay scale of its banks is repulsive to any believer in free markets. But ownership has its privileges, and the new President is no hands-off libertarian. If Mr. Obama really wishes to send his message "directly to them," may we make a humble suggestion? Don't talk to the CEOs. Deliver a few of those amazing speeches on the trading floors at Morgan Stanley and Merrill and Goldman Sachs. Something about realistic expectations might do the trick.