That was Hank Paulson’s big mistake. He partially nationalized the big banks before they went under. He rescued them before we could gain control. The result is that we – the American people – are the largest shareholders of Citibank (with 7.8% of their equity) and of Bank of America (with 6% of theirs), and yet we have no way to really influence their lending practices, no way to make them thaw the frozen credit markets, nor any way to stop them from lining their pockets with our tax money.
Now, there’s a raging debate over the $18.4 billion in year-end bonuses that the bankers just gave themselves. President Obama went out of his way to express his anger, calling the bonuses “shameful” and “the height of irresponsibility.” Senator Christopher Dodd is trying to find a way to claw back the money; and it seems that Andrew Cuomo is actually going to try to get Merril Lynch to return their $4 billion in bonuses. Some on Wall Street are defending the bonuses and others are justifying them on various tax and compensation grounds. Personally, I don’t think President Obama went far enough on Thursday. I think Geithner should immediately have told the banks to return the bonuses to the American people. Even if Geithner probably couldn’t force it, I think he could have made it happen in a phone call. Clearly, the banks didn’t need those $18.4 billion – I mean, our $18.4 billion – that badly.
But there’s one easy way to put an end to all this debate. Next time, we should let the big banks go bankrupt. We shouldn’t rescue them. We should only step in and nationalize right when they’re closing their doors – not before, as the Bush administration did. After all, if we’d let Merrill Lynch go under by not bailing out Bank of America – the way we let Lehman Brothers go down – those “bonus-bankers” would not be arguing about their entitlement to bonuses, nor about their need for incentives and hard work, nor about their merit. They’d be looking for a job like the other 100,000 + of their own employees that they laid off over the past two years – or like the nearly 2 million Americans who’ve lost their jobs since the banks’ financial landmines exploded.
My colleague, Andrew Rosenfield, argues that rescuing insolvent banks “is far superior to formal nationalization or receivership when that means assuming total direct operating control of institutions as complex as, say, Citibank or Bank of America—especially if the goal is to immediately empower those institutions to lend again.” I’m afraid that what the bonus fiasco just revealed is that those institutions cannot be trusted to use our money wisely – under any circumstance.
So, we can end the whole bonus debate very quickly by simply not rescuing the banks next time around. And, it turns out, there’s a bonus for us: there are better ways to use the TARP money. Giving another tranche of TARP money to the banks is clearly not efficient or wise. Instead, we should invest directly in ailing homeowners – or homeowners and renters more broadly. There are a number of proposals to do just that and they probably represent a far better use of the TARP. I’ll come back to those alternative proposals in a later post. But the bottom line is that we should make sure that the Obama administration does not infuse more of the TARP money directly into the banks. They’ve demonstrated that they are not using it wisely.
One last note. There is one refrain that I simply cannot stand. “If you’ve never worked on Wall Street,” we are told, you won’t understand the bonus issues. I’m sorry, that’s nonsense. I worked on Wall Street. In fact, before going into law, my official title was Wall Street Banking Officer at the bank that’s now called J.P. Morgan Chase. Those bonuses – coming on the heels of over $300 in TARP bailouts, record financial losses for the year 2008, and record lay-offs at those very same banks – are unforgivable. Entirely unforgivable. And it has nothing to do with whether you are on Main Street or Wall Street – or whether you’ve ever worked in a financial institution.