Friday, October 23, 2009

Richard Posner on the Goldman Sachs Bonuses

Judge Posner, who in addition to being the co-author, with his Nobel Laureate friend, of the Becker-Posner blog is an Atlantic correspondent, has this piece today on the Atlantic's website about the Goldman bonuses. Worth reading the whole thing, but here's an excerpt:

Goldman Sachs, we learned earlier this month, may end up paying more than $20 billion in bonuses to its employees in 2009. The controversial bonuses that American Insurance Group (AIG) had wanted to pay had been intended to reward performance before the company collapsed, and most of the recipients appear to have had no involvement in the decisions that precipitated the collapse.

The Goldman bonuses, in contrast, were intended to reward Goldman's employees for their outstanding performance during the economic crisis. The performance was made possible by the government's having bailed out Goldman in September 2008, when it is believed that, upon Lehman's declaring bankruptcy, Morgan Stanley was 24 hours away from following suit--and Goldman Sachs 72 hours. It was saved by receipt of bailout money and, more important, by being permitted to convert from a broker-dealer to a bank holding company. That entitled it to borrow from the Federal Reserve -- unlike Lehman Brothers, which was denied a Fed loan because it was a non-bank. That was not a sound basis for denying it a loan, but Goldman would have been in the same boat, had it not converted.

So the argument goes: Without government aid then, no $20 billion-plus in bonuses for Goldman Sachs's employees in 2009? Maybe zero in bonuses, maybe indeed, no Goldman Sachs at all. Against that background, the bonuses seem egregious. It seems that the government drove a bad bargain when it bailed out Goldman, that it should have demanded a big chunk of Goldman's future profits.

Posner goes on to note that the majority of the firm's profits in the last year came from proprietary trading, an activity, he argues, that is of limited societal value. Posner posits some negative political and economic consequences of this.

The image above accompanied Posner's Atlantic essay and was credited to Chris Hondros/Getty Images.

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