Friday, October 23, 2009


By Mike Dorf

Herewith, three barely considered thoughts on the news that the govt is slashing pay of some execs at firms that received bailout funds:

1) There is an element of inevitable unfairness here: Execs at firms that received but have since repaid bailout funds do not have their pay slashed even though the bailout may have been instrumental in their firms' continued existence.  ("May" because some firms were basically told they were getting bailout funds whether they wanted them or not.)  I say this is inevitable because the govt lacks leverage over firms that have returned funds: it is no longer a substantial creditor or equity holder.

2) Perhaps the unfairness was less inevitable for firms that continue to benefit from the bailout because they were counterparties to credit default swaps (and other deals) with bailed out firms.  Some such counterparties were at risk of going under and it is hardly clear that the govt paying $100 billion to Firm B, which it then uses to honor its obligation of $100 billion to Firm A is materially different from the govt simply paying firm A the $100 billion.  If B would have gone bust absent the govt funds, and if A would have been far enough back in line that it would have lost most or all of the money owed by B, then A has effectively gotten a bailout.  It's true, of course, that the govt now lacks the leverage to get pay concessions from A, but that simply means that the govt should have placed greater restrictions on what B could do with the money in the first place.  The best that can be said in this respect is that hindsight is 20/20, the economy was on the brink of catastrophe, and so the whole bailout was a rush job that therefore didn't include all the jots and tittles we'd like.  The worst that could be said is . . . well, you know, look at Sec'y Geithner's phone log . . . .

3) By worldwide standards, Americans tend not to be egalitarian with respect to compensation.  That is, we tend to think that the super-rich are entitled to stay that way, so long as they earned their money more or less according to the rules.  Commitments to social welfare programs here have traditionally been less generous than in other developed countries and inequality as such is rarely an issue.  Don't believe me?  Ask President Edwards.  Going forward, it will be interesting to see whether the outrage generated by large bonuses at bailed out firms extends beyond the idea that people shouldn't be lavishly rewarded with public funds for work that is not socially beneficial to support for higher and more progressive taxes in general.


oyat said...

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egarber said...

>> If B would have gone bust absent the govt funds, and if A would have been far enough back in line that it would have lost most or all of the money owed by B, then A has effectively gotten a bailout.

Based on that logic though, can't you say anybody with a financial stake got a bailout? If I'm an investor whose CDO didn't collapse because the government helped shore up bank capital, you could say I've been bailed out too. But my example was the whole point of the bailout in the first place -- avoiding a nasty ripple effect. I know it's a little different, since default swap counterparties were essentially investing in "insurance" rather than equities. But I'm not sure that distinction matters.

egarber said...

Actually, a CDO isn't an equity, I don't think. I should have said "rather than securities." 5 points off :)

Michael C. Dorf said...

Eric, your point is certainly a fair one: At some point down the line, the benefits of bailing out the too-big-to-fail banks go to everyone, and that's why we did it. However, my complaint is that the line is drawn at the direct recipients rather than their immediate (and known and well-connected) counter-parties.

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