Experts dispute claim by CNBC's Burnett that size of Wall Street bonuses is unrelated to TARP money

Responding to criticism of the estimated $18.4 billion in bonuses paid in 2008 by Wall Street firms -- some of which had received federal funds from the Troubled Asset Relief Program (TARP) -- CNBC anchor Erin Burnett stated during the February 1 edition of NBC's Meet the Press: "The taxpayer money isn't being taken and paid out in the form of bonuses. It goes in a separate pool, shall we say, a separate account for banks." Burnett's assertion ignores the basic economic principle that, as the Government Accountability Office noted in a report on the TARP Capital Purchase Program, "money is fungible"; indeed, numerous experts have reportedly stated that without the federal assistance, Wall Street bonuses would have been much lower. And the GAO stated: "Generally, the institutions stated that CPP capital would not be viewed any differently from their other capital." Further, in an October 2008 Time magazine article, Money magazine senior writer and Time.com contributor Stephen Gandel quoted Brad Hintz, a former chief financial officer for Lehman Brothers, saying of Morgan Stanley and Goldman Sachs: "Had it not been for the government's help in refinancing their debt, they may not have had the cash to pay bonuses."

According Gandel, "Bonuses for investment bankers and traders are projected to fall 40% this year. But analysts, compensation consultants and recruiters say the drop would be much more severe, perhaps as much as 70%, were it not for the government's efforts to prop up financial firms."

During Meet the Press, host David Gregory aired a video clip of Sen. Claire McCaskill (D-MO) criticizing the bonuses after a report from the office of New York state comptroller Thomas P. DiNapoli found that bonuses for 2008 would be the sixth largest in history. Burnett responded:

BURNETT: I understand the outrage and you understand the populism. There are, though -- well, how shall we say this? The taxpayer money's not being used to pay the bonuses. I think people could understand if you work for a company, right -- if the three of us worked for a company, your guests -- and I lost $10 billion, but [guest] Steve [Forbes] over there, he made a billion dollars, so overall the company actually loses money. But Steve went and did his very darndest for that company, and he made money. So, should he be paid for his work? That's essentially what we're talking about here. And reasonable people could argue about this, but many reasonable people would conclude, yes, he should be paid for that.

And I think, David, you've raised a fair point, which is maybe it's the whole use of the word "bonus." If you explained to people this is how they are compensated, that might make a difference. But there is also a fundamental misunderstanding. The taxpayer money isn't being taken and paid out in the form of bonuses. It goes in a separate pool, shall we say, a separate account for banks. So, maybe people don't care about that distinction, but it is there.

However, in the Time article, Gandel quoted several financial experts asserting that, in the words of analyst Frank Bruconi, chief economist in the New York City comptroller's office, "Had the federal government not stepped in with a bailout plan and other moves, the pay and the employment situation on Wall Street would be much worse":

Uncle Sam has a new name on Wall Street -- Sugar Daddy. Bonuses for investment bankers and traders are projected to fall 40% this year. But analysts, compensation consultants and recruiters say the drop would be much more severe, perhaps as much as 70%, were it not for the government's efforts to prop up financial firms. "Year-end pay on Wall Street will be higher than it would have been had it not been for the government and mergers," says Alan Johnson, a leading compensation consultant. "You would expect it to be down much more."

Further, in defending bonuses as appropriate for high performers regardless of the overall profitability of the company, Burnett did not acknowledge that, as Bloomberg News reported, critics have noted the "asymmetric compensation" of the current system, "in which people are rewarded when they do well and aren't required to return the rewards when they lose money."

Moreover, Wall Street firms' process for distributing annual bonuses has been criticized for allowing employees to collect bonuses for short-term profits even if those profits subsequently evaporated. The New York Times reported on December 17, 2008:

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street's pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino -- and let them collect their winnings while the roulette wheel was still spinning.

"Compensation was flawed top to bottom," said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. "The whole organization was responding to distorted incentives."

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

"That's a call that senior management or risk management should question, but of course their pay was tied to it too," said Brian Lin, a former mortgage trader at Merrill Lynch.

[...]

[C]ritics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to weaken.

"What happened to their investments was of no interest to them, because they would already be paid," said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group.

From the February 1 edition of NBC's Meet the Press:

McCASKILL [video clip]: They don't get it. These people are idiots. You can't use taxpayer money to pay out $18 billion in bonuses. What planet are these people on?

GREGORY: Fair question, Erin?

BURNETT: I understand the outrage and you understand the populism. There are, though -- well, how shall we say this? The taxpayer money's not being used to pay the bonuses. I think people could understand if you work for a company, right -- if the three of us worked for a company, your guests -- and I lost $10 billion, but [guest] Steve [Forbes] over there, he made a billion dollars, so overall the company actually loses money. But Steve went and did his very darndest for that company, and he made money. So, should he be paid for his work? That's essentially what we're talking about here. And reasonable people could argue about this, but many reasonable people would conclude, yes, he should be paid for that.

And I think, David, you've raised a fair point, which is maybe it's the whole use of the word "bonus." If you explained to people this is how they are compensated, that might make a difference. But there is also a fundamental misunderstanding. The taxpayer money isn't being taken and paid out in the form of bonuses. It goes in a separate pool, shall we say, a separate account for banks. So, maybe people don't care about that distinction, but it is there.

MARK ZANDI (Moody's Economy.com chief economist): This highlights a very significant risk of the government coming in and giving this money to the banking system: That we're effectively nationalizing the system in one form or another, and by doing that, then taxpayers -- rightfully so -- are saying, well, I want some control over what you do with this money.