Crashing stocks, lavish bonuses

Crashing stocks, lavish bonuses

US treasury secretary Henry Paulson’s bailout package of $700 billion, more than $2,000 per American, essentially amounts to asking taxpayers to rescue Wall Street banks without a payback guarantee. And that too while bonuses continue to rain on boardrooms even as stock prices plummeted in the last few weeks.

The US treasury hopes a fiscal stimulus would stabilize markets, preventing economy-wide job losses. While the general populace will contribute (through government debt, tax, inflation) to stem financial panic, there is essentially nothing in the Paulson plan to ensure that the same people reap the fruits when the US economy roves on to the upside of business cycle.

Interestingly, even as stock prices crashed in the past few weeks, boardrooms may have had reasons to cheer. Ten thousand employees in New York office of Lehman Brothers will share a bonus pool of $2.5 billion. Bloomberg on 16 September reported “Merrill Lynch and Co. chief executive John Thain and trading-division head Thomas Montag may reap payouts totalling more than $47 million if they leave or are given lesser roles after Bank of America Corp. buys the firm". It wouldn’t be entirely wrong to hold boards and managements of investment banks at least partially responsible for the present financial turmoil; yet far from bearing the burden, some among them are being awarded golden parachutes.

Bonuses and stock options, among other instruments, were invented to solve principal agent problems that arise with the separation of ownership and control, i.e. the modern publicly traded corporation. But given the current scenario, it would be a good idea to prohibit investment banks from declaring bonuses or stock options for managers, and dividends for stockholders before paying back their debts to treasury. The funds may then be given back to the people by redeeming the fiscal deficit and lowering taxes.

Although there may be some economic justification for a fiscal stimulus, especially for Keynesians; if the Paulson plan doesn’t incorporate rule-based mechanism of repaying American citizens, the whole bailout package may go down in history as nothing but a reflection of the hegemony of a financial elite.

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