“Sure, I’d Make That Bet”

“You’re going to make an extra $2 million a year – or $10 million a year – for putting your financial institution at risk. Someone else pays the bill. You don’t pay the bill. Would you make that bet?

Most people who worked on Wall Street said, ‘Sure, I’d make that bet.’” - Frank Partnoy, Inside Job Inside Job criticizes several Wall Street executives who made tens of millions – or hundreds of millions – of dollars, even as their firms collapsed. For example, Joseph Cassano, an officer of AIG’s Financial Products division, received $315 million from 1987 until he retired in March 2008, six months before AIG was rescued by the federal government. Robert Rubin, the former Treasury Secretary and head of Goldman Sachs, made $126 million during eight years as a board member and advisor to Citigroup through 2009.  Companies often award annual bonuses to  employees after a good year. But 2008 was hardly a good year for Wall Street. Profits were down, stock prices plummeted, and many banks nearly collapsed.

In 2008, the federal government implemented the “Troubled Asset Relief Program,” known as TARP, to support the banks. Some argued TARP was unnecessary; others said major banks would have been forced into bankruptcy without it.

Below is a table of the net income (or losses) for 2008 for several of the major financial institutions mentioned in the film, along with the total amount of bonuses those firms paid that year, the number of employees who  received more than $1 million or $10 million in bonuses, and the amount of TARP support each firm received. The dollar amounts are in billions.

For your blog today, again, please discuss the following:

1. Why did these banks pay such large bonuses in 2008
2. What grade would you give the decision to award these bonuses?
3. Finally, how might the prospect of such large bonuses affect the behavior of employees? In theory, people have an incentive to perform well if they make more money when their contribution to their bank’s profits is greater. But what happens to the employees when the bank loses money or collapses? If the banks still pay bonuses, and employees know losses will be borne by investors and taxpayers, will they take on too much risk?

Please be sure to respond to this blog post thoughtfully and thoroughly.  Please also number your responses in your blog post. Thank you!

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