Wall Street Bonuses Are an Outrage

Just a mere $18.4 billion in Wall Street bonuses, and suddenly the
entire country is like Kansas in the 1890s, raising hell instead of
corn, screaming for revenge on money power that has done us so wrong
while rewarding itself so generously.

The outburst of populist rage is particularly alarming when we
consider how easily such sentiments were managed just a short while
ago. Americans have known about mounting inequality and king-sized Wall
Street bonuses for years. But we also had an entire genre of journalism
dedicated to brushing the problem off.

Recall, for example, the famous essay by David Brooks
published in The Atlantic in 2001, in which he declared that, in one
representative salt-of-the-earth Republican region, people had "no
class resentment or class consciousness"; that complaints about the
lopsided distribution of the economy's rewards were something one heard
only from people in the wealthy and tasteful reaches of blue America.

Mr. Brooks's argument was powerful not so much because it captured
reality, but because, by suggesting that to care about economic
inequality was itself an act of snobbery, it ingeniously
short-circuited the entire debate. Egalitarianism begins at home,
liberal!

Others simply insisted that markets were themselves democracies,
that the deeds of business were an expression of the popular will, and
that entrepreneurs were leading the only kind of popular uprising that
mattered. The rightful home of that uprising was, of course, Wall
Street, where rebel bankers were always supposed to be fighting stodgy
aristocrat bankers on behalf of the common people.

That's why it once seemed to make so much sense to talk about
grandmas in small Illinois towns who were ace stock-pickers, to
fantasize about the conflict between man-of-the-people millionaires and
horrible, affected Ivy League millionaires, to dream of the day the Dow
finally reflected the common people's intelligence and made it to
36,000.

But does it console us any longer to recall that a CEO of Merrill
Lynch was once excluded from some mythic Wall Street insiders' club?
Can it make any possible difference, in our current predicament, to
know that Richard Fuld, who allegedly collected around $480 million
from Lehman Brothers in the eight years before its bankruptcy, attended
not Harvard but the University of Colorado?

No. We're populists of a more fiery sort now, and the old bromides no longer palliate.

And those who once celebrated the virtues of the common folks want
nothing to do with us now. As Mr. Brooks joked in yesterday's New York
Times, all the current anger really signifies nothing more than the
"resentments" of middle-class Washingtonians who have suddenly found
themselves in charge of the world.

Besides, our former friends had their reasons for letting the party
go on. If the federal bank bailout were to involve a real crackdown on
executive compensation, the Bush administration reportedly feared, it
might have driven banks away from taking the deal altogether. Bankers
would prefer global disaster to a pay cut, in other words, and this
obscene calculation needed to be taken into account. Public outrage was
apparently nothing by comparison.

Now the populist shoe is on the other foot, though, and it's the
liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at
the millions doled out to bankers who drove their institutions into the
ground, the public understands something about moral hazard that the
Treasury Department doesn't. Maybe, in its rage for fairness, the
public is on to something that the banking industry's remaining
defenders need to acknowledge.

It
is merely this: That Wall Street's compensation system isn't just
aesthetically displeasing to liberal snobs. It is the very heart of the
problem. According to Bill Black, a professor of economics and law at
the University of Missouri-Kansas City and an authority on
dysfunctional financial systems, "It is the compensation system that
has proved to be the weak point in everything critical that went wrong,
that has produced a global catastrophe."

At each stage of the disaster, Mr. Black told me -- loan officers,
real-estate appraisers, accountants, bond ratings agencies -- it was
pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks.
This is not merely because is would make for good PR, but because
lavish executive bonuses sometimes create an incentive to hide losses,
to take crazy risks, and even, according to Mr. Black, to "loot the
place through seemingly normal corporate mechanisms." This is why, he
continues, it is "essential to redesign and limit executive
compensation when regulating failed or failing banks."

Our leaders may not know it yet, but this showdown between rival
populisms is in fact a battle over political legitimacy. Is Wall Street
the rightful master of our economic fate? Or should we choose a broader
form of sovereignty?

Let the conservatives' hosannas turn to sneers. The market god has failed.