Elizabeth Warren doesn’t understand

Posted by Marc Hodak on October 20, 2009 under Collectivist instinct, Patterns without intention | Read the First Comment

Elizabeth Warren is discouraged.  Not with regards to her job of overseeing TARP spending, on which the Harvard professor has done a decent job.  Instead, she is “speechless” at the prospects that certain bankers may get record bonuses this year.

“I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it’s business as usual,” Warren says. “I don’t understand how they can’t see that the world has changed in a fundamental way – it’s not business as usual.  All I can say right now is they seem to be winning this argument.”

It’s not an argument, Liz; it’s a business model.  The financial services business model is actually quite simple:  employees get 50 percent of net revenues.  The stable portion of this net revenue is paid out in “salaries” and the uncertain, variable portion of this net revenue is paid out in “bonuses.”  The “bonus” portion gets split in rough proportion to who brought in the revenues.  All this goes on regardless of how “the world has changed.”  Last year, net revenue was lower, and bankers on average got much less.  This year, net revenues are higher, and bankers (the ones who survived the carnage, anyway)  get more.  What’s not to understand?

Warren’s block is not the arithmetic.  Warren’s block is that she hates bankers.  Her real problem is that the world has not changed the way she wishes it would have changed, where the money that a bank makes flows to someone other than the bankers.

Where does she think that money should go?  The shareholders are happy that their stock prices have doubled since the beginning of the year, up almost four times their lows in October or March.  The employees at the surviving banks are happy to still have their jobs.  In fact, all of the surviving banks’ stakeholders are thrilled that they have apparently made it through the storm so that the revenues can come back to whatever level the bankers can make happen.

But Elizabeth Warren is not happy.  Perhaps she believes that since the big, bad banks may not have made it through the storm without taxpayer help, including the ones who were forced to take taxpayer money and paid it back at the first opportunity, that the government (which Warren breezily equates to “the taxpayers”) should still have some claim on the money flowing to the bankers.  Alas, one can’t answer why the government isn’t getting all the money to someone who may believe that that is the only outcome that makes sense.