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Subjectively, I think the executives are overpaid in general. However, bailed out bank executives are objectively overpaid for the reason you stated: you can't

Subjectively, I think the executives are overpaid in general. However, bailed out bank executives are objectively overpaid for the reason you stated: you can't have capitalism without losses. In fact, I don't think they shouldn't have been bailed out at all. The banking system probably had to be rescued, but bailouts mangle capitalism. Banks that needed bailout should have been nationalized with the very explicit constraint that they be re-privatized after the storm had passed. (Note: I mostly just parroted Nassim Taleb's argument from two years ago.)

dasil003 16y ago
Did they have to be rescued? We already have FDIC to ensure the little guy doesn't lose his shirt. Sure, top financial experts claim that if some those big insolvent banks failed then the economy would die. Well, maybe or maybe not, but most of the top experts testifying to congress had an a tremendous conflict of interest with regard to their personal careers and holdings. We don't have any example of what would have happened... somehow I doubt people would just stop producing though. Also, even if we accept that a bailout was necessary, then the taxpayers should have owned those banks. The government should have seized them, purged the toxic assets, and then re-privatized when the books were clear. This is, as far as I know, the textbook way that the World Bank recommends bank insolvency be handled, recommended over and over again to third-world countries, but somehow never got seriously considered when it's big American banks.
- hga 16y ago
  Actually, plenty of them didn't have to be rescued; note this from the report: "Payments largely from firms that have reimbursed taxpayers: Eleven of the seventeen firms the Special Master has contacted regarding his proposal have fully reimbursed the taxpayers. Of the $1.7 billion in payments identified by the Special Master, more than 90% were made by firms that fully repaid, or were taken into consideration in the Special Master's determinations regarding "exceptional assistance recipients."" I don't know what the last of that means, but the rest suggests that most of these "overpaid executives" worked at firms that never needed a bailout, but were e.g. part of Paulson's "you are not exiting this room until you sign this agreement" 3rd World dictatorship riff, which was done so that the public at large wouldn't know which companies were actually in deep trouble (a strategy that was necessarily well publicized at the time).
  - sethg 16y ago
    Yes, in 2010, a lot of these companies have been able to pay back the government. But in 2008 the whole system of credit was seizing up because lenders and investors, not knowing when the next pile of shit would hit the fan, were panicking. We can’t send a time machine back to 2008 and announce, “we are from the future and we certify that you can lend to these guys at 5%”.
    - hga 16y ago
      Indeed; contra dasil003, it's very clear to me that the perception of counterparty risk had gotten so high that extreme measures like the Paulson stunt and TARP were required to prevent a repeat of the cascading bank failures that in the Great Depression was triggered by this failure: http://en.wikipedia.org/wiki/Creditanstalt http://en.wikipedia.org/wiki/Creditanstalt And so given all that, I'm not so exercised about either the "bailouts" or the "excessive executive compensation" (Does anyone want 3rd raters to run these institutions?) Sweden pulled off something like what dasil003 recommends, and while I like it in principle I'm utterly unconvinced our political ruling class had any chance of pulling it off.
    - anamax 16y ago
      > But in 2008 the whole system of credit was seizing up because lenders and investors, not knowing when the next pile of shit would hit the fan, were panicking. That's true, but it doesn't imply that Wells Fargo, to pick one example, needed a bailout in 2008. Note that much of the potential for panic came from a regulatory decision to exempt certain obligations from normal bankruptcy rules. That made an orderly shutdown of Lehmann impossible.
      - hga 16y ago
        It's hard to imagine any "orderly shutdown" that would have resulted in their bonds being worth much, especially during the process (that's Leahman's commercial paper AKA ordinary borrowing, not anything exotic or toxic they were selling). The Reserve Primary Fund's inexplicable overexposure to Lehman bonds then caused them to "break the buck" which started the cascading failure of the world's financial system.
- redrobot5050 16y ago
  The problem was a political one. When Lehman Brothers failed, I believe it was something like 60,000 people lost their jobs over the actions of 300 people. There was political pressure on a weak administration (Bush is already consigned to the bottom 5 presidents in American history) not to make the shitstorm it was handing over to the Obama administration any bigger. People losing their jobs in a recession == bigger shitstorm. In other words, the process you described works great, but "creative destruction of the free market" is not a great talking point amongst the masses.
  - hga 16y ago
    Garbage. The failure of Lehman Brothers caused the Reserve Primary Fund, which had been making a big deal about how they, the inventor of the money market mutual fund or the like, were being conservative in their investments, to "break the buck" (http://en.wikipedia.org/wiki/Reserve_Primary_Fund http://en.wikipedia.org/wiki/Reserve_Primary_Fund). All that plus the AIG mess etc. caused perceptions of counterparty risk to soar. There was an insane run on money market funds and drastic action had to be taken to prevent the banking system from seizing up. A lot more than 60,000 jobs were at stake; perhaps less than 600 million, but certainly 9 figures worldwide and 8 in the US.
    - redrobot5050 16y ago
      Do you have a better source than wiki? I mean, this was the party line on justifying the bank bail outs, but again, its counter to the World Bank Handbook on resolving bank insolvency through government buying/auctioning the bank components.
- btilly 16y ago
  The FDIC is not magic pixie dust. If one of the "too large to fail" banks had failed, the FDIC didn't have cash enough to save the little guy. Can you imagine the potential consequences of that rippling through our system?
  - dasil003 16y ago
    No I can't, I'm not an economist. However it seems to me the tax payers could bail out the FDIC instead, or they could buy the banks instead of handing them a big ass blank check.
    - btilly 16y ago
      The challenge was that if there was a period of uncertainty about the effectiveness of the FDIC, that could lead to a run on the banks, which would quickly result in a much, much larger bill than TARP. Not to mention other potential economic fallout. (Which is large.) I don't agree with much of the chosen solution. But I fully agree that the problem was real.

dasil003 16y ago

Did they have to be rescued? We already have FDIC to ensure the little guy doesn't lose his shirt. Sure, top financial experts claim that if some those big insolvent banks failed then the economy would die. Well, maybe or maybe not, but most of the top experts testifying to congress had an a tremendous conflict of interest with regard to their personal careers and holdings. We don't have any example of what would have happened... somehow I doubt people would just stop producing though. Also, even if we accept that a bailout was necessary, then the taxpayers should have owned those banks. The government should have seized them, purged the toxic assets, and then re-privatized when the books were clear. This is, as far as I know, the textbook way that the World Bank recommends bank insolvency be handled, recommended over and over again to third-world countries, but somehow never got seriously considered when it's big American banks.

hga 16y ago
Actually, plenty of them didn't have to be rescued; note this from the report: "Payments largely from firms that have reimbursed taxpayers: Eleven of the seventeen firms the Special Master has contacted regarding his proposal have fully reimbursed the taxpayers. Of the $1.7 billion in payments identified by the Special Master, more than 90% were made by firms that fully repaid, or were taken into consideration in the Special Master's determinations regarding "exceptional assistance recipients."" I don't know what the last of that means, but the rest suggests that most of these "overpaid executives" worked at firms that never needed a bailout, but were e.g. part of Paulson's "you are not exiting this room until you sign this agreement" 3rd World dictatorship riff, which was done so that the public at large wouldn't know which companies were actually in deep trouble (a strategy that was necessarily well publicized at the time).
- sethg 16y ago
  Yes, in 2010, a lot of these companies have been able to pay back the government. But in 2008 the whole system of credit was seizing up because lenders and investors, not knowing when the next pile of shit would hit the fan, were panicking. We can’t send a time machine back to 2008 and announce, “we are from the future and we certify that you can lend to these guys at 5%”.
  - hga 16y ago
    Indeed; contra dasil003, it's very clear to me that the perception of counterparty risk had gotten so high that extreme measures like the Paulson stunt and TARP were required to prevent a repeat of the cascading bank failures that in the Great Depression was triggered by this failure: http://en.wikipedia.org/wiki/Creditanstalt http://en.wikipedia.org/wiki/Creditanstalt And so given all that, I'm not so exercised about either the "bailouts" or the "excessive executive compensation" (Does anyone want 3rd raters to run these institutions?) Sweden pulled off something like what dasil003 recommends, and while I like it in principle I'm utterly unconvinced our political ruling class had any chance of pulling it off.
  - anamax 16y ago
    > But in 2008 the whole system of credit was seizing up because lenders and investors, not knowing when the next pile of shit would hit the fan, were panicking. That's true, but it doesn't imply that Wells Fargo, to pick one example, needed a bailout in 2008. Note that much of the potential for panic came from a regulatory decision to exempt certain obligations from normal bankruptcy rules. That made an orderly shutdown of Lehmann impossible.
    - hga 16y ago
      It's hard to imagine any "orderly shutdown" that would have resulted in their bonds being worth much, especially during the process (that's Leahman's commercial paper AKA ordinary borrowing, not anything exotic or toxic they were selling). The Reserve Primary Fund's inexplicable overexposure to Lehman bonds then caused them to "break the buck" which started the cascading failure of the world's financial system.
redrobot5050 16y ago
The problem was a political one. When Lehman Brothers failed, I believe it was something like 60,000 people lost their jobs over the actions of 300 people. There was political pressure on a weak administration (Bush is already consigned to the bottom 5 presidents in American history) not to make the shitstorm it was handing over to the Obama administration any bigger. People losing their jobs in a recession == bigger shitstorm. In other words, the process you described works great, but "creative destruction of the free market" is not a great talking point amongst the masses.
- hga 16y ago
  Garbage. The failure of Lehman Brothers caused the Reserve Primary Fund, which had been making a big deal about how they, the inventor of the money market mutual fund or the like, were being conservative in their investments, to "break the buck" (http://en.wikipedia.org/wiki/Reserve_Primary_Fund http://en.wikipedia.org/wiki/Reserve_Primary_Fund). All that plus the AIG mess etc. caused perceptions of counterparty risk to soar. There was an insane run on money market funds and drastic action had to be taken to prevent the banking system from seizing up. A lot more than 60,000 jobs were at stake; perhaps less than 600 million, but certainly 9 figures worldwide and 8 in the US.
  - redrobot5050 16y ago
    Do you have a better source than wiki? I mean, this was the party line on justifying the bank bail outs, but again, its counter to the World Bank Handbook on resolving bank insolvency through government buying/auctioning the bank components.
btilly 16y ago
The FDIC is not magic pixie dust. If one of the "too large to fail" banks had failed, the FDIC didn't have cash enough to save the little guy. Can you imagine the potential consequences of that rippling through our system?
- dasil003 16y ago
  No I can't, I'm not an economist. However it seems to me the tax payers could bail out the FDIC instead, or they could buy the banks instead of handing them a big ass blank check.
  - btilly 16y ago
    The challenge was that if there was a period of uncertainty about the effectiveness of the FDIC, that could lead to a run on the banks, which would quickly result in a much, much larger bill than TARP. Not to mention other potential economic fallout. (Which is large.) I don't agree with much of the chosen solution. But I fully agree that the problem was real.