As someone who spent fifteen years at various major Wall Street firms, and nearly my entire twenty-four career to date having a discretionary bonus as a major (and often predominant) form of my compensation, I thought I’d chime in on the recent commentary.

Let me start of by saying that as I’ve written before, failing firms need to be allowed to fail.   Poor management needs to be separated from capital so that capital can find a better steward, and the genuine threat of failure is vital to ensure that proper risk management and operational caution is exercised at every step.   Likewise, I’d agree that for a company to be on the public dole and pay non-contractual, discretionary “bonuses” to any employee would be reprehensible.   That said…

In the fall of 2008, a group of supposedly very smart people decided that our financial system was on the brink of “collapse”.   Never mind for a moment that the long term demand for banking, capital raising and investment management would exist regardless of what particular firms were around to provide those services.  Hundreds of billions of dollars were assembled and in foie-gras style, crammed down the throats of companies that didn’t ask for it (just like the geese).

Firms like Goldman Sachs and JP Morgan have since been pretty clear that although they were sweating it, word of their demise had been greatly exaggerated.   At last Wednesday’s assembly of the Financial Crisis Inquiry Commission, Lloyd Blankfein of Goldman reminded his inquisitors that they had raised substantial amounts of fresh capital, and could have raised more,  prior to having the TARP money put to them, and JP Morgan’s Jamie Dimon stated in a CNBC interview shortly thereafter that they did not need TARP funds to ensure their survival.

It should be no surprise that in the volatile markets of 2009, containing one of the most ferocious upside moves in stocks ever recorded, Wall Street firms were fantastically profitable.    Most of the major Wall Street TARP recipients have paid back their cramdowns with interest, and yet there’s a lot of money left over.  But in an age of record-breaking deficits and politically-stoked class warfare, a demagoguing President Obama eying the money pot has the courage to say “We want our money back, and we’re going to get it”.    Why does he think it’s his money? I’ll also take the bet that you will never hear Obama utter those words to General Motors.   But I digress.

There are sorry parallels between what’s happening with employees of Wall Street firms and the minority communities that are the supposed beneficiaries of affirmative action, another quasi-bailout program with terrible unintended consequences.   Although filled with the best intentions for helping any particular needy minority individual, every person in these groups created solely by skin-color (thus perpetuating the need to categorize ourselves as such — take note of your upcoming census) must now face the occasional (or not occasional) silent wondering of their fellow students or co-workers:  “I wonder if he’s here only because of his skin color”.   That any member of such a targeted group might possibly endure that kind of unspoken criticism is disgusting.

Isn’t the same now possible towards employees in the banking industry?   “Yeah, the new neighbors both work on Wall Street.   I wonder if they’d be buying that house if it wasn’t for TARP?  We so bailed them out, and look at them now.” And a possible response:  “But we didn’t ask to be bailed out, and our departments made money.  We’re not investment bankers — we’re computer programmers.   Not to worry, with our 80 minute commutes and 50-70+ hour work weeks, we won’t see you too often.” I’m not sure it’s equally disgusting, but it is artificially divisive nonetheless.

I like to say that “honest achievement is the root of self-esteem”.   By stuffing money into the Wall Street firms, by having a Federal Reserve that can keep rates so low for so long that it’s hard for banks to not make money, but then railing about it when they do, our government has once again used its power to fracture civil society that much further.   It has now sown the seeds of doubt about that achievement, and with it, the self-esteem.

But what would Obama do with the money anyway?   It would get thrown into the vortex that is our Congress and spent on grand designs that can not work. By contrast, the voluntary spending and investing of Wall Street bonuses is for many regions of the country one of the primary economic engines, with ripple effects literally worldwide.  Ask the waiters at the Manhattan steak houses what they think of Wall Street bonuses, or the car dealers, or the home improvement contractors, or the real estate agents.    Ask them if they’d rather have some derivative scrap of a nanny-state program, fought for by political gamesmanship, or a bunch more customers fueled by Wall Street bonuses.

Obama’s problem is that he can not get away from the Wall Street vs. Main Street rhetoric.   When will he and his disciples own up to the fact that it’s all the same street? Something tells me that Obama and his staff, let alone much of Congress, have never read Leonard E. Read’s short but brilliant classic, “I, Pencil”. It’s never too late.

The more Obama and his ilk pursue the sort of vindictive, utterly unpredictable legislative and public-relation campaigns against Wall Street’s top earners, the more these earners will simply pull a John Galt and say, that’s it, it’s not worth it.   They won’t retire.  They’ll simply form or join private organizations that will do everything the public organizations do, but with the exception of not playing in the public arena.   And if we can assume that there is at least some correlation between compensation and talent, then by extension, returns in which the general public can participate will go down, while a separate caste of privately-accessible returns will increase in scope.   Civil society’s splintering will be furthered once again.

One of my most lasting lessons from college was an ex-Westinghouse executive-turned-professor describing the concept of a big company holding up a “price umbrella” for other smaller, more aggressive companies to get under.   Here we have our government calling out a supposed price umbrella.  So by extension, there would seem to exist an opportunity for one or more companies to swoop in and steal all of the customers being over-charged by these overpaid Wall Street types.   It isn’t happening.

In a recent column, John Tamny wrote the following:

So far, however, “discount” investment-banking firms and traders have yet to reveal themselves in a substantial way. That said, if what Wall Street’s myriad critics say is true about its employees being overpaid, it seems there’s a very real and enriching opportunity for these same critics to put up or shut up. If investment banking and trading are really as easy as they suggest, here’s their chance to prove it.

To those critics:  Please “put up” and prove your case.   Then spend the profits any which way you’d like, if they haven’t been confiscated first.

On September 15th, like many Americans, I made my third-quarter estimated state and federal income tax payments.   I spent about an hour figuring out how much money I needed to send in, and about another hour driving to and from, and dealing with, the post office.    I can’t get those two hours back.   But it wasn’t the large checks that really got me steamed, as much as the thought of how the money would be spent.

Imagine a scenario where a genuine solution to a long-time affliction against humanity could be reached simply by raising a large sum of money, but at the same time, there were no income taxes.   Say it was going to cost, in the form of a one-time payment, 10% of your annual income, to cure cancer.   To truly cure it.  To be able to relegate it to the proverbial dustbins of history.   Who wouldn’t gladly write the check?

By tremendous contrast, what form of government spending produces such a feeling?    I believe it is exactly this contrast that gets to the root of the anger we see today about a government running itself seemingly out of control.   There is a gut-feeling that much of our tax money, much of the costs of government, much of the regulatory barriers to whatever, much of the debt we’re incurring, just amounts to so much waste.

Try to think for a moment of the specific things that you think the government should be charged with doing.    Beyond the important but abstract things like enforcing the rule of law, most of us would consent to pay for some specific services, such as a national defense or even a public highway system.   But it’s tough for any one person to come up with a long list of things.     The framers of the US Constitution thought about such things and came up with their own list.   It’s very short, and it’s spelled out largely in Article I, section 8 This, of course only deals with the federal level, and notably, the tenth Amendment ascribes all other powers to the states.   Almost none of the issues that occupy today’s headlines remotely fit the list, and as of 2004 the Federal Register had nearly 80,000 pages. It’s safe to say there are more today.

So have we cured cancer?  Or hunger?   Or homelessness?  Is there a chicken in every pot?  How about an iPod? Can government succeed in such efforts?

To suggest that it can not is not to be pessimistic, or unpatriotic, or even anarchistic.    To suggest that it can not does not mean that individuals should not try on their own, or even in groups both big and small, to do what they can.  It boils down to a question of who decides. Who decides what problems should be tackled?   Who decides what should be spent on them?  Who decides what level of service or result is appropriate, and at what cost?

Are there incentives in place for government to succeed?   What happens when it fails?   In the private sector, capital is raised through voluntary means based on a  service provider’s potential to meet some need.   Often, but not always, there is a rate of return for the capital provider.   When the service provider succeeds it is rewarded with more capital.  If it should fail, capital providers look elsewhere.    No such feedback mechanism exists with government.  It’s worse than that, because with government, the capital raising process is involuntary.

Getting back to writing that one-time check,  I believe most of us would write it because most of us have a sense of genuine charity.  Faced with a genuine need and the distinct possibility of making a difference, we rally to the cause. Indeed, all of the major religions call upon us to be charitable.  And there’s the rub:  taxation, directed by politics, even when the proceeds are to be used for supposedly noble goals, is not charity.

There have been some amusing rumblings about the ads that California and Nevada are shooting over each others bows.   So what’s the problem?  That’s what’s supposed to happen!

What a great demonstration of how competition works at some of the highest organizational levels out there — entire states.   How much better off would we be if states took their relative economic strengths seriously?

But look at some of the reverse cases.  In the Northeast, we have New York and New Jersey racing each other to the bottom as to who can impose the highest income taxes on their upper income earners.   It’s a clear blindness to the Laffer Curve if there ever was one.

It’s also a wilfull ignorance of the concept of dynamic vs. static budget analysis, that is, legislators enacting laws and regulations as if there will be no behavioral changes by the players involved.   It goes something like this:   “Say, let’s raise taxes on the “wealthy” by 10%, and we’ll budget a 10% increase in revenue from them.   There aren’t enough of them to vote it down anyway, and then we can fund some nifty new programs in our budget!”

When will states like California, New Jersey and New York open their eyes to the cause and effect of bloated budgets and high taxes (note, they’re the same thing) leading to businesses and individuals seeking more welcoming pastures?   Do they need to make such complete economic basket cases of themselves before the causality is obvious?

The shame of this is that millions of people needlessly suffer the consequences in the meantime.