Why Bankers Don't Deserve Titanic Bonuses

Since the banks recently announced their hefty bonus plans, I've seen many comments and heard many pundits support the right of banks to give themselves the payouts. The argument goes like this: They paid back their TARP loans, they are now outside of government control and in a capitalist society they should enjoy the fruits of their labors. Why punish them some more?

Robert Sloan, author of "Don't Blame the Shorts" takes another angle, arguing that taxing the banks is really a counterproductive move:

"My personal opinion is that we will (have a double dip in the US). We don't seem to understand that the money comes from the same pool. You put a tax on banks and you want them to lend," Sloan, who is also a managing partner of prime brokerage risk manager S3 Partners, said.

Give me a $#%$# break. This is the oldest line in the book. The banks are making near record profits, paying out billions in bonuses, and they aren't lending anyway. What is it going to take to get them to lend, giving each banker their own private jet and island, at taxpayer expense?

The bankers shouldn't be giving themselves titantic bonuses because the didn't earn them. Banks are still benefiting from ongoing intervention from the Fed and the government. And much of this intervention is subsidized by savers and the general public.

There are two main ways in which Fed and government policies are bolstering bank profits.

1. The Fed is keeping rates close to 0%, creating an historically steep yield curve. The Fed has engineered an environment where any responsible banker should be able to make a profit. Banks can now borrow money for free from the Fed and then loan it out at anywhere between 5-20%. And while bank borrowing costs have dropped to 0%, lending costs on many financial products have barely budged. Check your credit card statement. I bet you haven't seen a rate reduction. In fact, many individuals have seen rates on their credit cards go up. So, where's the difference between low borrowing costs and high lending rates going? That's right, into banker's pockets.

2. The second reason the banks have become suddenly more profitable is that the government changed the accounting rules. In April 2008, the Financial Standards Accounting Board (FASB) changed bank accounting rules so that banks no longer had to mark to market the value of their debt. The result of this is that bad assets suddenly disappeared as a problem and bank profit skyrocketed, along with their stock prices.

I'm happy the banks are doing better. No one wanted them to go under. But let's not pretend it's because of banker genius. Let's not let the money we've provided to the banks be squandered on yachts, private jets, and luxury condos.

We now have an enormous budget deficit, partially caused by bank bailouts and a bank induced recession. If the bankers are patriots at all, they would understand that it's in the country's best long-term interest to reduce the deficit and they should happily be lining up to do their part. After all, what helps the country in the long run will help them. I'm waiting to hear those words and I expect I'll be waiting an awfully long time.