Dividends are typically based on how much a bank (or company, moreover) has profited, less whatever capital is needed from the profit. Similarly, bonuses are based, at least theoretically, on how the managers and the nonsupervisory employees alike perform as well as how the bank performs. In their respective ways of shoring up banks amid the financial crisis of 2008, the E.U. and U.S. differed on how easy it would be for banks to pay dividends and bonuses, as well as to have access to governmental funding. These differences reflect both the relative power of the financial sector in the governmental sector and the cultural attitudes toward business.
“Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses. . . . Extra capital for European banks should be raised first from the private sector, then from [the state] governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said. Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal.”[1] The bankers much raise additional capital before government coffers could be tapped and dividends and bonuses could be paid.
As an aside, the nature of the E.U.'s federal system is also relevant, as state funds would be tapped; only when they are exhausted would a federal fund be used. In the case of the U.S., the states were to be shut out of the solution. This reflects the more general shift from federalism to consolidated power at the federal level. The European federal system was at the time more balanced, and thus more viable.
After Lehman Brothers went under in September 2008, the U.S. Government took “swift action to ensure its banks had a strong cushion of capital.”[2] The banks first (rather than last) resort of capital would come from the Federal Reserve Bank (as created money) and TARP funds enacted by Congress. The bankers did not have to raise additional funds, and they could pay dividends and bonuses even though the government bailout was supposed to be used to expand lending, which largely didn't happen. The banks could take the governmental funds with few if any strings attached. Also, the U.S. Treasury allowed banks to pay back the funds earlier than perhaps advisable because the bankers wanted to be free to pay whatever bonuses they saw fit for themselves.
The difference on whether dividends and bonuses should be allowed at troubled banks reflects a rather basic ideological difference between the E.U. and U.S. concerning whether economic liberty ought to be limited even in cases in which the economic entities are culpable. In short, is a bank (or business) whose management has performed very badly, as in recklessly taking on too much debt, justified in paying out dividends and especially bonuses nonetheless? If traders knowingly sell crap to even their best customers, as traders at Goldman Sachs did in the case of the subprime-mortgage-based financial-derivative bonds, should those traders expect to get bonuses anyway? Competence and ethics are thus both relevant.
Admittedly, the bonus system on Wall Street had made its way into calculations of standard or basic compensation, such that the bankers had come to expect at least some bonus each year, regardless of performance. However, this expecation (and practice) contorts the very meaning of a bonus; it is not to be expected because it is granted for good or excellent performance, or even ethical conduct. U.S. officials tacitly bought into Wall Street's convenient notion of a bonus, whereas E.U. officials held onto the basic fact that a bonus is an extra, not a given, and, moreover, that raising additional capital as a hedge against systemic risk is more important than bonuses (and dividends).
I suspect that because the E.U., at the time at least, had major parties on a broader political spectrum than that of the U.S., the financial sector did not have as much power over governmental institutions as in the case of the United States. Put another way, the U.S. political landscape was more tilted in favor of the financial system. Goldman Sachs, for instance, gave $1 million to Barak Obama's 2008 presidential campaign. Furthermore, the U.S. Supreme Court ruled in Citizens United (2010) that corporations could give unlimited amounts of money to political campaigns. Meanwhile, the "hard left" was represented only by "liberal Democrats," whose power has been typically diluted in the Democratic Party. Even the liberal wing of the Democratic Party does not reach the Left parties in Europe in terms of Socialism, for example.
Therefore, I submit that the interests of corporations, including their stockholders and managements, are distended in American politics. Perhaps not by coincidence, the culture itself is amenable to business. For example, business values have gained a greater footing in how education is conceptualized at many universities in the American States. Since 1980, for example, both universities and students have reduced education to vocation in assessing a major's worth in terms of its potential for resulting in a good-paying job. The criteria for higher education are not so limited, or warped. In terms of teaching, corporate power-point presentations, which were ubiquious in business settings, became more common not only in "teaching by bullet-points," but also in what students would study for exams.
The cultural value of business in American society, combined with the monied/political power of corporations (including banks) in the halls of government can explain why the American response to the incompetent bankers differed so much from the European response. This is a good case study particularly because it is ludicrous that a no-strings governmental response would follow the bankers' pathetic abuse of the subprime derivative bonds. The sector had even lobbied to keep financial derivatives from being regulated! That bonus were granted attests not only to warped judgment, but to the cultural and political situs of the financial sector in America. I suspect that many Europeans, even E.U. officials, were shaking their heads in disbelief.
1. Stephen Castle, “Europe Tells Its Banks to Raise New Capital,” The New York Times, October 13, 2011.
2. Ibid.
2. Ibid.
