The Private-Sector Solution to the Bonus Problem

So here is the problem…

On one hand, you have nearly 6 million homes in foreclosure in less than two years and the numbers keep rising.

Yeah yeah, no pity for those brainless fools, who thought their American Dream of a 4-bedroom home with a pool, a play-yard and a mud room would come true as easily as a subprime loan. (“You can never have a big enough mud room”, I’m told).

No pity for those “whatever!” speculators, who simply walked out of their homes, keys at the door, after their investment “just didn’t work out.”

I’m talking about those poor guys, living for years and years, hand to mouth, in some family home they’d inherited, no mortgage no rent, and who suddenly found themselves with a home equity loan shoved down their throat (/bank account) by a cunning mortgage broker…

OK, maybe “shoved” is a bit too much. But whatever the exact physics, at some point it involved a poor, cash-constraint chap being delivered the news of a sudden treasure hidden in his home, which could be uncovered effortlessly, with just a few signatures on a 60-page tome of fine print.

Treasure dug out, money spent, only that their “messiahs” forgot to tell them that, when the market is going up all around, home equity is a true treasure only if you’re planning in the future to either trade down or move to Liberia or something. Otherwise all the capital gains you’ve made by selling the old home will have to be used to buy you a new home.

Anyway, we all know the result… millions of people losing their home (some for defaulting on a $30,000 loan for Christ’s sake!) and, along with that, their community, their cobbler, their church, their roots. And, of course, many are also still losing their job. That’s the story on Main Street…

Meanwhile, on Wall Street…

…bankers are patting themselves on the back for having done what they are supposed to do best: Take risk and get rewarded for it.

I’m not talking about the reckless and greedy type of risk that led to the crisis in the first place (and there’s bound to have been some of it this year!). I’m referring to the disciplined, calculated risk that bankers are meant to take in order to allocate capital efficiently in the productive sectors of the economy.

True, much of their boon is thanks to Ben & co, and their desperate, throw-it-all-in measures to incentivize risk-taking and re-establish some modicum of confidence in financial markets.

But that’s precisely the point. The gradual recovery in risk-taking (which, by the way, includes buying the bonds of real companies that employ real people) was the clear intention of policies designed to resurrect the economy—and bankers are slowly delivering. As such, they are playing their own part in kick-starting economic growth.

Does that mean they should get a massive bonus? Not really!

Whatever the microeconomic argument for a bonus (incentivize performance, competition, etc), which I personally believe in, there is a strong argument for modesty until we all emerge from this hole, and for action to restore a sense of fairness. (Incidentally, the argument applies to my own pay too, even though I’m not exactly a banker).

Yet here is the problem: Say I’m a nice banker and I go to my boss and say “hey buddy, I’d like to forego my bonus this year because it’s looks unfair!”… What do you think will happen?

(a) He’ll think I’m feeble, uncompetitive and unassertive.

(b) The firm will take my bonus and distribute it to the “greedy” ones.

So not only do I not get a bonus; not only do I look utterly dumb; but the poor homeless guys my humility is supposed to help don’t get to receive a single penny!

The fact of the matter is that demanding a big bonus has as much to do with pecuniary greed as with fulfilling an ego thing—I’d even argue it’s more of the latter, given that some of these guys already have enough gazillions of dollars to feed their great grandchildren.

So here is what I propose, and this is serious—a personal project:

A “Bonus for Homes” program. Basically, I am setting up a fund that would be up and running by the time of Bonus Season later this year, where bankers can pledge a portion of their 2009 bonus. This would then go to relieve poor households facing foreclosure from their home equity loan (HEL).

I’m focusing on HELs for a simple reason: The help needs to be targeted to those who need it most and who were fooled the most. Namely, those who already owned a home, never thought they’d had to pay for a rent or a mortgage (and couldn't afford to anyway), and who are now facing the prospect of being homeless.

In contrast, if someone got a loan to buy a new home s/he couldn’t afford, her/his financial planning must have already included monthly payments for housing. So in principle s/he can trade down.

Funds would also go to people who already lost their home due to HELs and need financial help to buy a new home. At a later stage, another target group would be the long-term unemployed facing foreclosure.

Apart from helping those who should be helped, the idea fulfills another objective: Maintain the incentive structure of the base+bonus system and the competitive environment that (provided checks and balances are in place) allows the private economy to flourish.

There are obviously a lot or side-points to discuss, including why the government cannot (anymore) be part of the solution, which deserves a whole other post.

But this is happening, here and now, and it will even if I end up being the first and only contributor. So please forward and ask whoever is interested to send me an email at the address in my blogger profile (chevelle_ma@live.com).

Oh, and one more thing, for the bankers out there who think I’ve gone nuts… Take a stroll around Riverside, CA or Pahrump, NV, and then come back to talk to me… only don’t take your corporate jet… it might get squattered!

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