Bailouts mainly issued by governments usually have some consequences which are helpful whereas others may be detrimental to the economy. This is mainly because it involves giving loans or capital to entities whereby in our case it is involving banks and mortgaging companies that are in danger of bankruptcy or liquidation. Thus from many points of view this is to some extent very vital because it is an intervention attempting to save the entity of reference from insolvency, bankruptcy, or total liquidation leading to ruin of the entity (Sprague, 2000).
However, the bankers’ bonuses are traditionally awarded or paid to some finance industry workers when a bank‘s financial year comes to an end. Moreover, they are mainly designed for the purpose of rewarding employees’ performance over the year that has led to increase in the bank’s profits or some other relevant part of the business improvement (Wright, 2011). Thus the bonuses are meant to serve as a source of motivation by rewarding good performance which leads to increased well being of the organization. However, in situations where an executive or an employee has excellently performed then they should be entitled to the bonuses, whereas in case of poor performance then they should bear the consequences that have accrued as a result of their activities and so they are not supposed to receive any bonus (Davson-Galle, 2009).
Moreover, according to the normative ethics whereby deontological or utilitarian theories may be considered, the goodness or badness of an action is always determined by the by the consequences that accrue as a result of undertaking such an action. Thus, when an organization has been given a bailout it is a clear indication that the overall performance of the organization is poor so the executives of such organizations should not at any one point be allowed to enjoy the bonuses. This is mainly because the bonuses are supposed to reward good work but their organizations are not doing well hence they should bear with their period of poor performance and upon resumption of good performance then the bonuses should be reinstated (Waggoner, 2008).
Although the bailout can serve a very critical role in reviving an entity which in case of collapse may end up affecting the economy negatively it is also an indication of several negative impacts to the organization. The bailouts offered to an organization usually signals that the business standards are lower for the beneficiary entities by incentivizing risk (McLean, 1996). It also leads to creation of moral hazard by the guarantee of safety nets. Moreover, it also promotes the aspect of centralized bureaucracy because it allows the powers of the government to determine the terms and conditions of the bailout. The bailouts also results to a situation whereby the instillation of a style of corporatist government occurs resulting to a condition whereby businesses ends up using the power of the state in order to forcibly obtain money from taxpayers. This is due to the fact that the money used for bailouts is obtained from the public funds that are mostly collected from the taxpayers hence these beneficiary entities puts unnecessary pressure on taxpayers for their survival (Wright, 2011).
However, depending on the consequences of bailouts mentioned above it is clearly evident that they pose some detrimental effects to the economy thus from the perspective of consequentialist theory also referred to as utilitarian whereby the righteousness of an issue is determined by the consequences that accrue then it is not right at all to pay bonuses to executives who are poorly performing as clearly indicated by the consequences that may result from paying out bonuses to executives whom the organizations which they head are being sustained by bailouts (Davson-Galle, 2009). This is mainly because bailouts results to creation of moral hazard whereby they are indicative that the firms involved are capable of taking reckless risks, whereby in cases where the risks are realized then the burden of paying the losses is shifted to the taxpayers for the prevailing time as well as in the future. Therefore the danger which is involved in this situation is the spread of this moral hazard which may end up making the next crisis bigger (Friedman and Posner, 2010).
Consequently, by bailing out collapsing companies this translates to confiscation of money from members of the economy who are productive and giving out that money to the ones that are failing (McLean, 1996). By maintaining companies with unsustainable or obsolete business models, then by doing so the government will be attempting to prevent its resources in terms of finances and assets from being liquidated thus making them available to other entities where they can be put to more better and productive use. One of the essential components of a free market which is healthy is that both failure and success must be allowed to happen at the time they are earned (Freifeld, 2009). However, instead with the aspect of bailout, there is reversing of rewards whereby the proceeds from entities that are successful are however given out to collapsing ones. However, how this situation leads to the improvement of the economy is beyond a clear understanding to most Americans (Waggoner, 2008). It is however obvious that a large number of Americans would opt for the rejection of the corporate cronyism, thus allowing the natural incentives and regulations of the free market to genuinely select the losers and winners in our economy, whereas not the whims of politicians and bureaucrats.
However, according to Andrew Cuomo who is the Attorney General of New York report about bonuses received by the top executives in 9 banks that received bailouts from the government through its TARP Program which is funded by the U.S. government indicated that despite these organizations owning the government a lot of money in terms of bailouts, there top executives were being paid large sums of money in form of bonuses (Freifeld, 2009). This is unfair to the economy as well as to the organizations themselves. This is mainly because the bonuses given out should otherwise be used in the revival of the banks and paying back the government bailouts instead of the executives continuing to enjoy their bonuses even at times when their organizations are performing very poorly. The bonuses are meant to reward for good work hence there is no basis on which these bank’s executives should have continued rewarding themselves for poor performance. Or else it would be a situation whereby someone does something bad and instead of confronting him/her you end up telling him/her thank you for that (Friedman and Posner, 2010).
Although corporate executives should bear the responsibility of their own actions, the case in these banks is totally different. This is because when these banks were doing well, the employees got better pay (Davson-Galle, 2009). Whereas when they were doing poorly, the employees also got better pay. When these banks ended up doing very bad, they ended up been bailed out using taxpayers’ money through the TARP Program and their employees still continued to be paid well. Thus their bonuses as well as the overall compensation didn’t significantly vary even as the banks profits continued to diminish. This is however not supposed to be the case because when the banks are doing poorly the executives should only continued getting their salaries only with exception of bonuses which in some of the banks are as high as thrice of the employees’ salaries (Sprague, 2000).
Individual compensation to employees should be taking a strong consideration to the business unit performance as well as the overall firm. Employees should therefore be sharing in the business upside at times when the overall performance is strong as well as sharing in the downside at times when the overall business performance is weak. However, despite these claims, it was clear from the investigation that there was no clear reason or rhyme to the way in which the banks rewarded and compensated their employees (Friedman and Posner, 2010).
The bailout of these banks may however be having ultimate costs which are higher to the extent of amounts equivalent to nominal bailout, however the payments of interest on the debt becomes due immediately, hence the recoveries from these banks, if any, has to take many years (McLean, 1996). Hence instead of paying out compensation or rewards to employees the bonuses should be directed to the quick recovery of the banks from financial constrain. However, the impacts likely to accrue from bailout which happen in one or another form, will definitely impact interest rates, taxes, exchange rates, imports and exports, foreign investment in and outside United States as well as corporate profits and sales (Davson-Galle, 2009).
In conclusion, there should be an ultimate choice whether the bonuses were deserved or not (Waggoner, 2008). However, according to my opinion the right choice is that there should be shared sacrifices in order for the fast tracking of the regeneration of the financial stability of these banks that have over time made the U.S. such a great country. Moreover, the wrong choice would be to continue rewarding these banks’ employees with unwarranted bonuses at the expense of the banks recovery. This is because the bonuses should be used in the recovery of the banks and payment of the bailouts instead of rewarding poor performance (Freifeld, 2009).
Davson-Galle, P. (2009). Reason and Professional ethics. Surrey: Ashgate Publishing Limited
Freifeld, K. (2009). Banks Paid $32.6 Billion in Bonuses Amid U.S. Bailout (Update4). Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHURVoSUqpho [Accessed on 16 February 2011]
Friedman, J. and Posner, R.A. (2010). What caused the financial crisis? Pennsylvania: University of Pennsylvania Press
History of U.S. Gov’t Bailouts. (2009). Available at: http://www.propublica.org/special/government-bailouts [Accessed on 16 February 2011]
McLean, G.F. (1996). Normatic ethics and objective reason. Washington, DC: Paiedeia publishers and The council for research in values and philosophy
Sprague, I.H. (2000). Bailout: An inside’s account of bank failures and rescues. Washington, DC: Beard books
Waggoner, J.M. (2008). Bailout: What the rescue bear Stearns and the credit crisis. Hoboken, New Jersey: John Wiley& Sons, Inc.
Wright, B. (2011). The arguments banks use to justify bonuses. Available at: http://www.efinancialnews.com/story/2011-01-17/the-arguments-banks-use-to-justify-bonuses [Accessed on 16 February 2011]