Goldman Sachs bonuses: more than just bad PR

“The trouble with socialism is socialism. The trouble with capitalism is capitalists,” William F. Buckley, Jr., observed. His point was that free markets are underwritten by public opinion, not divine right. Bad behavior by the business elite can provoke the public to demand that the terms of free enterprise be rewritten or, in dire times, revoked.Does the leadership at Goldman Sachs get this? The firm’s recent announcement that its top 30 executives will receive long-term stock instead of cash as year-end bonuses suggests they have heeded, however belatedly, Buckley’s warning. Yet such “sacrifice” is hardly sufficient when capitalism itself is increasingly the target of public wrath.

Take AIG. In March, the insurance giant said it had to pay some $450 million in bonuses to its disgraced financial products unit, ostensibly for the long hours it put in losing 90 times that amount the previous fall. This, after taxpayers hadbailed out the firm to the tune of $173 billion.

Public outrage prompted Congress to grill the firm’s then-CEO, Edward Liddy, who subsequently asked top bonus-getters to “do the right thing” and return at least half their bounty. This may appear like justice half-done, though since actual returns have fallen far short of pledges, it seems more like justice half-baked. Still, it illustrates Buckley’s point. Outrageous behavior by business executives undermines the public’s faith in capitalism, leading people to call upon the guiding hand of government to supplant the invisible hand of the marketplace. By June, the Obama administration had appointed a “pay czar,” Kenneth Feinberg. This week, he proposed a $500,000 salary limit for hundreds of executives at firms bailed out by the federal government.

In hindsight, the AIG bonus debacle had all the subtlety of a medieval morality play. Goldman Sachs is a far more intriguing case.

By any measure, the storied firm is having a banner year. Its revenue and stock price have rebounded handsomely from a year ago, so the $16.7 billion it has reserved for year-end bonuses seems like a just reward – at least to Goldman’s CEO, Lloyd Blankfein, who recently replaced AIG’s Liddy as Wall Street’s Public Enemy No. 1.

“Everybody should be, frankly, happy,” Mr. Blankfein said of Goldman’s success in the now infamous interview with the Times of London in which he claimed he was “doing God’s work.” These are the kind of cringe-worthy comments that Buckley had in mind when he warned capitalists that they could be their own worst enemy. They certainly have guaranteed that Goldman will remain ground zero for populist outrage, notwithstanding the firm’s bonus modification and a $500 million program to aid small businesses.

Yet Blankfein went even further. “The financial system led us into this crisis,” he declared, “and it will lead us out.”

In light of what happened to the financial system just a year ago, this is an astonishing statement. It shows the same fundamental faith in free markets as Buckley’s wry aperçu. There is nothing essentially wrong with capitalism, just a few errant capitalists who, because of bad faith or simply bad manners, spoil the party for the rest of us. The vices of capitalism – greed, reckless ambition, ill-considered risk-taking – are merely the defects of its virtues. This does not obviate the need for the occasional acts of public contrition. Blankfein himself admitted that Goldman’s bankers “participated in things that were clearly wrong and have reason to regret.” But the implication is clear: Give capitalism some time, and it will work these problems out.

The public doesn’t share this faith. In a Time Magazine poll conducted shortly before Goldman announced its blockbuster bonuses, only 18 percent of respondents thought “large Wall Street financial institutions learned from their mistakes,” while a whopping 75 percent believed that “business as usual” would prevail. More ominously for Goldman, 62 percent of respondents said the government should strictly limit pay at Wall Street firms, “regardless of whether or not they’ve paid back the government.”

A year after Wall Street nearly took down the world economy, most Americans cannot understand how any firm that stood at the center of the crisis could be doing so well, even one as venerable as Goldman Sachs. Conspiracy theories worthy of Dan Brown seem to better explain Goldman’s success than elbow grease and old-fashioned hustle. It doesn’t help that the fingerprints of its alumni are all over the decisions that saw its competitors fail last fall shortly before it received nearly $13 billion in bailout money (which has since been repaid).

This is dangerous territory for Goldman, or for anyone who champions free markets. The invisible hand describes an economic world where winners and losers are chosen by the public – individually, anonymously, and without coordination – not by any one person or secret cabal. It is an elegant vision that provides a powerful moral justification for the kind of economic inequality that year-end bonuses highlight. Individuals, this vision implies, rise and fall by hard work, not elite favor.

Last fall, the invisible hand was pulling the big banks into financial quicksand. Without the strong arm of the federal government, as Treasury Secretary Timothy Geithner recently affirmed, “none of them would have survived.” For free-market evangelists, this is an inconvenient fact, one that ought to lead to the kind of soul searching about capitalism’s shortcomings. It certainly should give second thoughts to Wall Street about the wisdom of handing out blockbuster bonuses when the health of the larger economy remains in doubt.

For now, however, it looks as if the bonuses will go forward, the outrage will grow, and Americans will continue to demand that the government fix a financial system that seems incapable of fixing itself. When Washington heeds that call, it is unlikely to conclude that the problem with capitalism is merely capitalists. They, and their year-end bonuses, will only be the most obvious defects in a system that will seem deeply, perhaps even inherently, flawed.

John Paul Rollert teaches business ethics and leadership at Harvard Summer School. He is pursuing a JD at Yale Law School and a PhD at The Committee on Social Thought at the University of Chicago.