The Financial Times has reported on where $4 billion of the TARP money went…. to pay bonuses to the executives who bankrupted Merrill Lynch (story). They deposited $10 billion in TARP money in October and wrote themselves $4 billion in bonus checks a couple of days before Bank of America took over the insolvent firm. We can no longer say that the $350 billion first round of TARP money sank without a trace. Now Bank of America needs another $20 billion in TARP money to make up for this and some other losses from Merrill that it didn’t expect.
One interesting aspect of the story is how weak is the correlation between pay and performance. Merrill paid its people 6 percent less in 2008 than it did in 2007, when the firm’s numbers still looked pretty good. If total incompetence and driving a company into bankruptcy yields 94 percent of the pay of doing a great job, what incentive is there to try to turn a profit for shareholders?