Bailouts and Bonuses on Wall Street Case Memo

BAILOUTS AND BONUSES ON WALL STREET Case Memo

Goldman Sachs and Matt should restrain huge bonuses to the highly paid traders after the financial crisis. Given the Rawls’s theory of justice, Goldman had an obligation to be fair to the public, to the greatest benefit of the least advantaged, in this case, the public who were experiencing unemployment and lost their home. These huge bonuses are unethical, because Goldman had received $10 billion TARP funds of taxpayer money to avoid bankruptcy and these highly paid traders were those who had largely contributed to the financial crises which caused economic downturn with high unemployment rate in the public.

Rawls’s justice system is based on Liberty Principle and Difference Principle. Difference principle implies that social and economic inequalities are to be arranged so that they are both (a) to the greatest benefit of the least advantaged and (b) attached to the positions open to all. From Rawls’s perspective, a company allows some employees to be better off than others by providing incentives to gain more profit and providing a fair and just distribution of the rewards of those contributions. Goldman Sachs and many investment banks on Wall Street used incentive-based bonus to attract top-tier talents. The bonus system hence motivated bankers and traders to engage in high risk taking to drive up the short-term profit with other people’s money without holding them the least bit accountable, which caused financial crisis when millions of people went unemployed and lost their home.

The bonus system neither increased the aggregate utility of the whole society, nor made the least advantaged individual beneficial. Instead, Inequality in this case is unfair as it harmed the least fortunate, who suffered from economic downturn as a consequence of Goldman and other financial institutions’ actions.

Wall Street bonus system also carried moral hazard, considering top executives and traders were rewarded for risk seeking, but not punished when the system collapsed. If traders can earn huge compensation after crisis, it would be perceived as a shift of money from all taxpayers to the bankers that created the crisis by taking excessive risk.