Wall Street's Bonus Babies
If there is such a thing as reincarnation, I could think of a lot worse fates than to return as one of the nearly 5,000 bankers and traders who belonged to Wall Street's millionaire club in 2008, a year, coincidentally, in which the United States' financial system came apart at the seams.
On Thursday, the New York attorney general's office issued a detailed accounting of Wall Street's bonus culture. If you have time, take a look. It makes for an intriguing read.> But aside from the report's charts and statistics, the conclusion reconfirms the widely-held suspicion that investment bankers are from Mars, while the rest of us inhabit an entirely separate universe.
For instance, the study found that the nation's big investment banks continued to lavish royal monetary packages on employees with scant regard for the corporate bottom line. When they profited, so did their employees. When they did poorly, employees were still paid handsomely. "And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well," according to Andrew M. Cuomo, New York's attorney general. "Bonuses and overall compensation did not vary significantly as profits diminished."
Citigroup and Merrill Lynch, which each lost more than $27 billion in 2008, handed out, respectively, $5.3 billion and $3.6 billion in bonuses. They also received TARP funding worth about $55 billion. Fun fact: Citigroup handed out bonuses of $1 million or more last year to 738 bankers and traders. That still lagged behind Goldman Sachs, which bestowed bonuses worth at least $1 million to 953 employees. Laissez les bons temps rouler, anyone?
Speaking of Goldman, its bonus totals, as well as those at Morgan Stanley, and JP. Morgan Chase last year exceeded their institutions' individual net income.
• Goldman earned $2.3 billion and paid $4.8 billion in bonuses. It received $10 billion in TARP funding
• Morgan Stanley earned $1.7 billion and paid $4.5 billion in bonuses. It got $10 billion in TARP funding.
• JP Morgan Chase earned $5.6 billion and paid nearly $8.7 billion in bonuses. It received $25 billion in TARP funding.
Another takeawy: the party mindset which predominated during the boom carried over when after the sub-prime crisis hit. While the recession forced the rest of Corporate America to press the reset button, Wall Street - with the exception of a financial institution here and there going under - didn't rethink its compensation practices.
"For instance, at Bank of America, compensation and benefit payments increased from more than $10 billion to more than $18 billion in between 2003 and 2006. Yet, in 2008, when Bank of America's net income fell from $14 billion to $4 billion, Bank of America's compensation payments remained at the $18 billion level. Bank of America paid $18 billion in compensation and benefit payments again in 2008, even though 2008 performance was dismal when compared to the 2003-2006 bull market."
"Similar patterns are clear at Citigroup, where bull-market compensation payments increased from $20 billion to $30 billion. When the recession hit in 2007, Citigroup's compensation payouts remained at bull-market levels -well over $30 billion, even though the firm faced a significant financial crisis."
Over time, Cuomo noted that the expectation of huge paydays became part of the prevailing corporate culture, as well as a "source of competition" between different firms. At Merrill Lynch, for instance, the bonus pool was pegged to what management expected competitors would do. So it was that Merrill shelled out nearly $16 billion in 2007 while piling up more than $7 billion in red ink. The next year, the company paid almost $15 billion as it tottered on the brink of bankruptcy. The report concluded that the losses in 2007 and 2008 "more than erased Merrill's earnings between 2003 and 2006." That's quite something, even during a famously gilded age.
The report is making headlines for now, but there are other important questions it should have raised. Such as why these banks needed TARP funding when they're paying out a royal fortune in bonuses. Given that dollars are fungible, it sounds like another sad case of taxpayers being forced to foot the bill.
I'll reserve judgment for now but that unanswered question cotinues to hang out there. There's an upcoming vote in the House of Representatives on a bill to clamp down on what's being described as "inappropriate or imprudently risky" pay packages. In the aftermath of the Cuomo report, maybe someone during the floor debate will take the opportunity to connect the dots.
A lot also depends on whether Cuomo intends to turn this into his pet issue in a run for New York Governor. To be sure, tough-talking New York Attorneys General come and go - remember Elliot Spitzer? - and the financial industry always outlasts its tormentors. At this point, in fact, Cuomo sounds more like a moderate reformer than a radical trustbuster. I'm still not sure what to make of the report's summation, which ends with the hope that the financial world sees the error of its ways. Nice but sort of limp, in an old school kind of way.