Wall Street Bonuses – The Abomination Continues

Do not think that this story will go away. Andrew Cuomo has just submitted another fascinating report of Wall Street bonuses and the manner in which they no longer reflect anything remotely connected to reality. Here’s a quote:

“Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.”

“We have set up a massive, expensive, and never ending welfare program for rich, complacent, and arrogant bankers.Why?”

How true.

The problem with the bonus structure in the financial industry is that it now no longer rewards excellent work or above the average contribution to businesses profits: it is expected.

I realize the difficulties that surround rewarding top performing employees: even in a loss making year there may have been many employees whose own contribution should still be rewarded as exceptional. And in an organization as large as, say, Citibank not every employee is associated with the loss making activities – no one in the entire branch system can be blamed for booking those obscenely stupid derivatives that blew up the balance sheet.

Yet I doubt – I have no direct evidence – that many of the big bonus payouts find their way to the branches. They mostly end up in the hands of the fools on the trading floor. Which is Cuomo’s point.

Banks like Citibank have been captured, almost literally, by investment bankers who have no experience of or knowledge of the hum drum ordinary banking that remains the ballast of that organization. The executive team is populated more by investment bankers and finance attorneys who are deal makers not bankers. They know the world of trades. Not the world of small business lending. They treat everything as if it is for sale. Their short term profit mentality is coupled with a false sense of security derived from overly complicated, and now proven wrong, set of risk management principles.

They don’t manage a business, they manage a portfolio. The notion of creating a long term structure is abhorrent to them. If it’s not now, it doesn’t exist.

They are traders.

So, inevitably, they have set up reward processes that mirror their own outlook on the world. They think it normal that a trader would be paid enormous sums even though that trader is using someone else’s money.

I have no problem at all with huge profits being made from banking. My point is that if you want to be rewarded that way play the game with your own money. Put your own wealth on the line. Not anyone else’s.

That is the fundamental disconnect on Wall Street: most of these millionaires are playing with someone else’s capital: they start by gambling away their shareholder’s stake, then they come running to the taxpayer and use our money.

In days gone by investment bankers who made bad bets went bankrupt. Personally. Their errors cost them their own wealth. Yes the central banks, as in Britain even in the mid 1800’s, or some major financier, JP Morgan in the US in the early 1900’s, stepped up to stabilize the system. But the bankers paid a personal price.

Nowadays there is no such connection between the trader and the loss that might accrue from his or her mistake. They make a bonus on the upside and shovel the losses off onto the shareholders or the taxpayers on the downside.

That is abominable.

It is a major distortion of the free market these folks worship. It is ludicrously unethical. It just plain stinks.

So I give Cuomo credit for pressing on with his ‘outing’ of the greed.

Traders who are not personally invested in their own trades should not be receiving egregious bonuses. Incentives, yes. Fortunes, no.

No one should be able to make a fortune working as an employee – the shareholders are being taken to the cleaners if that happens.

The word is ‘tunneling’. That’s is what happens when a group of employees extract an extraordinary amount of reward for themselves and leave the shareholders to hold the losses. It is a common practice on Wall Street. It should be illegal.

Just for the record and your amusement here is a list of the number of people getting million dollar bonuses:

• Citibank: lost $27.7 billion; paid over a $1 million in bonus to 738 employees
• Merrill Lynch: lost $27.6 billion; paid over $1 million to 696 employees
• Bank of America: 200 bonuses over $1 million
• Goldman Sachs: 953 bonuses over $1 million; 212 over $3 million
• JP Morgan Chase: 1,626 bonuses over $1 million; over $3 million to ‘over 200’ employees
• Morgan Stanley: 428 bonuses over $1 million; 101 over $3 million
• Bank of New York Mellon: 74 over $1 million
• Wells Fargo: 62 over $1 million
• State Street: 44 over $1 million

This, of course, is not an exhaustive list. Foreign banks with branches on Wall Street pay the same kind of wages in order to attract ‘talent’ – even when that talent is exposed as rotten.

What’s really notable is that none of these banks would be afloat without our help. Not one. They would all have faced bankruptcy, or at least massive decline and eventual failure, had it not been for the efforts of the taxpayer.

They play in a safe arena clearly delineated by our guarantees. And they luxuriate in the flow of cash they splash about for themselves. The shareholders may lose everything: that could be your retirement money. The taxpayers wade in with a massive safety net to catch the losers. But they still keep their money.

We have set up a massive, expensive, and never ending welfare program for rich, complacent, and arrogant bankers.

Why?

Addendum:

The Financial Times has supplied us with a nifty table of the bonuses, plus the relevant bank losses or profits from last year. The numbers still are annoying.