Andrew Cuomo

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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.

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Ken Lewis Must Go!

Alright I admit that’s a bit harsh. But he’s done nothing but foul up lately. The Bank of America shareholders meeting next week, on the 29th of April, should be a fun one to sit in on.

It appears that our indomitable Ken was coerced by Hank Paulsen, then Treasury Secretary, into going ahead with B. of A.’s takeover of Merrill Lynch even though revelations about the awful state of Merrill were becoming known to the bank’s executives. Apparently Lewis, a banking empire builder par excellence, was getting cold feet at the prospect of having to absorb Merrill’s balance sheet, stuffed as it was with a myriad unpleasant surprises. All of which were costly. Having sold his shareholders a bill of goods with his ‘opportunistic’ acquisition of Countrywide, whose corrosive book of sub-prime mortgages was already eating its way through B. of A.’s income, Lewis realized that taking on Merrill would most likely sink the bank entirely.

So he baulked.

Paulsen reacted with his best Goldman Sachs swagger, and read Lewis the riot act. Basically the message was: go through with the Merrill deal or the government will oust you as CEO. After all B. of A. was already a basket case by then and on the taxpayer dole, so combining with Merrill was only going to make a dead bank deader. It wasn’t going to kill a live bank.

Naturally Lewis saw the light. B. of A. went ahead with the deal, and we, the taxpayers, have been supporting it with ever more fervor ever since. We absolutely love B. of A.. Or at least we must in view of all the money we give it.

So now Ken has a problem.

It seems that some of his shareholders have awoken, and to their horror have discovered that the Merrill deal has not gone supremely well from their point of view. In fact it appears to have destroyed that part of whatever shareholder value had managed to survive the Countrywide deal.

Ken’s acquisition record is not too good just now.

These pesky shareholders now appear to believe – how could they? – that they have the right to oust poor old Ken. The nerve of these shareholders! There is nothing worse in all of corporate America than shareholders who think that management should be working for them and not the other way around.

I digress.

Lewis, having buckled and done his patriotic duty even though it clobbered his own shareholders pocket books, now has to face those shareholders and explain why he chose country over company.

That’s an ugly choice. Especially since his legal obligation is to the company.

So much for patriotism. Perhaps Ken can insulate himself by wearing a flag pin at next week’s meeting.

All of this is now roiling Washington. It is Andrew Cuomo mischievously supplying copies of all the correspondence that provide details of Paulsen’s strong arm approach and Lewis’ capitulation. It makes for great political theater. But it also raises a tough point: just how much can the government expect a private company to act in the public interest?

Obviously, had Lewis acted solely on his shareholders behalf he would have walked away from the Merrill deal. That would have left Paulsen in dire straits because Merrill would almost certainly have gone the way of Bear Stearns, only on a much larger scale. As Paulsen apparently put it to Lewis: there was a risk of systemic failure had Merrill gone belly up. In the heat of the moment the only viable option Paulsen had was to force Merrill into B. of A. regardless of the damage it did to the bank. There was no time to get shareholder input, and in any case, given the leaks about Merrill’s condition, the shareholders would most likely have rejected the deal had they been asked.

So the government effectively pushed B. of A. closer to the brink of insolvency, knowing it was going to have to bail it out anyway, rather than risk the liquidation of Merrill on the open market.

Paulsen probably also calculated that poor old Ken was going get the heave ho sooner or later. B. of A’s executive team has managed to destroy too much shareholder wealth for them to survive for long. So given that Ken’s demise was a matter of time, Paulsen must have thought he could use Lewis’ fear of being fired for his own, and the country’s, best ends.

So the conflict of interest between public and private interests has caught Lewis in a vice. He came through with flying colors from the public’s perspective, although that won’t do him any good when he faces his shareholders.

Was Paulsen right? Should he have coerced a CEO to act against the interests of his shareholders? Given the options there wasn’t much choice. I give Paulsen a pass on this one. It was Lewis who could have pressed for a better deal from the government. As it is: B. of A. is one of our weaker banks and will need long term support to nurture it back to health. It probably needs breaking up so that it is no longer ‘too big to fail’. That would undo about eight years of Ken Lewis empire building.

The taxpayers owe Ken for taking on Merrill. B. of A. should fire him nonetheless: his empire building will have produced nothing but the erosion of wealth for its shareholders.

It’s a tough life being a bank CEO.

Ken Lewis must go!

Addendum:

This story is now exploding in importance. Friday’s Financial Times pursues it aggressively and lists all the documents you need to read.

The timing of Cuomo’s release of documents means that shareholder pressure on Lewis is bound to escalate rapidly. His chances of survival are looking slim right now, although it isn’t at all clear how much of his executive team also needs to go. Perhaps Paulsen’s strategy all along was to force the shareholders to clean house, so the fact that Cuomo’s investigative team suddenly send such inflammatory documents to Congressional committees right before the annual shareholder meeting may not be a coincidence after all. Then again the implication of that is an unusual level of cooperation between people like Cuomo and Paulsen, neither of whom seem to me to be the kind of people who willingly share the limelight.

In any case Ken Lewis, who’s leadership of B. of A., has been terrible, now has his career in jeopardy. His record says he deserves this moment. I only wish it had arrived through the normal course of corporate governance, and not through what appears to be a highly contrived and possibly politically motivated maneuver by Cuomo’s office.