— After paying for a $700 billion bailout, taxpayers say they're in no mood to see another round of six-, seven- or even eight-figure bonuses paid out to Wall Street rain makers. Sorry, readers: You'd better get used to them.
The windfalls are going to the folks who made such a mess of the financial markets that the resulting collapse threw some 8 million people out of their jobs and millions more out of their homes. So if you're not getting a Publishers Clearinghouse-sized check in the next few weeks for all the hard work you did in 2009, you have reason to be a little peeved.
The White House says these financial executives “just don’t get it.” But some Wall Street bankers report that the White House doesn’t get it, either.
These guys (and they're mostly guys; women get very few of the biggest bonuses) complain that restricting bonuses just isn't fair. They have bills to pay. There are mortgages on three or four houses, pricey tuition payments for exclusive prep schools and Ivy League colleges, alimony for multiple ex-wives.
Besides, taking huge risks with other people’s money is a very stressful job; if you lose that money, angry investors call you up all day long and complain. Further, these bankers are generating huge profits by taking a big pile of someone else’s money from over here, slicing off a nice chunk of it, and moving the rest over there. Why shouldn’t they be entitled to a nice slice of that profit?
For a time, after the Treasury put up hundreds of billions of tax dollars to save Wall Street from its mistakes, government moved to restrict the big pots of gold paid by the banks that benefited from the bailout. But now that much of the bailout money’s been paid back, those restrictions have been lifted.
And, despite the pitchforks and torches being raised by angry mobs against big bonuses, it’s highly unlikely that any real caps will be put in place. Most readers don’t understand why that’s so.
1) The real problem with bonuses based on “performance” is that the benchmarks for that performance have nothing to do with whether anything of real value has been created. If you’re a Wall Street banker who arranges the leveraged buyout of a dying manufacturing company, for example, your “performance” isn’t based on whether the company gets back on its feet. You’re a candidate for a hero-sized bonus at the bank once you’ve scooped out your nine-figure fee. It matters little whether or not investors in your leveraged buyout make back their money or the company in question collapses under the weight of the debt you’ve loaded onto it.
2) Companies showering this year's bonuses on top "performers" may — or may not — be required to “name names.” Attorney General Andrew Cuomo on Monday asked the eight biggest banks — Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo — to reveal how much they plan to pay out in bonuses for 2009. (The nation's six biggest banks set aside $112 billion for compensation in the first nine months of 2009, according to the New York State Comptroller's Office.)
No question this is going to be a big bonus year. But we won’t necessarily find out who got what. Cuomo wants the information by Feb. 8. But he didn’t threaten legal action if he doesn’t get it. The reason is that there is no law that requires banks to comply with his request.
There is also no law limiting how much companies can pay executives, and it’s hard to see how there every will be. (Great Britain recently enacted a tax on large bonuses; it remains to be seen what kind of unintended consequences the new law produces. One might be to simply shift more trading and deal-making to this side of the pond.)
There have been proposals to limit bonuses since Wall Street paid itself billions for making a multi-trillion-dollar mess. But they never got very far. The reason is pretty simple. Over the past three decades, as the role of manufacturing has declined as a driver of economy growth, it has been replaced largely by the financial services industry. Members of Congress may enjoy pounding hearing room tables expressing outrage at “Wall Street greed. ” But they are very happy to collect their own piece of Wall Street largess when it comes time to run for re-election. You could say we have the best Congress money can buy.
So companies are free to decide for themselves who gets what. Most corporate “compensation committees” consist of a few of the CEO’s hand-picked golf buddies who rely on “compensation consultants” who report back on how much the bank across the street just raised bonuses for its executives. That arms race is part of Wall Street's justification for the upward bonus spiral. "If we don't hand out extravagant pay packages, our best people will leave!"
In theory, controls on executive pay should be in the hands of shareholders, not taxpayers. The money being doled out for one more house in the Hamptons or matching his and hers Lamborghini Murcielagos (MSRP: $382,400 each) is really shareholders’ money. If your mutual fund holds Goldman Sachs stock, for example, every dollar diverted to the bonus pool is a dollar that could have landed in your retirement account.
But the rules of corporate governance — by which the shareholder owners of a company are supposed to determine things like how much its executives get paid — are even more hopelessly dysfunctional than Congress.
Of course, Congress has had ample opportunity to reform corporate governance — which is ultimately regulated by the Securities and Exchange Commission. Those proposed reforms were just a warm up for the current debate over bonuses.
The latest chapter in this story hasn’t been written. Congress is currently hashing out a new package of “regulatory reforms” to try to prevent bonus-fueled risk-taking from once again pushing the global economy to the brink of collapse. It’s possible we’ll eventually see a return to the Depression-era approach imposing restrictions on risk-taking — and boundless bonuses — in return for government guarantees to protect savers and small investors.
But unless those restrictions have any real teeth, we’ll continue to have the worst of both worlds: a system that rewards reckless investing by bankers — who can remain confident the government won’t let them fail.
It’s possible we’ll get real reform. But don't hold your breath.