Bonuses? For Wall Street?

10/30/2008 3:02 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

At first I thought it was an early Halloween prank, but no, it’s for real: Wall Street firms actually may pay out big bonuses this year.

Yes, the very people who brought us the global financial crisis are now getting ready to reward themselves for a job well done.

Believe me, if I were clever enough to make this up, I’d be writing screenplays in Hollywood.

Last week, the Associated Press reported that major banks, investment banks, and brokerage firms have salted away tens of billions of dollars in employee compensation, including possible bonus payments for 2008.

The nine financial companies it surveyed—Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Merrill Lynch, Bank of New York Mellon, State Street, and Wells Fargo—had compensation-related expenses of $108 billion in the first three quarters of the year. That’s 3% higher than in the first nine months of 2007, the AP reported.

These nine banks, incidentally, have just accepted capital infusions of $125 billion from the US Treasury courtesy of the Troubled Asset Relief Plan (TARP)—the government’s messy bailout of the financial system. That’s ultimately you and me, of course.

In a separate calculation, found that seven big-name investment banks (including extinct Lehman Brothers) had racked up $97 billion in compensation expenses this year, only 7% below last year’s totals. Their combined revenues are down 27%. As for their earnings and share prices, don’t ask.

I contacted all the major firms for comment, and—surprise, surprise—got few responses. Those who did talk were tight-lipped and noncommittal.

“It’s too early to say,” a Citigroup spokesperson said. A representative of another Wall Street firm, who asked not to be named, said that the expenses being accrued included salaries and benefits and that just because money was being set aside for bonuses doesn’t mean it will be paid out.

And it doesn’t mean it won’t be, either.

In early 2008, Wall Street firms awarded a near-record  $33.2 billion in bonuses—weeks before Bear Stearns went under and after several firms had already taken tens of billions of dollars in write-downs.

But amazingly, when bonuses are paid out early next year, they may total $20 billion or so—a third lower than 2008’s payments, but hardly chump change.

Unfortunately pocket change is about all shareholders of these firms have left. Lehman Brothers and Bear Stearns were wiped out. Merrill (which has agreed to be acquired by Bank of America) has seen its stock plunge by roughly 80% from its early 2007 high, and Morgan Stanley is off by a similar amount. Even Goldman, the crème de la crème, has lost 60% of its value in the past year.

Goldman itself seems resigned to what passes for austerity on Wall Street as its partners face the grim prospect of divvying up  “the smallest bonus pool, per capita, since Goldman became a public company in 1999,” the Financial Times reports.

But don’t get those Kleenex out just yet. “After all the employees, vice presidents and managing directors get their bonuses this year, there won’t be much left for the partners,” the FT writes. “Many are expected to get less than $1million.”

That’s on top of their minimum-wage salaries of about half a million. How can you maintain your Manhattan townhouse and Southampton beach compound on such a pittance? Goldman didn’t return a call requesting comment.

And here’s my favorite story: while Lehman Brothers was going under, someone was shrewd enough to set aside $2.5 billion to pay bonuses to its New York employees. (The UK’s Barclays, which scooped up Lehman’s US broker-dealer network for under $2 billion, has said it is not required to pay out the bonuses.)
Whoever pulled this off managed to keep the money separate from Lehman’s bankruptcy filing and hence out of the reach of creditors and bondholders who were left holding the bag when that venerable firm failed.

It’s like filling a lifeboat with champagne and caviar just before the Titanic sank beneath the North Atlantic’s waves.

Now, there are some people on Wall Street who actually defend big bonuses, though none of them is running for office this year.

They say that bonuses traditionally make up nearly half employees’ total compensation, which varies from department to department: brokers, for instance, earn bonuses based on their “production,” determined by a combination of revenues brought in, assets managed, and trades executed. And, of course, there’s the inevitable argument that if we don’t overpay them, our competitors will.

But can anyone tell me one area of the market that’s not doing horribly this year? Stocks are having their worst year since 1931. Emerging markets and commodities are tanking. Investment banking is nonexistent. And don’t even mention derivatives, So, where exactly is the “performance” that bonuses are supposed to reward?

And with financial services companies expected to shed tens of thousands of jobs, where are all these “top performers” expected to go if they don’t get their fat bonuses? Is Bear Stearns hiring?

Meanwhile, of course, American taxpayers now have stakes in all these firms, which we got for saving many of them from collapse.

So, it’s no surprise that politicians are getting involved. Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, wrote letters to the heads of nine financial firms asking about their compensation plans in light of the bailout. (TARP does have some restrictions on top executive pay.)

And New York attorney general Andrew Cuomo followed suit with letters of his own asking for similar information. “Now that the American taxpayer has provided substantial funds to your firm, taxpayers are in many ways, now like shareholders of your company, and your firm has a responsibility to them,” he wrote.

As I’ve said here many times, the last thing I want is for Congress or governments to set executive pay. But all across America, workers and managers are losing their jobs, seeing their salaries cut, and foregoing bonuses this year. They’re scared about the future and furious about the bailout. They will go ballistic at any hint that their hard-earned dollars are helping keep Wall Streeters in Maseratis.

So, are you listening, Wall Street chieftains? You really need to step out of your gilded cocoons for a change, because this year the whole world is watching.

Howard R. Gold is executive editor of The opinions expressed here are his own and do not necessarily represent the views of InterShow.

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