Enough with the Bonuses!

01/22/2009 2:49 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

In his inaugural address Tuesday, President Barack Obama urged Americans to embark on a "new era of responsibility."

That message resonated throughout the land, except in the one place it needed to be heard the most: Wall Street.

While Congress and the new administration desperately try to save the sinking economy and get the financial system off life support, some Wall Street firms are busy paying their employees substantially the same as they earned last year.

That's right-the very people who are most responsible for this mess, who have nearly destroyed the world economy with their recklessness and incompetence, and who are making our children and grandchildren foot the bill, are doing the only thing they know how to do well: pay themselves richly.

Before it completed its merger with Bank of America, Merrill Lynch doled out $15 billion in executive compensation for 2008, only 6% less than it did in 2007.

This is the same Merrill that reported $42 billion-that's billion-in operating losses last year, including a shocking $21.5-billion operating loss in the fourth quarter.

Those stunning losses prompted its new owner to quietly ask for an additional $20 billion from the Troubled Asset Relief Program (TARP) late last year. The government, with yet another gun to its head, caved and wrote the check.

Meanwhile, top Merrill executives were busy writing checks, too. According to the Financial Times, the firm "took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of the sale to Bank of America."

Talk about getting in under the wire! But it gets worse: B of A began talks with the US Treasury about getting more bailout money just days after Merrill's compensation committee approved those bonuses in early December, the FT reported.

So, you and I subsidized the estimated $3 billion to $4 billion Merrill paid its employees in the days before that dying firm mercifully gave up the ghost.

Personally I'd rather see my tax dollars spent on bridges to nowhere. 

A Bank of America spokesman didn't respond to my request for comment.

Wall Street bonuses are expected to be off substantially this year, and there are thousands fewer employees to collect them. Many top executives, including chief executive officers, are going bonus-free. Also, several major firms have restructured their compensation packages to include more long-term stock payouts and "clawback" provisions that let firms recover bonuses paid for deals that blow up in later years.

That's progress, but really, why pay any bonuses this year? Three-quarters of Americans polled recently say we shouldn't. 

And it's hard to justify by almost any traditional performance standard. Mergers & acquisitions, initial public offerings, credit markets, commodities, all are way off. And the Standard & Poor's 500 index had its worst year since 1937.

Trouble is, Wall Street lives in its own world, governed by rules that seem logical to its denizens but appear clinically insane to everyone else.

Jerry W. Markham, a professor at Florida International University College of Law and an expert on banking and securities law, says paying top performers big bonuses even in horrendous years like this one may actually make sense to the Wall Street executives who run their firms.

"If you lose the 'big producers,' it's over," he explains. "If they're not paid, they're going to jump ship."

Even now, he says, "if you've got a book [of business] you can get hired [elsewhere]."

But this year firms that throw big bucks at star brokers may be, at the very least, myopic.

Crain's New York Business recently pointed out that in the three years following the dot.com boom, Merrill's brokerage revenues dropped by 26%:

And analyst Brad Hintz of Sanford C. Bernstein & Co. says Wall Street's revenues plunged by 42% after the 1987 crash and didn't recover for five years.

These fat payouts would be outrageous enough if these firms were wholly owned by shareholders. But now, you and I are part-owners, too.

Unfortunately, taxpayers may have little recourse. The Treasury's rules for administering TARP, drafted under former secretary (and former Goldman Sachs CEO) Henry M. Paulson Jr., cover the top five executives of each firm. Obligingly, many of them limited their compensation.

For everyone else in their firms, though, this loophole was big enough to drive an armored car full of cash through.

Professor Tamar Frankel of Boston University School of Law says the government would have "very weak" legal grounds for a case and that the only relief might come through shareholder litigation, which also would be a long shot.

Indeed, a B of A shareholder has already filed a class-action suit over disclosure issues surrounding the Merrill takeover. (John Thain, the former Merrill CEO who helped engineer the deal with B of A, has stepped down from a top executive position with the bank.)

But I do think there are two things we can do.

First, it's time for a Congressional investigation of Wall Street compensation. I've said repeatedly that I don't want Congress involved in setting executive pay, and I still believe that. But now that we are propping up these companies, it's legitimate to ask where our tax dollars are going. And the bright light of transparency might do wonders for executives who think it should be business as usual for their firms.

Second, it's time for investors to really think hard about where we're putting our money.

Many are already doing that. A survey of affluent investors last fall by Prince and Associates found that 80% of individuals with investable assets of over $1 million planned to take money from their current advisors, and hardly any would recommend those firms.

Or as the FT put it:  "For the most part, the big brokers are full of second-rate bankers pushing mass-market products for excessive fees." And they're getting paid huge bonuses, too.

Of course, taking more control of your own finances rather than let someone else handle it involves more time, more work, and more knowledge. Maybe that's part of the "new era of responsibility," too.

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

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