Wall Street Bonuses

[Vulcanl]

It is unfathomable to me how these people can rationalize receiving ANY bonus at this time, never mind the sums being bandied about.   These are the same people who brought the entire financial system to its knees.  It has yet to begin functioning normally again, and it will be left to government to clean up this mess.

They live in an alternate universe.  It is clear that Wall Street never 'created' anything but rather simply took advantage of cheap, easy money and basic human greed.

They are never to be trusted again.

It’s Theirs and They’re Not Apologizing
By ALAN FEUER and KAREN ZRAICK
New York Times January 30, 2009

Getting between a broker and his bonus is like getting between a schnauzer and his lunch bowl. He may not bite you, but you are going to smell his breath.

“People come here because they want to work hard and get paid a lot for working hard,” one investment banker said Friday as he wended his way, lunch bag in hand, through the World Financial Center. “I think there’s a disconnect between Wall Street and Main Street.”

That certainly was the case this week when Main Street learned that, despite the craters of a down economy, Wall Street bonuses were more than $18 billion last year — roughly what they were in the fatty, solvent days of 2004. The media hollered, the president scolded, and ordinary people checked their wallets. But downtown, in the caverns of finance, the moneymakers shrugged and took it on the chin.

It is a complicated thing, they said, to apportion compensation in a bear market. First of all, profits do not stop; they often ebb. Second of all, losses move unequally, so the law of the jungle should still apply: you eat what you can kill.

“My bonus is ‘shameful’ — but I worked hard to get it,” said John Konstantinidis, a wholesale insurance broker, lunching Friday at Harry’s at Hanover Square.

“I’m a HENRY,” Mr. Konstantinidis added. “High Earner but Not Rich Yet.”

Nonetheless, it was rather remarkable on Friday how many white shirts denied getting a bonus altogether when they were asked. Indeed, if the data obtained by reporters in the district was any measure, there is no telling where that $18 billion really went.

What can be told, however, is that President Obama is substantially less popular on Wall Street this week than he was last week. Words like “outrageous,” “shameful” and “the height of irresponsibility” — especially when applied to a man’s paycheck — tend not to make you many friends.

“I think President Obama painted everyone with a broad stroke,” said Brian McCaffrey, 55, a Wall Street lawyer who was on his way to see a client. “The way we pay our taxes is bonuses. The only way that we’ll get any of our bailout money back is from taxes on bonuses. I think bonuses should be looked at on a case by case basis, or you turn into a socialist.”

That, indeed, was a recurring equation: Broad strokes + bonuses = socialist.

“It’s a very slippery slope to go down,” said another insurance broker as he waited to be seated for lunch at Cipriani Downtown. “A blanket statement like that borders on” — you guessed it — “socialism.”

There were, of course, those downtown who were disgusted by the thought of this year’s bonuses, though they were mainly wage earners like Ashton Johnson, 32, a courier who was chatting outside the Stock Exchange with a buddy wearing a sandwich board reading, “We buy gold.”

“It definitely is ‘shameful,’ ” Mr. Johnson said. “With the fact that stock is going down, they shouldn’t be paid so much.”

Meanwhile, around the corner, Larry Meyers and Gerard Novello, who work for an Italian securities firm, ducked into a Mexican cantina for a drink. It was Mr. Meyers’s 43rd birthday, and he ordered the tequila.

“On Main Street, ‘bonus’ sounds like a gift,” he said. “But it’s part of the compensation structure of Wall Street. Say I’m a banker and I created $30 million. I should get a part of that.”

“There’s got to be a better term for it,” he added, turning to Mr. Novello.

“Earned income credit?” he wondered aloud.

Colin Moynihan contributed reporting.

[T2K]

Presumably, some people at some banks may have successfully and ethically made some money?  And, as mentioned, I think in their industry it's structured more as a part of the annual compensation.

If my company lost money overall, but I closed some big and profitable deals - I would want my commission regardless and, as per my current contract, I would get it.

However, I understand the overall point and agree with it in general.

[TheWrathOfGrapes]

I think they should follow the example of Credit Lyonnais - pay those guys who bought CDOs and other toxic products for the bank with those CDOs (at their original face values) which have tanked as bonuses.

[Vulcanl]

Wrath that is a great idea.  Kudos to CS or UBS (don't remember which exactly), who have put in place a 'negative bonus' system where comp is tied to eventual results of a given deal.

The CEOs of Lehman, Merrill, Wamu, and Countrywide all walked away with hundreds of millions of dollars collectively in compensation after their firms went under.

They should be made to return these ill-gotten gains to a pooled trust of some sort and use that fund to take care of people who lost their livelihoods through no fault of their own.

[HR Guy]

I do agree but we also need to ensure that it is targeted. CEO's, absoluetly! But when we talk Senior Management, especially for the financial industry, it should be of those who had influence or in those area's. Given there are so many sections with nothing to do with the problems, it is hard to generalise that all senior management or even staff should be hit. Some area's of the banks actually made some good money.
It is easy for the Obama's to make wide statements about disgust and the general public applaud him for that but as they say, the devil is in the detail. UBS with it's 80% cuts may look great but it would be a real shame if it is across all employees. It should be in those area's only who, when things are going fantastic, get the big bucks. Cutting an operations analyst bonus by 80% from say $10,000 to $2000 is just not right.

[working_mom]

Yes agree with the HR Guy here. I know quiet a few people who have lost their jobs and livelihood especially from Back office who were not even remotely privy to the greed of the Front office guys!

[Nosey Parker]

The problem with this theory is that most IB's work on a total compensation culture.  So, at times your salary may fall below market average but it is tied into the year end bonus you get as well.  Take myself for example, we had a salary freeze two years in a row at the IB I worked at so over the course of two years i was hiring new staff to work in my team at a higher salary than i was getting because that's what the market dictated to get people in the door.  However, the only reason it was workable was because at the end of the year my bonus would be much larger than the new comers to compensate for this.  If suddenly there were no bonuses I would have been getting paid much less than people i was a couple of grades above. 

Salaries are never ever changed during the course of a year in any of the IB's i'm familiar with but in the five years i worked at one bank 2000-2005 the compensation went through the roof with the surge in derivative and structured FI products.   However, I most certainly agree that the way in which front office bonuses are calculated needs to be reviewed.  Also, I believe much more should be tied to share issuance so that the employees have a much more vested interest in how the company does overall. 

[so what]

I am far from being an authority when it comes to banking or investments. To a certain extend however I feel that its not really the bankers to blame for all this.

See, a few years back the hype started. Investing was fashion and everybody, including myself, happily stepped in to reap the benefits of high returns.
Now I am not a complete idiot and I suppose other people on this board aren't either, and I knew back then that this was a bubble that sooner or later was going to burst.

Now it has. And if I could, I would try to make some money out of it anyway.
The high profiled bankers do just that and I wonder, what is the difference between their greed and mine?

[working_mom]

I am far from being an authority when it comes to banking or investments. To a certain extend however I feel that its not really the bankers to blame for all this.

See, a few years back the hype started. Investing was fashion and everybody, including myself, happily stepped in to reap the benefits of high returns.
Now I am not a complete idiot and I suppose other people on this board aren't either, and I knew back then that this was a bubble that sooner or later was going to burst.

Now it has. And if I could, I would try to make some money out of it anyway.
The high profiled bankers do just that and I wonder, what is the difference between their greed and mine?

I think the difference will be as an ordinary investor you would want good return on your investments.That is not greed. But the high profile bankers take your money to fill their own pockets thats not just greed thats stealing as well

[TheWrathOfGrapes]

I am far from being an authority when it comes to banking or investments. To a certain extend however I feel that its not really the bankers to blame for all this.

Now it has. And if I could, I would try to make some money out of it anyway.
The high profiled bankers do just that and I wonder, what is the difference between their greed and mine?

The difference is when you lose money in those investments, it is very painful and comes out of your own pocket.

OTOH, those leeches bankers get fat fees, commissions and bonuses when the market went up. When the market goes down, they go to the government for bailouts. And what gall, they go to the government in their private jets or stretched limos...

If the compensation/penalty profile is asymmetrical, the temptation is to take on inordinately high risk.  When the bets turn out right, you get humongous rewards. When the bets go wrong, the bankers just walk out, and collect their golden parachutes, golden handcuffs and golden waste-paper baskets....

[tweek]

Isn't it just a bit too easy to blame <collectively> bankers for all this mess?? Granted, banks came up with the stupid policies to lend a whole lot of people way too much money, but where is the blame for the morons who took those loans that they knew - at least on some level - they really couldn't pay back?

I'd say there is plenty of blame to go around for the state of things in the financial world today. And, I'm with T2K - there are still bankers out there who followed sound business policy and made money for their bank last year -- why should they be punished for the mess others created? If they earned a bonus, they should get it.

No. I am not a banker.

[TheWrathOfGrapes]

Isn't it just a bit too easy to blame <collectively> bankers for all this mess??
No. I am not a banker.

No, not collectively. Just those greedy commission-based bankers. More specifically, the investment bankers, and those pseudo-IBs.

Yes. I am a banker.

[Vulcanl]

I agree with this author's piece.  The Wall Street we have known all of our lives is dead - never to return (good riddance):

Bankers Are About to Take a 50 Percent Pay Cut: Matthew Lynn

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Commentary by Matthew Lynn

Feb. 11 (Bloomberg) -- Pay levels in the banking industry are falling faster than snowflakes in winter.

U.S. President Barack Obama wants executives at state- rescued banks to get no more than $500,000.

U.K. Chancellor of the Exchequer Alistair Darling has promised an investigation into bonuses at the banks that his department now largely owns.

French President Nicolas Sarkozy said in a television address last week that bonuses based on taking risks had “led to catastrophe and should be outlawed.”

At this rate, the pay rules will soon outnumber the bankers.

There is no longer any doubt that remuneration in the financial-services industry will be lower.

The only question is whether we are talking about a 10 percent to 20 percent reduction -- the kind of blip that causes you to trade your Bentley for an Aston Martin. Or are we looking at a total wipeout, the sort of industrywide catastrophe from which there is no recovery?

In other words, is banking now like the typewriter business in the 1980s, or the horse-and-carriage industry in the 1890s?

Here’s my estimate.

Over the next five years, average pay at banks around the world will drop 50 percent.

Too Much Banking

First, there is too much capacity in the industry. There were simply too many bankers out there doing too much banking. Adair Turner, the chairman of the U.K. ’s Financial Services Authority, said as much in a lecture last month.

“Wholesale financial services -- and in particular that element devoted to securitized credit intermediation and to the trading of securitized credit instruments -- grew to a size unjustified by the value of its service to the real economy, and is now going through a downsizing, part of which is cyclical, but part a permanent one-off adjustment to a more economically efficient size,” he said.

It is now obvious that a lot of the financial innovation of the last decade was a waste of everyone’s time and energy. We didn’t need all that complexity: It certainly didn’t make the world economy run any more smoothly. The net result is that the industry will shrink, wages will decline and there will be more people around than jobs. Just ask a U.K. coalminer from the 1980s, or a Detroit autoworker today.

Role of History

Next, history is about to reassert itself.

Thomas Philippon, an assistant professor at the Stern School of Business at New York University , has studied wages in banking and finance compared with other professions of the last century.

In the 1920s and early 1930s, pay reached record highs, he says. Then it collapsed after the Wall Street Crash. Through the 1950s and 1960s, bankers didn’t earn much more than peers in similar professional jobs. Then in the 1980s, pay started to soar again. By 2006, it was running at 40 percent more than its long- term average. Relative earnings even outstripped the previous peak in the early 1930s.

This past decade was the best time to be a banker. Yet the one thing we know for certain is that markets get back to normal over time. If oil is trading at $140 a barrel, it’s probably going to fall in price. If gold is trading at $200 an ounce, it will probably rise. And if bankers are paid 40 percent more than their long-term average, then -- well, you get the idea.

Tight Control

Lastly, regulation.

From the middle of the 1980s until this year, financial markets have been steadily liberalized. That has led to a huge burst of innovation and experimentation, which caused rising pay. Some of that has worked out well, though much of it hasn’t.

The era of light-touch regulation is over. State-run banks will be tightly controlled by their new shareholders. Even the banks that need no taxpayer bailout will find the authorities keeping an eye on them. We are only at the start of that process.

In all likelihood, the regulations will get heavier and heavier, leaving little room for innovation because the last thing anyone wants right now is an elaborate piece of financial engineering. Yet if bankers are just doing dull familiar things in a dull familiar way, they can’t expect to be paid very well.

Investment banking won’t disappear. But the compliance officer and the corporate social-responsibility executive are suddenly the most important people in the office. And that will make it a quieter, less dynamic and less profitable profession.

To get back to their sustainable long-term level, salaries will need to fall 40 percent. But, as any trader will tell you, markets always overshoot, both on the way up and the way down.

So, in reality, a 50 percent drop seems more likely.

And the stark truth is, if you want to earn more than anyone else, which no doubt many people in banking do, then it is time to think about taking up some other career. We could be well into the 2050s before banking is booming again.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)