The worst fears of investment bankers regarding bonuses have not come to pass. Declining profits at many Wall Street banks, record breaking losses at some, and dire predictions from compensation experts gave rise to a fear that bonuses paid to bankers, traders and brokers would decline precipitously. That has not happened.
Wall Street bonuses grew in 2007 to a total of $39.34 billion, up from $36.19 billion in 2006. That is good news for many of our readers on Wall Street. But the news of that 8.7% increase will likely lend confidence to the cozy consensus that there is something seriously unsound with Wall Street’s compensation model and that a new paradigm needs adopting, perhaps with the very visible hand of the state pushing banks and brokerages into the new mould.
The sentiment that there is something wrong with the system that results in paying some on Wall Street more in a year than many Americans—including many journalists—will be paid in a lifetime has a long track record. Last year’s record bonus numbers, for instance, also summoned forth carping about allegedly “outsized” compensation. But in the best of times—when firms were registering record profits and shareholders reaped the benefits of huge dividends and rises in share prices—this view could be dismissed as the dividend of envy. In more troubled times, however, the calls for compensation reform can seduce even more balanced minds.
Before this goes any further, it’s important to see these calls for what they are—which is yet another attempt to substitute a rational plan backed by government coercion for a market process. Planning is conceit that will never die regardless of how often we hear about the triumph of free markets and the end of eras of big government. Many among us remain as dependent planning as a drunk is on booze. They can go a long way without the intoxicant but certain triggers are sure to see them back at the bar.
[More after the jump]
The analysis informing the latest urge to plan Wall Street’s compensation model along lines that some observers would regard as more rational or more beneficial to society is deeply flawed. We’re going to try our best, in a series of posts beginning today, to disrupt the developing consensus in favor of planning Wall Street compensation.
But let us begin here with a simple point—bonuses are up but this is largely a result of a growth in employment on Wall Street. In fact, the growth in employment outpaced the growth in bonuses. In 2006, Wall Street employed 165,293 men and women. Last year that number grew 12.3% to 185,687.
“Aggregate bonuses per employee, then, ended up falling from $218,945 in 2006 to $211,862 in 2007,” Felix Salmon at Portfolio writes. “But even that is a pretty modest drop of just 3.3%.”
Too modest, in fact, for the taste of money who believed the bonus decline would be—and should be—much steeper, given the financial performance of the banks that employ these men and women. In a series of items to follow, we’ll explain why critique of this compensation and how the proposed reforms are deeply flawed.
Bonus Pools Total $39 Billion on Wall Street: Table [Bloomberg]
Article in the journal yesterday pointed out that the promise (or dream) of big $$ draws some of the best/brightest to Wall Street (and rightfully questions whether this is the best use of such talent). There is a simple solution, for other fields to offer competitive earnings opportunities. End of story.
Isnt the bigger problem that most on wall st type jobs lack the education/experience to go run a real company like GM? Drag an IB into a home depot and see if he knows what all those tools do….
“just me” – don’t be daft. You don’t need to know how to stain wood cabinets to run GM.
And there are hundreds of former IBs in executive positions. They do just fine.
Try Scott Ford, CEO of Alltel for starters. Easily one of the most talented executives in the wireless industries.
Dear IA,
You mention 100s — over 165,000 work on wall st
To just me:
Wait, you’re saying that somebody that specializes in a particular product/industry/whatever, can’t just immediately go into a high level position of something unrelated?
Next you’re going to tell me that the surgeon next door can’t go be a rocket scientist!!!
Just me:
How ever did you come to the conclusion that a CDO trader can’t go run GM? Are you telling me that somebody that spends their years specializing in a particular industry/product/whatever can’t just up and switch to an entirely different specialization at a high level?
Next you’re going to tell me that if the surgeon next door leaves the hospital one day and decides he wants to become a rocket scientist, he can’t just become the head of NASA the next day?
What an astute observation.
Does anyone note that the majority of the highly compensated people are compensated with equity of the bank they work at. So last years batch of restricted stock for Merrill, Citi, Bear and UBS folks ain’t looking so sweet right now. Leave it alone, it works. Socialist bastards.
a GE exec could go run IBM or GM or JNJ or MCD or DIS. and he would make a much better banker than the other way around too because banking is just a relationship and sales business in the end
anyone have color on what a normal IB comp downturn looks like? for e.g. what happened from 2000 to 2001 to 2002
stu – right on, but you forgot to mention that much of the compensation [at IBs], whether cash or stock, is directly related to the fees generated (i.e. if you generate $2mn for the firm, you get $1mn). The fact that commies bitch about a perfectly fair system that greatly rewards performance and severly punishes failure has more to do with envy and pandering than fairness. You don’t see anyone speaking out in support of all the people that get canned once the markets turn south. The term “hypocrites” comes to mind.
hah, yeah right, the notion that IBs compensate on how many fees you attach your name to is proof that bankers are overcompensated. it is a much more qualitative process than that.
What most of these effete moralizers who read a little Chomsky as an undergrad and seethe with righteous indignation on their W commute to/from Queens every day don’t get is the fact that they are passing judgment on a business whose products are money and conduits of monetary value. Barring the occasional hubris-induced implosion this is a sickeningly lucrative business, and you have to think if the people who understand the most about money (if not always the implications of using it to lever into some tenuous capital structure arb exposure) are making this type of market in comp, well, it’s warranted (there will always be exceptions, but, as others have mentioned, they will get purged pronto during downturns). Goldman made over 20 billion this year. How did Home Depot and all its cute build-your-own-gazeebo kits make out? Wall St. is also highly competitive. The Merrill’s and Bear Stearn’s know that if they don’t pay their performers top dollar they will upgrade to a hedge fund or PE shop quicker than you can say capital infusion…
I don’t need to know how to use the tools found at a home depot, I pay people to do that stuff for me.
I’ll do social work all day long for a six fig salary.
You want teaching in poor schools, pay me! You want a fireman or a cop, pay me! But you gotta come up with my money every 2 weeks, no matter what! The state’s not appropriating funds? Fuck you, pay me! The governor call and wants tax cuts that you can’t afford? Fuck you, pay! And when you can’t pay anymore…I quit, that’s what I do. What? You though I was going to burn down something, didn’t you.
Bonuses are a reflection of effort, work and performance. While banks as a whole lost money, that does not mean that many analysts, associates, vps and mds did not put in the ridiculous hours that they usually do. For doing that kind of work, they are compensated. That’s a part of life.
In addition, it is unfair to lump all banks together and say that since the bank did poorly, everyone should suffer. That would be like saying that since California has a smog problem, New York needs to have less cars on the road. Many areas of the big banks had great years and did very well, but that was outshined by the massive losses that other areas incurred. Is it fair to penalize those that did well at their jobs because others didn’t? Obviously, everyone’s bonuses took a hit, but how much can you penalize someone for having a better year than last year, even if another group didn’t?
And finally, and this is the big one, most of the compensation on Wall Street comes from bonuses. The only reason people care is because it is called a bonus and not just salary. Most people view their bonuses as a year-end thing, maybe 5%-10% of their salary, which is a nice boost at the end of the year. These people also work 50 hour weeks and take their vacation days. Wall Street base salaries are fairly (to some degree) consistent with salaries in other jobs, but this is misleading. For starters, these people are smarter and work harder than people in most other professions and they have skills that are in demand. So…we have people who work more hours at harder jobs doing things that are harder to do and using skills that are rarer but they are making the same money in base salary as people in other professions? Bullsh*. Bonus has a very different meaning in Finance – it is an expected addition to your salary to match your total compensation to your effort and results. This is not a year-end gift, this is a reflection of your work.
People off Wall Street should be pushing for a move the other way – all compensation is bonuses, no salaries. Salaries allow for mediocrity because of their guarantees, while bonuses push people to achieve greatness. If everyone’s compensation was only their bonus, they would have to work harder and do more to make sure that they got what they deserved. Sure, there would be some outlandish bonuses (the analyst who works the 5500 hour year might earn close to $200k) but there would also be more disincentive to not fail (if that makes sense) and a greater overall result.
CAPITAL INFUSION
Two Thoughts:
Just Me: While its true that maybe fianciers might not make the best people in charge of an assembly line, couldn’t the reverse also be true. Namely, that Stan the Man, who worked his way up from the assembly lines at GM, ran a financial institution… errm, tried to run a financial institution… errr… well, you get my idea.
Anal_yst: I 50% agree with you. there are two reasons wall street can compensate better than other institutions, and it all comes down to Lack of Transparency, both in seeing how much someone makes (I have a few friends that work for the Fed and if they made mid-6 figures I am sure it would end up on sixty minutes and such), and also a Lack of Transparency in what value PE, IB, and investment managers provide. Even on the retail side where there is some transparency, I dont think people really understand. Compare that to a pizza mogul. If a pizza mogul tried to charge outlandish fees ala James Simons, they wouldnt be making too many pizzas.
And because of that, you cant compensate bright people as well as you can in wall street.
Of course you all knew this already, so its nothing new.
Lastly, I apologize for the run-on sentences… My brain is already full for today.
hah yeah right again, like most IBs could be anything but effective doorstops at a decent hedge fund.
when I set out the comp for VPs and associates in my group, I am interested in only one thing – did they facilitate my senior bankers getting a deal done. a lot of things go into this, but most assuredly not being a smart investor.
Not a Citi employee but hearing a rumor that all Citi bonuses paid in equity this year. Tell the district manager at Arby’s you are gonna pay him in Big Beef and Cheddar roast beef and see how he reacts.
Super Anon, have you ever hired a first year M&A associate? you tell me what skills they have.
When hiring MBAs into our group here’s what we look for: the most motivated (and this usually means the most greedy) candidates who we know we can work to the bone and they won’t bitch about how smart they are and how they should be working shorter hours.
Come to think about it, we hire guys like init4th$. If you are willing to just shill for your boss you will probably end up in management.
When I find out who you are; you’re fired. Start packing your $hit.
@ 10:08:
While you do make some valid points, such as the fact that many banks doing badly is not a reason for the individuals who put in the hours and effort to be penalized.
However, I have to take issue with your assertion that people in finance work harder and are smarter than people in less-compensated professions. I worked in IB and I must tell you that most of the intellects I encountered were mediocre at best. The only thing that differentiates bankers from the rest is their ability and willingness to do painfully dull, immaterial work for ridiculous periods of time just so they can be well- compensated. There are millions of people out there that are exponentially more intelligent than bankers and perform work that they are passionate about and that actually benefits society, yet the compensation just isn’t there.
In contrast to Lumbergh up there, the fact that banks are doing badly IS a reason for the individuals to be penalized. Who else do you penalize. These highly levered businesses exist for the benefit of shareholders not for the employees. They should be paid only what is necessary to keep them around to benefit the owners of the company. Look if your salary gets cut to $750k from $1 million you have nothing to complain about if your firm is hemoraging money. In corporate america, you just get fired. Peak salaries are so high because it accounts for the cyclical nature of the business.
10:38-
You completely missed the point in regards to individual penalties…not to mention you act like people don’t get fired on Wall Street.
if you are gonna start hacking at pay on the street their is a much bigger problem in the pay structure of MLB and NBA and NFL. The corrolary is -generate a lot of money (win games) – you get a share of that money / lose a lot of money(lose games) get fired. BAM
Regulating Wall Street compensation is a bad idea, but that doesn’t mean that Wall Street has a sensible compensation system.
I think the moaning over Wall Street salaries has less to do with envy or socialism and more to do with fatigue from Wall Street’s tendency to periodically wreck the economy through its short-sightedness.
Speaking as an employee of a Midwestern commercial real estate lender, we don’t enjoy watching the market grind to a halt because a bunch of Wall Street jackasses created CDO’s and SIV’s and whatnot out of thin air in order to maximize short-term profits at the expense of the broader financial markets. Then (surprise) they eventually had to admit that CDOs and SIVs have no value and will never be issued again. So it’s not envy or Marxism; it’s anger that the securitization market has frozen for six months because the geniuses in New York screwed up the market (again).
From my POV, the average Wall Street guy’s POV is that it’s no big deal because even when they paralyze entire markets for months at a time, his bonus only drops 3%. A few unlucky people get laid off, but things are good for most Wall Streeters even when they screw up tremendously. And of course the CEOs get extremely well-rewarded no matter what happens.
Wage controls and/or regulation are obvious non-starters, but let’s not pretend that the system might need some tweaking in order to discourage the kind of nonsense we’ve all watched the past few months.
CRE banker,
I’m sure you weren’t complaining the last few years when those crazy wall street concoctions were helping you get more deals done.
I for one am surprised that for corporate business at least (capital raising, M&A) the entry of lots of new competitors in the form of the old commercial banks hasn’t led to declining margins and therefore a decline in comp. And please, spare me the rant that BOA, JPM, et al are no match for the BBs. After a structure gets invented, usually by a BB, its not that difficult to duplicate. Business then gets directed to whatever firm is ready to put up capital – participate in a revolver, bridge an M&A deal – so the universal banks actually have an advantage.
@10:38 Peak salaries are high cause of the cyclical nature is only half the story. More important is the nature on wall street of the principal/agent relationship. Earn a profit and the worker (agent) gets to share it with the principals (shareholders). Losses though are borne entirely by the principals. At worst, the agent looses his job. This is the same at most public firms, where there is in fact a lot of incentive comp, but the difference on wall st is the oversized degree to which profits accrue to the agents. This kind of heads I win big and tails you loose mentality makes for outsized risk taking.
@10:44 Of course people get fired. Last cycle I had to personally lay off most of my group (and no not telecom or internet either). None of them thought they were so smart that could just leave when all the business dried up and we started cutting bonuses however. They were pretty happy to still have jobs even when taking million dollar pay cuts.
Let’s not get angry at all banks. Key for example doesn’t pay large bonuses. No need getting mad at them.
@11:17 you are right about that, its why most of us got into this business in the first place.
Let’s not get angry at all banks. Key for example doesn’t pay large bonuses. No need getting mad at them.
Let’s not get angry at all banks. Key for example doesn’t pay large bonuses. No need getting mad at them.
But Key doesn’t need to… they benchmark their salaries against other economics and finance majors that work at non-profits to make sure they pay competitively
Keybank also uses fear and scare tactics to make sure their analysts don’t get any crazy ideas, like leaving for another bank. And if somehow there’s a security breach and someone leaves, non-disclosure agreements are watertight. If you want details about Joes Pizza Shack acquiring Mario’s Family Style Pizzeria, you’ll have to do it over my dead body.
So according to the Wall Street guys it would be OK that every company/ industry in the world switched over to a compensation based model where half the profits were reserved for employee bonuses?
I get the feeling that there would be alot less cash/ stock/ debt for deals if this was the case.
Wall Street is overpaid.
Hello. Just have to give another perspective here. (Having worked a bit on Wall Street, I am privy to such sites as this one, and in times of massive layoffs I scope them out.)
Investment bankers work very, very hard. I don’t know anyone whose spouse works so many hours and is subject to so many demands. The day that the financial incentive is removed, and I am sure I speak for many bankers’ families here, Daddy will tossing that blackberry in the garbage to do something more mellow.
My husband, like so many other very talented and hard-working high finance professionals, earns every cent. What kind of “work/life balance”, third-rate schleps would the bulge bracket get if they didn’t pay for the best?
Okay, I know I am going to get ridiculed here for standing by my man, but I don’t care.
You were overpaid.
@12:10 news flash: In this day and age, everyone at the professional level works very very hard. Accounting, advertising, media, corporate. Long hours, chained to your blackberry, difficult travel, last minute schedule changes. We’re all expected to deliver.
I agree with Anon. There is no need to get mad at us. For example, 2 years ago in the midst one of the hottest M&A booms ever we didn’t even pay some of our analysts bonuses. I agree that they are overpaid which is why they won’t be getting a bonus this year either.
i see MBI has 6 buy/outperform, 5 hold and … 0 sell ratings!! gooood job ANALYSTS
I’m no “Chomskyite”, no “commie bastard”, proponent of a “planned” economy, etc. But I am critical of the way in which some on Wall St. (and CT and elsewhere) are compensated. And I mean precisely that. My criticism is directed not at those collecting the compensation, nor at the extent to which they are compensated, nor at the activities for which they are paid. I believe the mechanism by which they are compensated is flawed, creating powerful incentives that are misaligned with those of the economic risk takers on whose behalf these clever gurus of finance ostensibly operate. It is this misalignment (and the inefficiency it creates) that irks me.
Oh, and by “they” I mean traders, hedgies, PE managers (and the like) who are compensated in clique call options for which they get to choose the underlying. I don’t want to conflate all financial professionals, just as I would not appreciate being grouped with those whose criticisms are tinged with cries for “equitable” compensation (i.e. socialists).
@12:10 And as for the talent part, I’ll bet that involves simply putting his pretty face and square jaw between his client and a deal. While moving in glamorous circles and eating and sleeping in the best places. No heavy lifting, difficult analyses, no committment of his own capital. That’s why the threat of him chucking his bb to spend more time wtih you and the kids rings totally false.
12:20-
“analyst” doesn’t necessarily, in fact rarely ever, mean that one publishes sell-side research. Stop playing on the computer and go back to flipping your burgers.
I understand that pay can be volatile, believe me. But if you take away the potential for huge payout, the top guys won’t show up.
Having worked at Big 4 and law firms, those people work very hard. A lot of people do. But it’s not the same as Wall Street. Nothing gives incentive to jump out of bed and attack your work like the POSSIBILITY of getting a huge payout. You need the chance of the upside, that’s all I am saying. Capitalism really does work… money is the best motivator. I have to admit, it surprised me how powerful it was as well. At what price do you give up your family life, social life, time for hobbies? It costs money to give that stuff up. In other jobs, you really can take a day off when you get sick or your wife needs you; not the case for many bankers/traders.
P.S. — Anonymous, I believe that there is a really good chance the KBCM Comp Cmte is referring to banking analysts, not research analysts. 22-year-old kids don’t give those ratings; they make powerpoint presentations for their bosses.
Damn Group Heads and real Firers on the site??????
Business must be really bad!!!!!!!
There’s a pretty common theme running throughout these comments – the ones who aren’t and have never been on The Street are trying to tell us who are/have been on The Street that we’re overpaid.
There’s a name for that – it’s called “playa hatin”.
If any of you low six figures schleps needs a loan let me know you poor, poor bastards.
Bonus payments are a bet.
You pay the “premium” hoping said banker will bring in more than your premium payment over time. Basically if you dont cover your bonus in revenues or a multiple of it, you are gone in 2-3 yrs.
All parties know this going in.
Crying about bonuses is akin to you calling up your insurance company and saying I would like a refund of my insurance premium because my house didnt burn down this year.
The fact that Anonymous would run himself ragged, attempting econometric analysis and closing deals, for the “wow” factor of hanging out at a Ritz Carlton underscores my point… you would only get third-rate schleps if you didn’t have large cash incentives.:-)
12:24 – conceded that my comment belonged in the earlier thread about the sellside more than this one. but how about it? those $40-60 pt’s were undoubtedly the product of very sophisticated granular analysis
eh, you cant do granular analysis on a monoline, jackass
Yes, I did not used to read the site but the Tobias story caught my attention and yes, business is REALLY BAD
I’m calling BS on all these self-proclaimed Group Heads on this thread. If you’re really perusing DB, maybe you should go back to work and figure out a way to save our f-ing jobs. A$$holes.
Okay, we need a story and a comment section for actual layoffs. A lot of people got let go this week and I bet everyone wants the dish and rumors.
@12:39 I would put it another way. Those of us not directly on “the street” (but probably here cuase we’re customers or in some other way related and therefore knowledgable) are not simply telling you you’re overpaid. We’re saying that the notion that you are earing and truly deserve more because you work faster, harder and smarter is simply false, despite all the protestations, including those most eloquently posted by Banker Wife. No one is saying that you’re slackers, but many many people work as hard as you do, under equally stressful conditions and take home far less in the way of rewards. You’re simply the beneficiaries of a weird system that skews the risk reward table. I admit, this makes me a little envious, but that doesn’t make my observations any less accurate.
The only people who work as long are some doctors, and also the lawyers we bitchslap around and make them stay at work until 4am waiting for documents we finish with at 3am.
You find me the 30yo marketing VP or IT dude working 100+ hour weeks and I will show you a guy who is lying to you about how much he works so that he can have time to sneak off with his secretary
The bonus $$$ these people receive is outright ridiculous, and a bit disgusting.
If they want to make that kind of money so bad (and who doest), they should just take their salary money and invest it since they are “so good” at what they do. They have the “brains” and resources to it shouldn’t be that hard, right? RIGHT!?!?
I have a feeling bud that since your face is on DB at 2:10, the only work you do at midnight is wait for the graphics lab to deliver books, so you can hand them off in the AM to an MD.
scuse me… the comment at 2:12 was directed at 2:04
While we are at discerning the “fairness” of why different people/entities get paid more, let’s go through the entire world economic system, too. Fairness is an arbitrary concept.
@ 1:23 – apparently
@ 1:23 – apparently
@2:12 damn right i do that shit. i’m not a brilliant investor and i’m not a shrewd trader but there is a demand for what i do and i’m filling it. i made the choice to work long hours in exchange for obscene pay. if you didn’t make the same choice, you want to work 40 hours a week and take home a 5 digit salary, maybe 6 by the time you retire, that’s fine by me. but quit all your jealous bitching if you are unhappy with the choice you made, you either play the game or you watch from the sidelines.
If you look at total compensation relative to hours, IB people are not overpaid at all. An analyst who gets $120k in total comp and works 90 hour weeks for the year (~4700 hours) will get $25 an hour. Is that really so excessive?
If bankers get smaller bonuses they’ll just work less hours. Less hours means less money for the banks. Do you see where I’m going with this?
LOL right. and all the VPs making a couple mil? what is your plan for them? dont kid yourself analysts are not the ones driving 50% payout ratio
In stepping over each other in order to get dibs on who works the longest hours, everyone here is missing the forest for the trees. People are compensated (at least in theory) in proportion to the rewards that they bring to their firms. There are traders and hedgies who work 40 hour weeks (very stressful, but nevertheless 40 hours) that earn a ton. And people in salt mines that work 120 hours and don’t.
Lets take it as a given that an IBanker works long hours and takes home real money, the result of bringing in lots of revenue for his firm. The question then is are the consumers of his talents (the clients paying the fees, spreads, whatever) getting value. In the case of hedgies, investment managers yes, because the results are so easy to measure in black and white. I suspect though in most other areas no, and that the value of whats being sold is largely smoke and mirrors. Under the circumstances, the value of the banker to the firm is to convince customers to pay so much for so little. Those are the folks being called brilliant or talented bankers. The fact that they work long hours at this is just part of the mystique. And the system is such that these people are rewarded very well – as they should be, since theyre bringing in the big bucks. This will continue until the customers demand better value for their money.
“No one is saying that you’re slackers, but many many people work as hard as you do, under equally stressful conditions and take home far less in the way of rewards.”
posted by anonymous
Yeah, they are called KeyBank analysts!!!!!! (not the research analysts)
What’s with all the angry KeyBank kids on here? It’s all about “work/life balance”. Don’t you know we have a nap room?
What people don’t realize is that bankers, with their egregious and totally unwarranted salaries and bonuses, help support the local economy. I myself have supported several young Eastern European, Brazilian, and Asian “orphans” near Times Square.
Seriously, Key is the example of the ultimate meritocracy. Once, they promoted an admin straight to associate in the syndications group. Obviously a rare event, she was the best of the BEST. This addition to the group put Key squarely at the number 16 spot in the league tables. As a result, they gave her some additional responsibilities – namely, telling everyone within earshot that she was a SENIOR Associate, and driving around in her new 3-Series BMW.
“I admit, this makes me a little envious, but that doesn’t make my observations any less accurate. ”
posted by some self proclaimed genius
Your observations aren’t wrong but your analysis is similiar to what I would expect from certain SENIOR Associates.
“There are traders and hedgies who work 40 hour weeks (very stressful, but nevertheless 40 hours) that earn a ton. ”
Who? Where? Seriously, is this true? I would really like to know. Even 50 hours. Name one firm where the average week is less than 50 hours and comp is more than $500k.
“And people in salt mines that work 120 hours and don’t.”
Not in the U.S. they don’t.
“Who? Where? Seriously, is this true? I would really like to know. Even 50 hours. Name one firm where the average week is less than 50 hours and comp is more than $500k. ”
Posted by: Anonymous | January 18, 2008 04:57 PM
SunTrust.
Thanks Blue Room. Can you give me a location and/or business?
50 hours is 7:30 to 5:30. Give or take a few, that about what most sales and trading guys I know work.
and I might add, if they’re there past 5:30 its to bs, or maybe help the ops guys with a complicated ticket or two
Uh…yeah. I guess I got a little over-excited about the idea of working 8-5. That’s only 45 hours, not 50. The extra hour makes a big difference. Is anybody working 8-5? On a typical day?
We don’t pay our analysts $hit
Isn’t it interesting that people who were screaming for the Federal Reserve to come to Wall Street’s rescue a few months ago are now once again trumpeting the benefits of unfettered free markets?
But the real point is that paying your people more when your revenues are shrinking is not a sustainable business model. The compensation structure will have to change – not for moral reasons, but for self-preservation.
Oh. Give me a fucking break.
Evil Planning. Bugaboo Government.
What a terrible idea, government planning.
Governments should never plan.
Actually electing people to think
and make plans and decisions and laws for our society is an awful idea.
Governments make mistakes. Governments need checks and balances. It behooves us to think hard about government.s It’s ridiculous to argue
for abolishing all government, or abolishing all government role in the economy. It’s naive and
simplistic and unrealistic and most importantly a very bad idea.
If finance people are stealing or if sophisticated people are bamboozling unsophisticated ones, of course it should be illegal.
Whackadoo, blinders-on, finance types.
FT this weekend, Thain talks about record bonuses, yet ML lost money and is having to raise capital. Most businesses had record profits but a few had huge losses. What we’ve been saying here – make money for the firm and you get rewarded grandly, loose money and the loss is the firm’s. A lopsided comp structure that’s good for the employees, bad for the shareholders and therefore not sustainable, given that the shareholders are getting very cranky. So said Thain.
If open market conditions permit bankers to make a killing, then that is fair. However, if their bank has to make write downs as a result of their work, then this lack of contribution (or in this case, loss) should be reflected in the banker’s compensation. However, what is currently happening is that the Federal Reserve is pumping money into devalued bonds and lowering interest rates in order to supposedly save the market, but effectively also save these banks at the same time. Bankers will now undeservingly continue to take home large bonuses. Perhaps they deserved huge bonuses before, but if their bank should have gone bankrupt had the Fed not come to the rescue, then they don’t deserve a bonus now. This is not capitalism; this is the result of an arbitrary, controlled, and arguably corrupt closed-market system (of course the Fed is independent of congress, but the board is a government agency and it has government-ordained control over the supply of our national currency). Unfortunately, the guy flipping burgers is making up the difference in the deflated value of his savings and constant salary. The conclusion: by going from the top where the Fed can come in and significantly alter “open market conditions,” bankers / hedge fund managers and their friends at the Federal Reserve have managed to continue funding their Manhattan penthouse suites, expensive sushi dinners, and $15,000 concert tickets on the savings and salaries of the middle / lower class American.
You can’t blame bankers for taking advantage of the situation; if the opportunity for huge compensation is there, any wise person should take it. But that doesn’t make it fair.
Perhaps reverting to the gold standard or another asset backed standard is the answer to this inefficiency.
It will make all of you who hate to see people make money very glad to know that Citi has fired >10% of “evil bankers and traders” (that’s your take) as of just this past week. The layoffs were not restricted to the part of the firm that lost money — not by a longshot. These people generated value this year but had to be let go. Many others were demoted and management will get up to 90% restricted stock (which is like magic beans) for pay. I know that none of you know a hoot about finance, but that is not a cash payout — not even close. It’s an asset IF the employee hangs out for years, so it just makes it so that the firm has you by the balls.
The layoffs were 2 weeks before bonuses, so the people worked all year and generated revenue for the firm — completely unrelated to CDOs, MBS or anything like that — and were let go. I am talking about investment bankers in all groups here that generated value.
Furthermore, if C, MER and all of the other firms do not pay their top performers this year, then those people will go and work elsewhere, at banks that are not suffering as much. It would be a brain drain, and no, the top people are not easily replaceable. They top people work harder, faster and smarter than any of you haters could even imagine working. Those top people will help pull these banks through, but for a price.
And then C and MER will have even worse problems, because the areas that are making money are now super important to keeping the lights on this year.
No one here seems to be angry at the ratings agencies. That tells me that 1) you do not really understand what is going on, and 2) you really just want to get mad as some sort of class warfare reaction to Wall Street.
The ratings agency people, for the most part, do not get rich. Why is it that they rated some of this paper as if it was a top quality corporate bond, when they knew that a bunch of homeowners were not as reliable as, say, IBM? Doesn’t that piss you people off? Probably not, because you only want to get pissed at people who make money, because you hate people who make money.
Go bang on the door of the ratings agencies and tell them your outrage.
@2:35 We know plenty about finance. The payment in restricted stock is aligning the future interests of these people with those of the shareholders. Not a bad thing at this juncture, I would say. Maybe wouldn’t have worked a few years ago because, as you say, you need to pay certain talented people in order to keep them. In this market though, no one’s going anywhere.
Just a thought though re those top people. If they were so good would they really be at firms the calibre of C and MER in the first place? Which I would characterize as good but a little too bureaucratic to be great.
3:28 — You believe everything you read on Bloomberg/CNBC.
Top people generated so much value this year it would make your head spin — but the trading losses made by other people managed to offset it. It sucks incredibly badly to have the best year of your career and have some dipshit’s trading losses wipe that out and then fire half your team.
I agree with Blame the Ratings Agencies that your outrage has as much or more to do with the fact that you are a socialist than the notion that you are a truth-seeking shareholder trying to place the blame.
@2:41 Its not quite as simple as a bunch of homeowners vs. IBM. These are complex structured products, with different tranches, carrying different levels of risk. The people that did the structuring got paid big and still f***ed up. That’s why everyone is mad at them. True, the rating agencies failed to detect this till it was too late but the ratings are just another input, to be looked at with a bit of scepticism and considered only as part of the overall analysis.
2:41 – thank you for further nuancing my point (sincerely). just trying to break it down for these communists that these ratings agencies have some fault and that these haters just hate people who make money.
Do you think that ratings will become irrelevant in the future? Interesting topic…
@3:33 I have no outrage and I’m not a socialist but rather an institutional equities manager. I just want you to understand the logic of having the good performers share in the pain caused to the overall firm, thereby softening the blow that would otherwise be borne totally by the shareholders. Its a careful dance, that compensation people spend a lot of time on, cause as you point out, get it wrong and people walk. That said though, there is no way to justify having wins accrue to the winning employees and losses to the shareholders. A view that the market is coming around to, with restricted stock, and other programs that align owners and employees.
> I can imagine how it sucks to see success disappear before your eyes after busting your hump, but realistically, who should cover the losses? Wall Street is a high stakes game that can get brutal at times, which is why stuff like this happens. The trick is to ride out the lows.
3:45 — thank you
3:58 — Regarding:
“Wall Street is a high stakes game that can get brutal at times, which is why stuff like this happens.”
And that underscores why sometimes bankers and traders get paid what you think is an obscene sum. It is not an out of whack if it is a risk-adjusted return. You take on the risk of busting your hump all year and then getting fired or getting nothing OR getting a fat check. Makes complete sense.
3:58 — apologies if you are not the socialist who posted before but rather a common sensical wall street fellow