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In Defense of Wall Street Bonuses

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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]


Occupy Wall Street Defense Specialist: "Try In Vain to Sprint Away Alone" At Your Own Risk

Remember Occupy Wall Street? After being evicted from its Zuccotti Park global headquarters in Lower Manhattan last year the group seemed to loose a bit of steam but has vowed a resurgence, starting with a May 1 "spring offensive." Protests have been planned in 115 cities where "the financial elite play and plan," including the midtown offices of JPMorgan and Bank of America. Worried your place of business or home might be the target of some uninvited guests and/or a surly gigantic check? Then you might want to get in touch with your fellow prey and start strategizing. Planning for May 1 in New York began in January in a fourth-floor workspace at 16 Beaver St., about two blocks from Wall Street, according to Holmes. The date serves as an international labor day, commemorating a deadly 1886 clash between police and workers in Chicago’s Haymarket Square. The midtown demonstrations will take place from 8 a.m. to 2 p.m., followed by a march from Bryant Park to Union Square and a 4 p.m. rally there, according to an online schedule. Protesters, including labor unions and community groups, have a permit to march from Union Square to lower Manhattan, according to police. Goldman Sachs Group’s headquarters is among financial- district picketing options, Holmes said. Brian McNary, director of global risk at Pinkerton Consulting & Investigations, a subsidiary of Sweden’s Securitas AB works with international financial firms to “identify, map and track” protesters across social media and at their assemblies, he said. The companies gather data “carefully and methodically” to prevent business disruptions. Banks are preparing for Occupy demonstrations at the North Atlantic Treaty Organization’s Chicago summit on May 20 and 21 by sharing information from video surveillance, robots and officers in buildings, giving “a real-time, 360-degree” view, said McNary, who works on the project. Banks cooperating on surveillance are like elk fending off wolves in Yellowstone National Park, he said. While other animals try in vain to sprint away alone, elk survive attacks by forming a ring together, he said. As for what to do in the interim, pre-attack by wolf pack, lock it up. You're not doing anything. You're not teaming up with other elks, you haven't even heard about the demonstrations. What is Occupy Wall Street? Sayeth Mcnary, “When you portray a position ofweakness, it invites attack. [Banks] don’t want to provide the perception that they’re hunkering down behind their bulwarks and putting up big walls.” Wall Street Tracks ‘Wolves’ as May 1 Protests Loom [Bloomberg]

TomasEE [CC BY 3.0], via Wikimedia Commons

Bonus Watch ’17: Wall Street

Big Apple bankers have almost put that financial crisis unpleasantness behind them, paycheck-wise.