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Wednesday, December 26, 2007

No accountability on Wall Street
Posted by Jill | 6:09 AM
I hate January. I hate it because that's when I get my annual review at work. I don't know about you, but my innate paranoia always gives me an (unnecessary) sense of impending doom every year at this time. The review is simply a discussion, because like most people in my department, I'm no longer eligible for performance increases. But I'm always glad when it's over and I can exhale for another year.

Wall Street chief executives have no such worries, because this year has proven that no matter how badly they screw up in running their big brokerage houses, bonuses will always be nice and fat.

Four of the biggest U.S. investment banks -- Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. -- will pay out about $49.6 billion in compensation this year. Of that, bonuses are traditionally estimated to represent 60 percent, or almost $30 billion.

But that might not sit well with investors who held on to investment bank stocks this year -- and watched them plunge by up to 45 percent. Investment houses have been slammed by the credit crisis, and top executives this past week said they've yet to see a bottom.


Goldman Sachs CEO Lloyd Blankfein reportedly is in line for a bonus of up to $70 million this year, as the nation's largest investment bank has largely navigated past any mortgage-related losses. Lehman Brothers' CEO Richard Fuld was granted a $35 million stock bonus for 2007, up 4 percent from last year.

There had been some predictions the increase in bonuses would have been significantly higher. However, layoffs and top managers giving up their bonuses have curtailed that.

For the army of bankers and traders on Wall Street, it remains to be seen what their bonus checks will offer when they're handed out over the next several weeks. Top performers will still see some significant compensation as an incentive to not defect, while underperformers will suffer, executives at the banks said.

"If you were to normalize our business … you would see we had a record year across the whole enterprise," said Morgan Stanley Chief Financial Officer Colm Kelleher.

Morgan Stanley, the second-largest U.S. investment bank, reported compensation rose 18 percent to $16.6 billion from $14 billion a year earlier. This comes after the investment bank reported Wednesday the first quarterly loss in its history amid a $9.4 billion write-down due to the credit crisis.

Bear Stearns, the fifth-biggest securities firm, posted the first loss in its 84-year history yesterday after a $1.9 billion write-down. It reduced compensation this year by 21 percent to $3.4 billion from $4.3 billion in 2006 -- and members of its executive management committee, such as Cayne, won't be collecting year-end bonuses.

"Compensation levels need to be maintained to reflect market levels," said Chief Financial Officer Sam Molinaro.

At Lehman, compensation rose 9.5 percent to $9.5 billion, with bonuses accounting for an estimated $5.7 billion. The firm booked losses last week but managed to offset most of its mortgage write-downs and beat Wall Street expectations. Head count at the investment bank rose by 10 percent this year.

The bankers in the best position this year are at Goldman Sachs.

The nation's largest investment bank said Tuesday it was able to chalk up another record-breaking year with higher investment banking fees and smart bets on mortgage-backed bonds. It beat fourth-quarter projections.

In response, compensation at Goldman rose 20 percent to $20.1 billion. That means roughly $12 billion has been set aside for bonuses.

Still nervously waiting to find out about bonuses are the employees of Merrill Lynch & Co. The nation's largest brokerage won't report fourth-quarter results until next month, and there has been some speculation newly appointed CEO John Thain might shake up the bonus structure.

Thain won't get a year-end bonus since he took the job on Dec. 1 after Merrill Lynch ousted Stanley O'Neal because of significant subprime losses. But he did take home a $15 million cash bonus just for taking the job.

Imagine getting a $15 million signing bonus. Imagine getting a year-end bonus of $35-$70 million, on top of your salary. I don't know about you, but for me a $1000 bonus would seem just dandy, especially in light of that check for over $900 I just wrote last night for our escrow shortage, thanks to those wonderful people in my town who decided that we should be reassessed for property taxes based on peak October 2005 market prices.

I consider us fortunate in the Brilliant household, because we've been able to absorb the price increases for food, fuel oil, eletricity, gasoline, and the ridiculous property taxes that are increased by 8-10% every year in non-reassessment years (and 33% after the reassessment) thanks largely to one-party rule in my town and a structure in which jobs are filled by and contracts given exclusively to friends and cronies of those running the town. I wonder what those laid off by these firms think about these bonuses. I wonder what the Circuit City employees who were laid off and replaced by cheaper workers only to see the company's profits fall even more think about these bonuses. I wonder what those Republican loyalists who have been waiting now for over two decades for "trickle down" economics to "trickle" their bounty onto them think of these bonuses.

If this country were sane, John Edwards would be running away with the Democratic nomination for president, because he's the only one pointing out how these new robber barons are amassing more wealth than they or their children can spend in twenty lifetimes at the same time as the vast majority of Americans are seeing their own prospects and those for their children dwindle. How long are Americans going to cling to their optimism that every generation will do better than the one before when we're drowning in debt? How long are Americans going to regard "moral values" as only applying to sexual behavior, not even questioning a system in which executives can run a company into the ground and be rewarded by a multimillion dollar bonus, or even if they're fired, a multimillion dollar severance package? How long are people going to buy the notion that you can give these people a seat at the policy table and they aren't going to sweep ALL of the chips into their own pile? When does the greed end?


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Anonymous Anonymous said...
Get over it !
Wall Streeet = Greed
Capitalism = Greed

If you can't recognize this, you should be in the produce market not the stock market !

Wall Street has NEVER cared one whit about the average investor, except when a brokerage house is dumping some dog stock it underwrote to the dopey investing public ...

In case you haven't noticed, the average investor, (you know, jerks that listen to Cramer for example), have never and will never mean anything to the greed driven thieves Wall Street has always produced and nurtured ...

If you can deal with that, and it sounds like you can't, but if you can deal, only then can you play the game !

Blogger Jayhawk said...
...I'm no longer eligible for performance increases.

I know this does not actually pertain to your post, and is a bit trivial to boot, but it raises one of several issues I've had for years with our HOA Board. I was unable to overcome it even when I was a member of the Board.

We hire our own landscapers and the Board thinks they should get a raise every year. Some of them have been with us for many years and are well above the top of the range for the prevailing wage for that job description, so we are paying more for a laborer than that guy gould get as a supervisor anywhere else. If he worked for a landscape company he would either become a supervisor or his pay would have topped out at well under what we are paying him.

I favor paying a worker what he is worth. But I also believe in the fiduciary responsibility that comes with having been selected by your peer group as a financial manager. To go a little above prevailing wage would be fine with me, but...

Blogger Kenna said...
I love how obnoxious commenters are usually anonymous. No doubt Commenter # 1 is a slimy bottom-feeding subprime mortgage hawker who preyed on his fellow citizens over the past few years. He doesn't give a rat's ass about the insanity of it all because he got his.

Anonymous Anonymous said...
I work on Wall Street, but not as an investment banker. (I do desktop publishing to support them.) Since I began in the industry twelve years ago, with one of the four banks highlighted in the article, I have seen the vast majority of the jobs move from the banks to contractors (for one of whom I now work, at a bank not mentioned in the article). As a direct consequence, pay rates have dropped (or in many cases been frozen for years, resulting in a de facto rate drop when the cost of living is factored in), benefits degraded (when the bank is your employer, you get the equivalent benefits as a banker; when some third party is the boss, you take what there is), and in some cases, folks lose their jobs in the transition between bank-owned and third-party employment. (I won't even mention bonuses, which contractors rarely pay, but banks did.) Not once in those twelve years can I remember reports of the bankers where I worked missing bonuses or taking pay cuts. But if you're wondering how they manage, even in the lean years (not even mentioning the accounting and writedowns), here's a bit of data on methods.