http://www.washingtonpost.com/wp-dyn/content/article/2009/10/23/AR2009102302414.html By Roy C. Smith Sunday, October 25, 2009 The financial crisis is now more than a year old, and Americans are still angry -- angry that the economy tanked, angry that they're out of work. But mostly, people seem outraged by Wall Street bonuses. Seeking to assuage that ire, the Obama administration's "compensation czar," Kenneth Feinberg, last week announced plans to cut the pay of top executives at the seven companies receiving federal support through the Troubled Assets Relief Program. He has suggested that the cuts, which slashed pay for top executives by an average of 50 percent, should be a model for the rest of Wall Street and corporate America. In outlining the change, Feinberg has had to grapple with several misconceptions about Wall Street bonuses -- myths that have circulated since the beginning of the crisis. 1. The Wall Street bonus culture led to the financial crisis. There is absolutely no evidence to support this. The crisis was caused by a combination of lax monetary policy, loose regulation across the entire financial sector, yield-chasing by institutional investors craving decent returns in a weak market and a vast global banking industry that turbocharged the whole process. The bonus system, which has always been part of the securities industry's DNA, may have encouraged risk-taking by major banks, but it also encouraged risk management and other disciplined forms of corporate governance that are supposed to accompany the incentives. In a number of cases, however, these risk-management systems were totally inadequate in the face of the market tsunami that enveloped mortgage-backed securities after home prices began to drop in 2006. The storm carried away several firms, but others performed well despite the difficulties. It wasn't the bonuses that brought everything down; it was a combination of many things, some sloppy or foolish, and most far more important than bonus checks. 2. Wall Street is totally indifferent to Main Street. For people in the rest of the country to get past their bonus rage, they will have to accept that Wall Street professionals are not out to get them and that they actually do some good for the world. "Wall Street" now represents a global capital market that in 2007 comprised $145 trillion in market value of stocks and bonds, less than half of which was located in the United States. This is a sophisticated marketplace in which firms compete aggressively to secure trade orders and assignments from large corporations and financial institutions. The intense competition for virtually every trade lowers the cost of capital and widens access to financial markets for companies, institutions and governments all over the world. Collectively speaking, Main Street is Wall Street's client and generally has been very well taken care of. In this crisis, Wall Street professionals, through carelessness or errors, lost a lot more money than Main Street did, and probably more, proportionately, lost their jobs too. Wall Street didn't benefit from the market declines, and only in the past few months has it recovered some of what it lost. 3. With the job market like it is, Wall Street doesn't need to pay huge bonuses to retain key people. Traders make up much of the top talent on Wall Street, and even now, the best ones who can produce a lot of income are being lured away by big offers from other firms (including foreign banks) trying to displace some of the wounded players in their top ranks. But the real competition for these hot shots is among hedge funds, or private equity shops, which until recently could afford to pay very big bucks to attract savvy experts. The firms can't afford to lose these people, but neither can they afford to lose their other key employees, such as corporate advisers, risk managers and thousands of support people. There is a pricey market for these valuable workers, too, created by the forces of supply and demand. Even injured firms must stay competitive or risk losing more than they already have. 4. Wall Street will never restrict its own pay. The major Wall Street firms are all publicly owned companies with boards of directors subject to fiduciary duties and law. These boards have compensation committees that must justify their actions; they're subject to public scrutiny and potential litigation. Mostly, Wall Street compensation is performance based, and most of it is paid in stock subject to market vicissitudes, so employees have long-term stakes in the firms they work for. Wall Street directors believe their compensation system, developed over many decades, provides the incentives they need to maximize performance for their shareholders. After an op-ed piece in the Financial Times this spring by Lloyd Blankfein, Goldman Sachs's chief executive, Wall Street is working on a set of best practices for executive compensation. Several firms, including Morgan Stanley, Credit Suisse and UBS, have already announced major changes to their practices. These are likely to include "clawbacks," or compensation that has to be returned if events unfold less favorably than anticipated, and more compensation to be paid in stock with long vesting periods. These principles were adopted, more or less, by the Financial Stability Forum of the G-20 at the Pittsburgh summit last month. In addition to these efforts, Wall Street compensation as a percentage of net revenues, historically stuck at around 50 percent, may finally be coming down. JP Morgan Chase's and Goldman Sachs's third-quarter earnings reports both indicated blowout results but much lower compensation ratios -- 38 and 43 percent, respectively. Attempts at this type of reform have backslid in the past, but this time the boards of the firms appear to be committing themselves publicly in a forceful way that may be hard to undo. 5. Wall Street pay is so out of line, only the government can fix it. There is no reason to think that the government could devise a better compensation system for Wall Street, even if it could leave out the politics of its intervention (which it cannot). Certainly Feinberg's actions, though no doubt well intended, are not going to improve either the government's chances of getting its money back or the prospects of repairing these damaged companies. Because of his recommendations, Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements. These firms need a lot of rebuilding to recover from their losses, but without fully competitive access to good people, they will be handicapped in doing so. The top five Wall Street firms are now all bank holding companies, three of which are doing fine. They are all subject to extensive regulation by the Federal Reserve, which also announced new compensation guidelines. Tighter rules for the largest banks are expected soon. Wall Street bonuses didn't cause the current crisis, and reining them in dramatically isn't a cure-all. It's time to give it a rest. Roy C. Smith is a professor of finance at New York University. His book "Paper Fortunes: Modern Wall Street; Where It's Been and Where It's Going," is forthcoming in January. He wrote on executive compensation for Outlook in January 2007.
rubibond007, my "beef" is not with you, but my beef is with the author of the article you posted... Ummm, total crock of sh!t...here let me rebut the dingleberry author of the articles' premises... 1.) The author is technically correct...but, greed and self centered ambition were what caused the madness. A-hole "mortgage brokers" "lent" to unworthy customers...only to sell the "mortgages" to jackass banks on Wall Street...who "securitized" these mortgages and sold them to the world. Yup, the loan consumer thought to him/her self, "I 'deserve' a house...so, I will buy one at 'any' cost'" - even though they were borrowing...and as far back as Shakespear and the Bible they were admonished to "Neither a borrower nor a lender be." 2.) Ummm, no - "back then" traders in "CDO/MBS" generally had no care about the crap they traded...so long as it gave them cash. 3.) To the author of the article (or should I say pantywaste) Show me the advertisements for companies that need $2,000,000.00 employees? Author - go copulate yourself!!! These fu(kers LOST money...not made profit!!! We do NOT need their ilk and neither do the banks!!! Author - remove their phallus from your mouth and see reality! We could hire ANYBODY to LOSE money!!! Re-hiring jackasses who LOST money will NOT make you money - false assumption! Author, you say, "Oh, but they are making money trading now!" Again, author, go copulate yourself! If the taxpayer had not been forced at gun point to "loan" these banks money (money that was INTENDED to be LOANED) and is now "traded in the markets" to make the banks profitable, then the banks would STILL NOT BE PROFITABLE!!!! To the jackasses who think they deserve huge salaries...yes, I agree, go to a bank or hedge fund who has NOT lived off the taxpayers teet - I include within that lot the hedgies who are "buying" PPIP shit and MBS guaranteed by the gov't! 4.) Again...to the author of the article - "Go copulate yourself - show me one, just fu(king one employment contract that shows that one of these f'ers has to return money, if the company loses money or as a result of their "trading" will lose money!" Ain't gonna happen! (sic) 5.) The author assumes that we are so stupid that we do NOT know that the Wall St. elite and the gov't are in bed together! Hey, jackass author - put up some stats about how much money the Wall Street firms have put out to lobbyists in the last few years...and yes, I do include "off Wall St." companies like Fannie and Freddie - they have spent a ton in lobbying also. Just my thoughts! -gastropod
The function of business school professors nowadays is to explain why anything that Wall St and corrporations does is of benefit to society. e.g. if a company pollutes a river it benefitted the ecosystem because it killed fish that were eating snails etc Business school professors are just sad losers with the dream of a GS board seat in their eyes and who will say ANYTHING in the hope that a GS MD will notice his brown nosing and say, "why, what a stout felllow, I think we should have him on our board!".
You gotta be kidding me.You would have to be one of the animals on animal farm to go from feeling anger at these clowns to a feeling that yes,i like being pissed on from a great height by people who despise us.The arrogance of these bankers absolutely beggars belief.You know what? things better change soon-only they wont,not until people do something. We have just witnessed the greatest financial heist in the history of the world as far as i can see.Can anyone point out something that tops this? Sorry to sound like a conspiracy theorist but you would think we're living out some crazy movie script here. 666? the bear market low. Ok, so they used all our money to reverse the market at 666 and made enough money to carry on with the obscene bonus party thing.They must be laughing their heads off at us.Gives a whole new meaning to laughing all the way to the bank. Bearing in mind that all polititians are bought and paid for,most of the media too,gee,i just can't wait for the next thrilling installment can you?
any time I see an article titled X number of myths about topic Y, I dismiss it an an axe being grinded same as someone 'educating', you on a political topic points of view presented with presuppositions
Washington's Plans May Result in Even Higher Executive Pay.- In 1992, Congress intervened in corporate compensation and messed things up. Now it's the White House's turn. http://online.wsj.com/article/SB10001424052748703573604574491352851002752.html?mod=googlenews_wsj By JONATHAN MACEY.- Executive pay has emerged, once again, as a major issue in Washington. This week Treasury and the Federal Reserve announced new regulations designed to oversee and limit executive pay at thousands of financial institutions. This is deeply ironic, because today's pay woes are the direct result of prior government intervention. In 1992, Congress decided it would use the tax code to "improve" (i.e., reduce) executive compensation in publicly traded companies. Its vehicle was the Budget Reconciliation Act, a key provision of which became Section 162(m) of the Internal Revenue Code. Noting that executive compensation levels had received negative "scrutiny and criticism" from the public, the new law targeted what it called "excessive employee remuneration." It did so by limiting the ability of public companies to deduct executive compensation for its top employees unless the compensation was paid out in a form that Congress found acceptable. Salary was bad. Stock options were tax favored. Specifically, corporations were barred by law from deducting as a normal business expense any salary payments of over $1 million. Stock options, however, qualified for the corporate tax deduction without limitation. Much maligned today, stock options then were said to be "performance based" and therefore exempt from the new tax rules. The new tax law immediately led to a tectonic shift in the way CEOs and other top U.S. executives were paid. Stock and stock options became the dominant feature of executive compensation packages. The impetus for changing the executive compensation laws back then was exactly the same as it is today. Politicians wanted pay lower and wanted to change the executive compensation model to "fix" the risk-taking proclivities of top managers. In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders' interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in "excessive" risk-taking. What they fail to mention is that it was Congress's own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking. Fed Chairman Ben Bernanke asserted this week that "compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability." Mr. Bernanke promised that the government "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system." Other government interference has made the executive compensation problem even worse. A provision in the 1992 tax law required that executives meet certain "objective" performance measures in order to qualify for incentive-based (tax deductible) pay. In the scramble to come up with objective metrics on which to base executive pay, cottage industry "executive compensation consultants" emerged as the most important architects of executive compensation plans. The compensation consultants promised to design pay programs that did things like "drive the right behaviors" by corporate management, which meant assuming more risk to maximize shareholder value. Public companies hired droves of consultants to analyze pay schemes and design pay packages that created incentives to maximize share prices. Consultants came to be viewed as essential to boards of directors that wanted to implement appropriateâand tax qualifiedâperformance measures. The most successful consultants are those who can justify the biggest salary increases for the top executives of the companies that hired them. Researchers at the University of Southern California recently found that the median CEO compensation is $1.5 million in companies not using executive compensation consultants, $3 million in companies that purchase general survey data from such consultants but do not directly retain them, and $4.2 million in companies that retain consultants. Some companies use multiple consultants. The USC study found that the more consultants a company hires, the more it pays its top executives. About one-quarter of Fortune 250 companies hire multiple compensation consultants. Activist investor Carl Icahn summed the situation up well when he recently observed on his Web site that "the use of these compensation consultants, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not." The government also has tried to regulate executive compensation by requiring greater disclosure of the details of compensation plans. Perversely, this too has contributed to an increase in executive pay. How so? No self-respecting board of directors is willing to admit that their company's CEO is below average. So anytime the new disclosures indicate that an executive's pay is below average in any way, a pay increase is ordered. Since the early 1990s, government regulation of executive compensation has encouraged greater share-price volatility and risk-taking by U.S. corporate executives and led directly to higher, rather than lower, levels of executive compensation. Nevertheless, the Obama administration is now seeking an even greater role in overseeing and regulating executive pay. In June, Gene Sperling, a top aid to Treasury Secretary Tim Geithner, told the House Committee on Financial Services that "our goal is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole." This is just what the regulators told us back in 1992. Current proposals will no doubt result in even higher percentages of executive compensation coming from stock and option schemes rather than from salaries. History teaches that the most profound consequences of new compensation regulation will be unintended. It also teaches that as bad as private ordering may have worked in getting executive compensation right, the results of central planning have been even worse. Mr. Macey is a law professor at Yale and a member of the Task Force on Property Rights at Stanford University's Hoover Institution.
Here's my solution: 1. Get rid of all government backing for Wall Street, break up the TBTF firms, separate commercial from investment banking and only guarantee the former, and hold commercial banks' leverage down to 4-1. 2. Wall Street can now pay whatever salaries, bonuses etc. it wants based on revenues they legitimately earn. Welfare queens should NOT be going to sleep at night on a giant pile of government cash.
Wall St would find this plan very unfair and somewhat communistic. A better plan for them would be to impose an extra 20% tax on society, and use the proceeds from that to support current banks. Half of that amount could be used to pay out exec bonuses. Anyone that disagrees with this plan is stupid and hates capitalism.
I do not have an issue with compensation and bonuses in a free market capitalistic non government socialist economy. I have an issue when bonuses are handed out by companies that took bets and lost and then were handed taxpayer dollars. If it was not for this taxpayer money these firms would have been out of business and none of them would have been collecting any bonuses.