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By Shah Gilani
Contributing Editor
Money Morning/The Money Map Report
In a report released last week, New 
York State Comptroller Thomas P. DiNapoli estimated that the securities industry granted its employees $18.4 billion in bonuses – a revelation that President Barack Obama characterized as “shameful.”
Not surprisingly, the audacity of The Street’s greed is far more shameful than people realize, because the total payout was actually much higher than the report found.
What wasn’t widely reported is that the $18.4 billion was only the cash portion of the bonus payout and only accounted for the money paid to securities-industry employees who worked in New York City. In other words, bonuses paid to employees working outside the city weren’t included. The Comptroller’s estimates also didn’t include stock options that have not been exercised, but that could easily increase the value of the bonus-related compensation by as much as 25% to 100%.
Wall Street’s greed precipitated the banking-and-credit crises, leaving taxpayers to foot the bill. Now those same taxpayers are being asked to finance Wall Street’s bonus payouts, which were actually a proximate cause of the crisis. They fueled a culture of greed and avarice, and created incentives for actions that led to the near-collapse of the U.S. banking system.
The Street’s greed, deceit and indifference are not only shameful; each is also a travesty of a mockery of a sham.
Understanding the compensation equation requires a look at more than just the numbers.
Backgrounder on Bonuses
Proxy season is fast-approaching: It’s the time of year when U.S. public companies – in advance of their annual stockholders’ meetings – send out the proxy statements that detail such items as shareholder resolutions and top-executive compensation. The American business press typically uses that as an opportunity to declare open season on executive compensation, running long stories that detail the seemingly huge payouts in cash, bonuses and grants of both restricted stock and stock options.
This year, however, due to the ongoing financial crisis, the executive-pay controversy has been elevated to an even-higher higher level. Companies that accepted government bailout money have still paid out big bonuses, attracting the ire of federal lawmakers and the new U.S. president alike.
Just yesterday (Wednesday), in fact, President Obama announced a salary cap of $500,000 for top executives at companies that receive large amounts of bailout money, calling the step an expression of both fairness and “basic common sense.” [For a detailed report on this executive-payout salary cap posted elsewhere in today’s issue of Money Morning, please click here].
For the past decade, the New York State Comptroller’s office has released estimates of bonuses paid to New York City-based securities industry employees. The $18.4 billion paid out last year represents a 44% decline from the $32.9 billion dispersed in 2007.
However, the decline isn’t as steep as Wall Street would have us believe. First, since New York firms last year cut their payrolls by about 19,200 people, or roughly 10.2%, from the 2007 level of 187,800, the average 2008 bonus of $112,000 was dispersed over fewer employees, meaning the payouts resulted in an actual drop of only 36 %. The average cash bonus in 2007 was $175,186.
These cash bonus figures are averaged. Not everyone gets a bonus and some folks get very large bonuses. A clerk making $35,000 a year is not going to get a $112,000 bonus; however, a trader making a salary of $150,000 might get a bonus of $2 million.
It’s important to remember, too, that while all employees are paid salaries, bonuses make up the bulk of compensation packages for bankers, traders, brokers and managers.
Top-employee salaries typically run between $100,000 and $750,000, but generally fall into the low-six-figure column. At the end of last year, the top executives of Goldman Sachs Group Inc. (GS) decided to forgo any cash, stock or options bonus compensation for 2008, stating that it “was the right thing to do.”
Goldman’s top executives had to make do with their $600,000 salaries. As for the rest of the firm’s employees, it has been reported that they will have to share a paltry 2008 bonus pool that a Goldman spokesman said could total only $2.6 billion. But not to worry: The firm likely will say that none of the $25 billion of Troubled Assets Relief Program (TARP) money it received courtesy of American taxpayers will go for bonuses. Perhaps some Wall Street accountants can explain that to me.
While forgoing 2008 bonus compensation after receiving only a $600,000 salary may seem noble, no one is shedding a tear for the Goldman executives. In 2007, Chief Executive Officer Lloyd C. Blankfein took in $68.5 million; co-presidents Jon Winkelried and Gary D. Cohn each made $67.5 million; and David A. Viniar, the firm’s chief financial officer, made $57.5 million.
A Move to Regulate?
While President Obama called the $18.4 billion bonus pool “shameful,” U.S. Sen. Claire McCaskill, D-MO., was more pointed, stating that “they [just] don’t get it. These people are idiots.”
To make her point, McCaskill cited a report (also carried by Money Morning) stating that executives at 116 banks that got government bailout funds were paid an average of $2.6 million in bonuses. She condemned Citigroup Inc. (C) last week for even considering taking delivery of a $50 million luxury corporate jet after having received a direct government investment of $45 billion, as well as an additional $300 billion in government insurance against losses on its toxic balance sheet. Citigroup demurred, and cancelled delivery of the jet, because of the direct pressure from the U.S. Treasury Department.
McCaskill is not just vocalizing her anger; she has sponsored a bill called the Cap Executive Officer Pay Act. Her bill proposes that any company taking any bailout money from taxpayers limit compensation, for anyone at the recipient firm, to $400,000, which as it turns out is $100,000 less than President Obama is willing to grant executives. McCaskill said she picked $400,000 because that’s the salary paid to the U.S. president, and incidentally is also eight times the median U.S. household income – and which, by the way, may not seem too shabby, unless you’re Goldman’s Blankfein, who made more than that every two days back in 2007.
Sen. McCaskill didn’t want to take away the punchbowl entirely, however; she suggested that once taxpayers receive what a company owes them, the firm is free to pay its executives whatever they want.
The Treasury’s aforementioned TARP initiative requires that senior-executive compensation be subject to “clawback” provisions in the event compensation was based on inaccurate information. But for all the executives who artfully escaped with fat severances and golden parachute deals after bailing out or being pushed out of the companies they helped wreck, there’s no such provision.
Perhaps there should be.
Taxpayers as well as shareholders should be able to claw back compensation from the likes of former Merrill Lynch & Co. Inc. CEO E. Stanley “Stan” O’Neal, who retired after announcing losses of $8 billion (an amount that ballooned to more than $27 billion, by the end of last year), and took a pay deal worth more than $161 million.
Then there’s Citigroup boss Chuck Prince, who tiptoed off with a $38 million “bonus” after announcing billions in losses and steering the bank to the brink of insolvency.
And of course there’s Martin Sullivan, the former CEO of insurance giant American International Group Inc. (AIG), which needed $85 billion in cash infusions and another $45 billion in backstopping by U.S. taxpayers. Sullivan, who made $39.6 million in his last three years at the firm’s helm, ambled away in June with a severance package of $47 million, regulatory filings state. Sullivan got a $15 million severance, and a $4 million bonus for the portion of the year he actually worked. According to the filings, he also got to keep already-outstanding stock and long-term cash awards worth about $28 million.
In the final analysis, the fundamental question that needs to be addressed is a straightforward: Are Wall Street executives worth what they are paid, given the risks they take with money that actually belongs to shareholders (and, now, the U.S. taxpayer)?
The short answer – and I say this as a formerly well paid Wall Street executive – is “no.” The prevailing school of thought, as espoused by those who earn such outsized compensation packages, those who are paid to do the bidding of the well-heeled and greedy, and those who aspire to the mantle of “Master of the Universe,” is: “We want the smartest people running these firms and in order to get them you have to compensate them or they will go elsewhere.”
That is the biggest sales job on all of Wall Street. No one is that smart.
There is not any value added by the majority of highly paid Wall Street bankers and traders to the economy at large. The discernable value they add is actually the value of their compensation as it becomes an element of gross domestic product (GDP). The same money would better serve the economy and GDP if a large portion of it was channeled back into shareholder value, dividends or simply resided as accumulated capital on the balance sheets of banks that would have cheaper better capital to make lower cost loans.
Now, that’s an idea whose time has come.
America should always be diligent about shepherding free markets, domestically and internationally, and compensation should not be regulated by any government. There are, however, limits that need to be applied to compensation if public companies are allowed to leverage their shareholders’ balance sheets and create the systemic risk that threatens us all. There were no regulators shepherding the system, which is a travesty. There were no shareholder advocates taking down greedy and profligate boards of directors, which is a mockery. And, if inordinate greed continues to undermine free markets and our capitalist system, then everything Wall Street stands for will be a sham.
[Editor's Note: As the controversy over executive compensation on Wall Street underscores, the damage wrought by the ongoing financial crisis is both widespread and deep. After all, why else would the federal government push to limit how much the top “rainmakers” of a Wall Street firm earn each year? Clearly, it will take time to make the needed changes, meaning that uncertainty will remain the watchword for years to come. And that means investment profits will be tough to come by.
But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat - right? You'd know what to anticipate, could craft a profit strategy designed to specifically capitalize on those market shifts … and could then just sit back, watching as the profits roll in from the very marketplace events you predicted.
To make this scenario a profitable reality, however, you need an experienced navigator to guide you. R. Shah Gilani - a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – is just that guide. Gilani has identified five new financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani uses these “trigger events," as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report. Also, check out Gilani’s first-person sidebar on executive compensation, located elsewhere in today’s issue of Money Morning. Just click here to access that other story.]
News and Related Story Links:
- Money Morning News Analysis:
Top Citi Executives to Forgo 2008 Bonuses, Reports State. - Money Morning Banking Bailout:
Banks That Got $188 Billion in Bailout Money This Year Paid Out $1.6 Billion to Top Execs Last Year. - Bloomberg News:
Obama and Congress Seek to Limit Pay at Bailed-Out Companies.
- Money Morning News:
O’Neal Finally Out at Merrill Lynch. - Money Morning News:
Citigroup’s CEO Prince Opts to Retire;
Robert Rubin Steps in as Chairman. - Money Morning News Analysis:
Federal Government Grants AIG a New Bailout Package. - ABC News:
The Biggest Loser: Hank Greenberg.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Shah,
A well written article and yes it would take a book to enumerate the crimes against humanity these Wall Street Titans have committed. Another crime that Jamie Dimon and JP Morgan Chase have committed that you may not be aware of is what they have done to over 400,000 credit card holders who took advantage of what was advertised and specifically stated as fixed rate life of balance transfer offers. Starting in November less than 2 months after Chase bought Washington Mutual they announced a change in terms on these fixed rate Life of oustanding balance transfers they were adding a $10.00 a month finance charge service fee and raising the required minimum payment from 2% of the outstanding balance to 5% of the outstanding balance. If you check their quarterly reports their credit card services division went from making almost $500 million for the first 3 quarters of 2008 to a $371 million loss in the fourth quarter. Their executives who made this "business" decision are not available to any cardholder to discuss this mess and all their service people are trying to tell us they want to help us and they want to be the "trusted" financial service provider people turn to. What a joke. Just a thought as I just went through my FINRA 101 review course. You know what the whole first hour was devoted to. ETHICS!!!! I wonder where the NASD now FINRA and the SEC were and why aren't these Wall Street Titans required to take ETHICS courses. Somewhere along the way these people seem to have lost them if they ever had any. Oh and you might as well include all the politicians and lawyers and MBAs in needing ETHICS classes. Maybe we might then get some leaders somewhere with a conscious who care about something other than themselves
'Marginal banking' is a term for the banksters counterfeiting. You deposit $100. How much of that do they loan out? ZERO. It goes in the vault, and they loan out up to $900 that does not exist. They 'make' 1200% profit on your deposit, and pay you maybe 3%, and a bunch to PACs to prevent justice. Their accomplices in Washington will not bite a hand that feeds them. Its all a scam, and a house of cards. The collapse of the house is the current Depression, but we have 10x worse coming down the pike. 600 trillion in credit default swaps, and derivatives are about to disappear. CEO bonuses are definately wrong, but the collapse originated with the banksters. There is money to be made here, if you understand.
Shah Gilani writes that "compensation should not be regulated by any government. There are, however, limits that need to be applied to compensation […]"
Mr. Gilani would make a great politician, would he not? What exactly is your position, Mr. Gilani, other than that you would like to have your cake and eat it too?
While Mr. Gilani's stance is not apparent, what is apparent is that the principle of freedom and liberty is completely lost on Mr. Gilani as well as every comment-poster to this page. I understand taxpayer concern over how their money is spent, but why attack the bankers rather than the morally bankrupt politicians who are choosing to bail them out? I suppose the answer to this is simple: fear. The politicians have convinced the masses that the world will end if we let our current banking system fail. Common sense would tell us that as long as there is demand for borrowing and lending in a free market, it certainly will take place, even if we don't have banks named Citibank, Chase, and Bank of America. In, times like these, however, it is clear that common sense does not prevail, but rather the continued transfer of power into the hands of a small group of elite, who continue to do immense damage to our future prosperity.
When will people wake up?
This is exactly what happens when we interfere in markets and popup insolvent institutions: no failure; no accountability; no punishment; and therefore, no pay cut.
So now we're going to interfere again by mandating salary caps? That, in turn, will cause unanticipated consequences. Where will the next hole in the dike sprout?
As in the famous exchange between characters in Jurassic Park confirms:
Henry Wu: You're implying that a group composed entirely of female animals will… breed?
Dr. Ian Malcolm: No, I'm simply saying that life, uh… finds a way.
These greedy cunning scheming evil people should be prosecuted, and their ill gotten money redistributed to poor people.
I called my mortgage company on our condo in Orlando that we bought 3 years ago for our daughter and granddaughter to live in while she attends Univ. of Central Fl. It has dropped drastically in value and there is no market. I was attempting to have Chase Home Finance lower our interest rate. He checked our credit and says the score was 802, which is very good. He said we would need to pay more down before they issued a loan. The condo was $298,000 with $100,000 down but has fallen to approx $215,000. If we keep the present loan. they have a risk of approx 183,000. He said with what they would require plus all closing costs which include 2.5pts,
we would need $28,000. THis is utterly ridiculous. It should cost a document fee plus a new mortgage paper, perhaps less then $1,000. The property is the same. Our credit is the same. We have paid on time each month with no overdue charges. The money is coming out of my IRA which makes a further problem because of the reduction in value linked to wall steet and the banking industry. They are making loans to others at a lower rate then we are paying but not to good customers Thank you for a response
exterminate them
An outstanding article. Every American should read it and determine and then tell their own bank their feelings towards this biggest scam ever.
Your perception of this Wall street crooks society is brilliant.
I agree that the bonus situation for executives has gotten shameful. However, for our President to rail at bank CEOs who got taxpayer funded bailouts and took shameful bonuses and then IGNORE and/or NOT SAY ONE WORD about Franklin Raines who ran Fannie Mae into the ground so that the government had to use taxpayer money to bail them out but Mr. Raines walks away with millions, this is hard to stomach. Mr. Raines should be included in that list for clawbacks. President Obama should return any money received from his #1 Presidential campaign donor (Raines). Christopher Dodd and Barney Frank in Congress who received Fannie Mae and Freddie Mac largesse while refusing to regulate them properly should return the lobbying money they received. In a time when federal employees are having their salaries frozen and people are being laid off left and right Congress should forgo their automatic 93,000 dollar pay raise this year. It is despicable, disgusting and unconscionable for them to reward themselves in such a way in this time of economic hardship. Let's bring back tar and feathering for our politicians – many deserve it.
[…] Wall Street's Bonus System Was a Major Financial Crisis Catalyst By Shah Gilani Contributing Editor Money Morning/The Money Map Report […]
Shah – Thank you for your response to my comment and I am being perfectly serious here. I do not see a difference between receiving a donation from a lobbyist to consider their position when voting on a bill and taking a bribe. Yet the first is done constantly by our politicians while the 2nd is illegal and puts people in jail. Both parties and all politicians are guilty of this! I do not pretend otherwise. Our politicians rail against lobbying and earmarks in bills but our whole tax system is set up to allow all this and it SHOULD NEVER BE ALLOWED. I sat and listened to the presidential debates and most of it from both sides was what they were going to do to satisfy their various constituencies. There was very little about standing up against all this stuff and doing something for the public and American people in general. Until we totally scrap our tax code and start over I don't think this will ever be fixed. I am a firm believer in a very simplified flat or fair tax with at most 2 tiers of tax rates and NO DEDUCTIONS for people to get around. It would simplify our lives and be the easiest method IMO to deal with the lobbyists and the earmark issues and get the politicians back to doing what is best for the country as a whole and not their pet supporters. I have a friend who agrees with me. We belong to different parties and we both notice that if we contact a member of Congress of the other party about any subject, WE GET NO RESPONSE – WE GET IGNORED. This is true whether the Democrat is contacting a Republican or vice-versa. If anything, it is more important for politicians to respond to those who disagree with them and their policies than those who agree. Our system is so crooked it is ridiculous!
Shah Gilani's article on "Wall Street Bonus System" is very good and for many investors a real eye opener. It is my belief however that the biggest benefactor of this system has been the Federal Government itself via the income tax system. When government engineers accounting scheme's that cloud's the basic math of balance sheets it created "fuzzy math".
The government then incentivizes bad business practices in the name of "helping" the poor into housing ownership. Of which they provided minimal or in many cases zero "after signing" support programs to help these new homeowners develop long term plans and budgets needed for the responsible managment and protection of their newly acquired assets.
Why doesn't or didn't the law makers of this country step in and fix the problems they themselves helped to create? The answer is simple, to do so would require cutting off the stream of tax revenues from those "greedy high income earners". Simply put you can't keep artifically moving the tax payer goal posts and expect anyone to win the game.
Moving tax payers out of "middle tax brackets" and pushing them into "lower tax brackets" first breaks their moral and reduces the desire to be productive. People with no desire to be productive are more receptive to handouts. Hand outs not only buy votes but also increase the burden on those in the upper tax brackets.
With enormous pressure now upon them our wise law makers now find themselves having to bite clean off the only hand they've been feeding from. Yes they have painted themselves into the proverbial corner this time.
I have no fear however that the American people will rebel just like they did in the past. We can only hope that neither we nor the terrorists blow us up 1st.
Administrators and ?Compliance? executives do not 'add' tens of millions of value. Figureheads and BOD's with ever more suspect gravitas and wisdom have been shown to add little value. 'Rainmakers' and 'Dealfinders' and 'Dealmakers' may rarely add periodic value even into the tens of millions as reward for exceptional added value. But very rarely. Artful and perspicacious traders can be shown to add value, when such exists, by much more objective criteria than most seeking exceptional reward. Perceptions of what the 'market' for their services demands has been arrogated by, until now, the unchallenged hubris of the grossly unwarranted 'entitled'.
Obama should return the est $275 million in his campaine fund and adjust the salary cap to reflect his $400,000 salary plus free room and board,travel etc! His total comp is approx $1,200,000 annually! Plus one heck of a retirement fund with star status speaking like Clinton's $7,500,000 earnings!!!!!
Proscriptions should begin immediately for any government official elected or appointed, and any wall st. executive who contributed to this mess.
Yes, it is shameful but it is human nature to be that way. If I were to be in such a controlling position as those CEOs, I would not be surprised if I were to participate in such greed. There is no one to prevent me from taking the rewards.
James Saito
Now I know why ex-royalty were guillotined in the French Revolution. When I was a child I thought this was inconceivably cruel and unnecessary. Now I know that it was merely removing highly effective antisocial predators from society. Bring Back The Guillotine.
Barbara R…You are right-on-the-mark! The trouble with writing an article about all the greed and all the crooks on Wall Street is that to really tell the WHOLE story would take a book, and more than three quarters of it would be about naming the lobbyists and Congress members whose influence is bought while American taxpayers are sold up the river.
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[…] the last 30 years, Wall Street has had a problem with its remuneration system. Base pay was only around $150,000 even for a partner/managing director – not enough to live on for […]
Since I can remember all Americans are greedy junk buyers so why cry when some people maximize their greed opportunity, there isn't one American who wouldn't take all the money they could get their hands on and not give a damn about the consequences or who pays and goes hungry because you are at stores buying more crap you don't need, but when bankers do it the outcry is unbelievable, holy hypocrits your greed finally came home to roost.
Canadian viewpoint
there is no denying that the global meltdown is in large measure due to wall street's greed and corruption in marketing junk bonds to unsuspecting or corrupt colluding managements.
executive compensations must be related to real returns paid to shareholders who have risked their savings invested in the corporations and under no circumstances should bonuses be in excess of equivalent shareholder dividend returns. After all the executives are being paid for their services and the ceo should never receive payment in excess of 100 times the average of the rest of the staff and workers.
Make the fat cats list, sue them and jail them but don't forget to seize their assets asap.
[…] (However, if you do want to read more about it, Smart Profits Report sister publication Money Morning has a free detailed analysis of the problem right here.) […]
[…] the last 30 years, Wall Street has had a problem with its remuneration system. Base pay was only around $150,000 even for a partner/managing director – not enough to live […]