The party's not over yet -- for some

[bigbadwolf]

At dissidentvoice:

The Guardian (UK) reports that people at Wall Street’s top banks are to receive pay deals, in large part discretionary bonuses, totaling more than $70 billion. Bonuses appear to ignore their failed performance, bear no relation to the losses incurred by investors or plunging the global financial system into a crash with their casino-style investments. They estimate a tenth of the bailout will be spent on enormous salaries and bonuses.

It will be difficult for the media and public to find out about executive compensation and the bailout. The Treasury Department is taking the approach of blacking out the compensation section of their contracts, see e.g., the blacked out compensation section of its contract with Bank of New York Mellon.

 

[Yan He]

Sounds like people really hate big bonus on the Street, that it's time to stop it ?!

More silimar articles can be found everywhere. There's a "Frank" guy advocates freeze of bonus on Street. Just wonder did he ever bring home a big bonus.

 

[Stefan Zota]

This is a very risky direction.
Fed has right to vote on compensation only as a shareholder. So they can decide bonuses for Fannie, Freddie, maybe even AIG. Also they can impose some restrictions on bonuses for highest executives. All fine so far.

However forcing a low compensation pool is a pure socialist move. If a bank made a profit in this turmoil that was done through hard-work of the employees not just "external Fed incentives". Wall Street was based on meritocracy, providing rewards for people that bring legal profit. In the end shareholders decide. If they feel that compensation is too high they will penalize the board.
On the other hand, main asset of financial companies is not a factory, land or building. Everything is based on finance/trading/technology. Behind these, all is done by people. That is always the source of revenue.

 

[Andy Nguyen]

Anyone reads the free media PR given to the guy from Bear who started Banker Gone Broke
People have mixed feeling when they read about some second year analyst whining about the 100K bonus now long gone.

 

[bigbadwolf]

Anyone reads the free media PR given to the guy from Bear who started Banker Gone Broke
People have mixed feeling when they read about some second year analyst whining about the 100K bonus now long gone.

Subtle misdirection form the US media (their speciality!): concentrating on the minnows who make $150,000 while giving the big fish -- who take home 8- and 9-figure bonuses and parachutes -- a wide and respectful berth. At the upper end, everthing is murky, mysterious, shrouded. As Mario Puzo said in his novel, "Fools Die," you get rich in the dark.

 

[ExSan]

Banks Owe Billions To Executives

 

[bigbadwolf]

In the Guardian today:

Royal Bank of Scotland, which is being bailed out with £20bn of taxpayers' money, has signalled it is preparing to pay bonuses to thousands of staff despite government pledges to crack down on City pay.

The bank has set aside £1.79bn to cover "staff costs" - including discretionary bonuses - at its investment banking division for the first six months of the year alone. The same division caused a £5.9bn writedown that wiped out the bank's profits for the same period.

...


Banking sources privately acknowledge that the sight of these bonus accruals may provoke anger. They concede the industry's pay and bonus regime is under unprecedented strain as it fails to reflect profitability, asset writedowns or share price declines.

The public reaction is very inconsiderate. Do they not realise that manufacturers of yachts, private jets, luxury condos and expensive wines also need to eat, to put food on the table? And what are bank execs to do without these accoutrements? Travel on the New Youk Sub? Take commercial flights? Drink tapwater? What is the world coming to?

 

[ExSan]

NYT - Op-Ed Contributor: Money for Nothing

Op-Ed Contributor: Money for Nothing
By DAVE KRASNE
What's been lost in the uproar over Wall Street bonuses is how completely the culture of executive compensation has permeated the financial industry.

 

[JeffSmith]

Stefan, I don't believe that Wall Street is or was a meritocracy providing rewards for bringing profits. It was a high stakes game where the object was to make the company look good as possible for a short period of time and cash out.

If you look at the compensation and work ethic in other countries you will see that bonus and compensation of American Execs and Wall Street was way out of whack at the top.

 

[Stefan Zota]

Stefan, I don't believe that Wall Street is or was a meritocracy providing rewards for bringing profits. It was a high stakes game where the object was to make the company look good as possible for a short period of time and cash out.

If you look at the compensation and work ethic in other countries you will see that bonus and compensation of American Execs and Wall Street was way out of whack at the top.

It was and it is!
Some exceptions do not make a rule. If you read about some high executive, perhaps incompetent, that does not make everyone the same.
For instance, trying to ostracize a set of prop trading quants, for a decision from one man is wrong. They are very smart people, could have worked in academia, could ave built models in other areas instead they chose to work long hours. Why? Compensation is one factor.

By the way, also keep in mind that financial sector had a decisive factor to the wealth of this country in last 20 years. U.S. may not very competitive in all other fields, but these banks/funds/ventures gained global recognition.

Even ignoring all these observations, government is a shareholder at most, nothing more.
If they have 51%, then authorities can make any decision. Otherwise, they do not have the ownership.

 

[bigbadwolf]

By the way, also keep in mind that financial sector had a decisive factor to the wealth of this country in last 20 years. U.S. may not very competitive in all other fields, but these banks/funds/ventures gained global recognition.

Stefan, that's been the problem with the US economy, not the jewel in its crown. If these same very bright quants had been working as design and production engineers, for example, the US economy would not be the creek right now. I'm not blaming the quants for their career choice, of course: they have to take what's available in a set-up engineered by those on high. And those on high have built sand castles of finance that are now being washed away.

 

[Stefan Zota]

Stefan, that's been the problem with the US economy, not the jewel in its crown. If these same very bright quants had been working as design and production engineers, for example, the US economy would not be the creek right now. I'm not blaming the quants for their career choice, of course: they have to take what's available in a set-up engineered by those on high. And those on high have built sand castles of finance that are now being washed away.

I understand your Dr. Doom approach , but as you already seen, I am more conservative.
A certain system worked for 20 years, produced wealth. That wealth converted into property, assets etc. Now, there is a crisis caused by certain excesses and deregulation. Does that dismiss the whole concept of modern economy? Does a downturn of 1 year with unemployment of 7-8% dismiss everything in past 20 years?

 

[doug reich]

Stefan, while a downturn would not normally spell doom on its own, "this time is different". (People are very good at extrapolating straight lines.) Consider the following argument, which, from several months of listening to BBW, seems to match his thinking:

http://www.nytimes.com/2009/01/23/business/23norris.html

High & Low Finance
Wall Street Paychecks May Wither

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By FLOYD NORRIS
Published: January 22, 2009
It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge blunders that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.
Skip to next paragraph Multimedia

Graphic Financial Sector Wages Relative to Other Industries





So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.
Are financial workers overpaid? And if so, will it continue?
The answers, according to a new study by two economists, are yes, they are overpaid, and no, it will not last.
"Wages in finance were excessively high around 1930 and from the mid 1990s until 2006," wrote Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, in a National Bureau of Economic Research working paper released this week, "Wages and Human Capital in the U.S. Financial Industry, 1909-2006."
They forecast that up to half the wage differential observed in recent years "can be expected to disappear."
They won't disappear overnight, of course. The sad story of how Merrill Lynch bosses handed out bonuses just before the Bank of America takeover was completed — and just before about $15 billion in losses materialized from Merrill's portfolio — reinforces the suspicion that Wall Streeters see themselves as entitled to outsize paychecks even if their companies are failing.
But even in the Depression the adjustment took time. The professors calculate that relative financial wages, taking into account education and other demographic factors, declined sharply in the 1930s and then at a slower pace until about 1980, when there was virtually no difference. Then, in a new era of financial innovation, "The financial sector became once again a high-skill, high-wage industry," Mr. Philippon wrote on the N.Y.U web site this week.
It may be no accident that New York City, the country's financial capital, went broke in the 1970s as financial industry wages approached their low point. Nor is it surprising that Manhattan real estate prices soared in the 1990s and early in this decade, as multimillion-dollar Wall Street bonuses pushed up demand for high-end apartments. If relative wages are set to decline, the pain in New York could be greater than in other regions.
The authors offer several reasons why financial salaries soared in the 1920s and again since 1980. It isn't computers, they argue, because there were no computers the first time, and it is not just a strong stock market. Instead, they attribute it in part to strong demand for financial analysis at a time when technical revolutions were leading to an explosion of new stock offerings and loans to young and risky companies. Before 1930, that was the electrical revolution. More recently, it was information technology.
There is also the lure of increasing financial innovation, which they say is least likely to occur when there is more regulation. "Highly skilled labor left the financial sector in the wake of Depression-era regulations, and started flowing back precisely when these regulations were removed."
The authors note that risky debt was popular in the 1920s, then all but disappeared until the 1970s brought junk bonds. Such debt, they note, is used to finance companies with high growth potential, but skilled analysis is required.
"This explains the dynamics of rating agencies, which were important players in the interwar period, small and largely irrelevant in the 1950s and 1960s, and growing fast from the 1970s until today," they write.
By the peak of the credit boom, rating agencies were essential to financial innovation; they had developed models that somehow proved that there was little risk for investors who put up most of the money for very risky loans. The models turned out to be very wrong.
As a result of the current crisis, much of that innovation now seems foolish or even criminal. Without the innovation, banks could never have issued subprime mortgages with teaser interest rates that would later soar. Nor could such mortgages have been bundled into securitizations financed largely by AAA-rated investments.
Nor could regulators have been persuaded that the banks' own risk models should be used to evaluate the safety of the banks. "In retrospect," the authors write, "it is clear that regulators did not have the human capital to keep up with the financial industry, and to understand it well enough to be able to exert effective regulation. Given the wage premia that we document, it was impossible for regulators to attract and retain highly skilled financial workers."
"Of course," they add, "regulators will be able to hire cheap skilled labor in 2009, just as they were able to in the 1930s."
Just how much the demand for financial innovation will fade is unclear, of course. "These things come in waves," Mr. Philippon said in an interview. "If for the next 10 years, we go back to a '60s-style economy, where big firms make investments without taking too much risk, finance will shrink." But, he added, if the green revolution, alternative energy and biotech "turn out to be like electricity, then we will need them."
He is convinced that less financial innovation could be good for a time, and that this crisis has shown to all that much more regulation is needed. "Some of the financial innovations we have seen are obviously inefficient," he said. "A good chunk of innovation has to do with tax and regulation arbitrage. That is really a waste for the society."
And, he added, the society could benefit from a flow to other industries. "As a society, do we want to put a third of our best brains in the financial sector?" he asked, pointing to a study indicating Harvard graduates from the early 1990s were far more likely to go into finance than were those who had graduated a decade earlier.
That generation has grown accustomed to the idea that investment banks, not to mention hedge funds and private equity funds, pay far better than companies in other industries. There is no guarantee that at least some of the advantage will not continue, but as I read the study, I recalled a passage from the recently published history of Goldman Sachs, "The Partnership," by Charles D. Ellis.
"Goldman Sachs was fighting for its life all through the Depression and World War II and was profitable in only half of the 16 years from the 1929 crash to the end of the war," Mr. Ellis wrote. "Most of the partners owed the firm money because their partnership income was less than the moderate 'draws' that their families needed to get along."
Floyd Norris's blog on finance and economics is at nytimes.com/norris.

 

[bigbadwolf]

Consider the following argument, which, from several months of listening to BBW, seems to match his thinking ...

Yes, it corresponds with my thinking in some places. I think historians writing about this era a century from now will probably reach a consensus that the financial industry was not some innovative sector of an otherwise sluggish and moribund economy but one of the causes of such an economy. That it was parasitic by nature, and contributed to the growing disparity in wealth and income both in the US and worldwide.

Obama has said he's "pro-science" (whatever that means). So maybe an honest mathematician will be able to make an honest and honorable living doing something of real worth.

 

[GusTsahas]

Today Obama called Wall Street's $18 Billion dollar bonus "shameful", but there is no consideration from politicians that the government made back $7 Billion for the US government in the form of social security, medicare, federal, state and city income taxes..... :-k It reminds me when the politicians were crying about $4 dollar gas while ignoring the fact that the government makes about the same money in taxes as the oil companies make in profits.

I do agree that "finance" was too large a share of the GDP but things have a way of finding their right level without making all the participants into devils. Not everyone working in finance made millions in bonus's, some made "only" $200 or 400K, which left them with $125K or 250K after taxes and a life style that includes $20 - 40K in property taxes, private schools and the like. These folks will have to live within their new lower earnings but so will their communities as I don't know who will be paying for all the government services we have become accustomed to.

 

[JeffSmith]

Obama blasts Wall Street over bonuses Obama Blasts Wall Street Bonuses - BusinessWeek.

 

[bigbadwolf]

I do agree that "finance" was too large a share of the GDP but things have a way of finding their right level without making all the participants into devils. Not everyone working in finance made millions in bonus's, some made "only" $200 or 400K, which left them with $125K or 250K after taxes and a life style that includes $20 - 40K in property taxes, private schools and the like. These folks will have to live within their new lower earnings but so will their communities as I don't know who will be paying for all the government services we have become accustomed to.

No, of course not. Most people in the field have been busy making a living to put food on the table. Including quants, who've been an incredibly industrious lot. People have to make the best out of whatever limited array of choices is made available to them. Speaking more generally, I find it distressing that everything is explained in terms of individual choices and moral lapses. Situational logic is usually the propelling force. Even for supposed ogres like Hitler and Attila the Hun. The first thing Marxist analysis teaches is not blame the individual capitalist, who is merely making optimal decisions in the framework that is provided to him, but to look, rather, at the overall structure and direction of capitalist society. This is what I'm doing. I'm not blaming an individual Madoff but saying, rather, that the system has encouraged such people to rise to the top, and has encouraged them in their excesses.

Obama is just another opportunistic politician and by focusing on bonuses he's looking at a symptom of what's wrong and not at the root causes (if indeed he can understand the structure at all). To this extent, focus on bonuses is a red herring.