Today, Senator Claire McCaskill of Missouri introduced legislation that would limit salary, bonus, and stock options for executives as financial firm recipients of bailout funds be limited to the President’s level of pay, currently $400,000.
McCaskill’s proposal is likely to go all of nowhere. She is not a member of the Finance or Appropriations committee, so her proposal is more a shot across the bow than a serious initiative. And given that “executive” is generally defined as the five most highly paid corporate officers, the ones whose remuneration is listed in the proxy statement, it covers only a trivial number of employees.
But her bill is getting a lot of media coverage, which means it could serve as a starting point for negotiations. It has become a benchmark as far as the public is concerned.
So how reasonable is it? The problem is that too few people in the industry have any memory of what bad times were like, and the last few years were so grotesquely rich (in terms of pay, not risk adjusted performance) as to have distorted industry participants’ sense of reality. The pretext for the largess was that the really good people would decamp to hedge funds, so pay had to be ratcheted up to those levels (John Whitehead, former co-chairman of Goldman, dismissed that idea when the bubble was at its peak).
Bear in mind: the bonuses paid in 2008 in New York, when all the big domestic players and most of the large foreign firms (who constitute the bulk of employment) were on government life support, were the roughly the same as in 2004, which was a good but not stellar year. I’m not certain of the headcount differences then versus now; with the loss of Bear, Lehman, and a lot of headcount cuts industry-wide, I doubt that employment is much above 2004 levels.
Since people are generally not too open about pay (and tend to exaggerate to boot), I have only a couple of datapoints, but I think they are germane. Anyone with relevant info from the last downturn is encouraged to speak up.
The dot bomb bust was bad on Wall Street. To give an idea: I went to see a friend in the search business in 2002 to get his insights about a company he knew. He had two neat stacks of unopened letters on a credenza behind his desk, each roughly 2 feet high. I asked about them. He explained he was getting an enormous amount of letters from job-seekers (and mind you, his was a very small firm). He didn’t bother opening them, since he knew or could find plenty of good people and employers preferred to hire the employed over the unemployed. The letters were from unknown quantities and there was no reason for him to try to weed through them.
So why did he keep them? In case someone connected called him to ask him if he had received the resume of his good buddy. Then he would dig through the pile and give it a (usually obligatory) look.
One of the hard hit businesses was mergers and acquisitions. Keep in mind that M&A is a fee business; the professionals do have overhead (salaries, travel, secretarial, computers and software, access to databases) but they don’t use capital and they require less infrastructure than trading operations (which have trading stations, data feeds, lots of software and valuation modes, risk management, sales forces, back office). Now admittedly, in boom cycles (the late 1980s and the last few years) Wall Street messes up this nice model and decides to try to gain a leg up in M&A by risking its balance sheet (committing to lend to fund deals). That always leads to ruin. But that gets reined in during bad times, so let’s think of the traditional, high wits, low overhead version of the business.
I’d welcome any other inputs, but the people I knew in M&A (senior MDs running what had been high profit industry groups, so the top of the food chain in that business) were cut back to $400,000. And they were unhappy but not disappointed, if you can appreciate the distinction. They of course hated that they had to keep trying to do business when there was no business to be had. Tilling a field during a drought is not pleasant. But they were grateful to still have a job, to not have been demoted, and knew intellectually that their pay was fair in light of current conditions.
Assume 3% inflation. Compound $400,000 forward to 2009. You get roughly $500,000.
M&A is a talent business. You need pretty highly developed skills to master the technical aspects and be credible with CEOs. The top people can and do set up or join boutiques (although some recent ones overlarded with talent, like Perella Weinberg, haven’t done as well as the older boutiques, like Greenhill & Company).
Traders will argue that level is too low, that if they make $30 million for someone, they deserve a bigger cut.
No dice, Unless you are willing to pay back your share of losses, I don’t accept the logic that you are entitled to a asymmetrical pay deal. You may have been lucky enough to extract that, but what you can get in good times (or from chumps) and what you deserve in a more abstract sense are two different things. You are playing with other people’s money, and that carries with it substantial responsibilities (or at least it should, but management heretofore has been complicit in pretending that it doesn’t).
Warren Buffet, in his reinsurance business, had a simple formula: his execs got a pool of 15% of the profits on deals written 5 years earlier, ex any losses on the same pool. Five years was long enough for the vast majority of deals to prove themselves out.
I could see a variant of that formula for traders. Say you do make $30 million in profits in year one. You get a salary and only 1/10 of your cut that year in cash. The rest is deferred. Any losses in years 2-5 get deducted (the deferred portion can be invested in a high or low risk manner at the choosing of the trader, so there would be some income on the deferred amount) Any remainder is paid out.
Now that would take some tweaking (t creates an incentive for a trader having a super year to change firms, for instance), and there may be better ways to achieve the same end, but you get the drift: you can’t have people who take serious risks with capital enjoying “head’s I win, tails you lose” arrangements. Either they rewards have to be reined in substantially so they have less reason to take big gambles, or they need to share more in the downside.
The threat to contain pay is serious enough that Wall Street may have to find a way to deny its reflexes and exercise restraint. This is going to make for some interesting theater.
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now what, pray tell, would that do to GDP?
@Anonymous
GDP? Are you joking? Wall Street is supposed to be a facilitator, but it’s grown so big that it’s become a tax on the real economy.
@Yves
I think (hope) that the systemic changes are going to limit the amount of risk (leverage) that people are going to be able to take on. This will depress earnings (winnings?) and bring bonuses back to earth.
That said, I’m all for McCaskill’s proposal. In fact, I sent her an email promising a campaign contribution if it gets done.
Everyone knows things are going to get much worse as the slow down builds and ripples through the real economy. I’m not sure that scapegoating a few individual fraudsters like Madoff are going to satisfy some who lost their job, their house and their 401k, then watched $18bn in bonuses distributed to people who lost $2 or 3 trillion dollars. If I were an ambitious AG with jurisdiction I might try something even more punitive with an eye on a possible primary challenge to Bam.
_______________________
Watch me drop the F-bomb on them
“Fnationalization! Fbankruptcy! Ftaxes! Funemployment!”
hat-tip bg
@Anonymous
GDP? Are you joking? Wall Street is supposed to be a facilitator, but it’s grown so big that it’s become a tax on the real economy.
@Yves
I think (hope) that the systemic changes are going to limit the amount of risk (leverage) that people are going to be able to take on. This will depress earnings (winnings?) and bring bonuses back to earth.
That said, I’m all for McCaskill’s proposal. In fact, I sent her an email promising a campaign contribution if it gets done.
Everyone knows things are going to get much worse as the slow down builds and ripples through the real economy. I’m not sure that scapegoating a few individual fraudsters like Madoff are going to satisfy some who lost their job, their house and their 401k, then watched $18bn in bonuses distributed to people who lost $2 or 3 trillion dollars. If I were an ambitious AG with jurisdiction I might try something even more punitive with an eye on a possible primary challenge to Bam.
_______________________
Watch me drop the F-bomb on them
“Fnationalization! Fbankruptcy! Ftaxes! Funemployment!”
hat-tip bg
Warren can do that because his execs never quit. But even he has to make people whole while they wait the 5 years. If he buys your company you are arguably whole. If you are a 20 something quarterback with the Falcons you might not be willing to see defered comp.
bg,
I don’t see what’s wrong with golden handcuffs. A lot of places have vesting schedules. A lot of Wall Street firms (and other places) would give a portion of comp in restricted stock.
Forget pay caps, these people should be in prison.
If a milk company or a toy company sold you substandard, toxic products they would be shut down and prosecuted for negligence.
When that happens on wall street, the government bails them out with the taxpayers money and pays their salaries.
I don’t give a damn whether some trader made 30 million in a year, if it weren’t for taxpayer support he would be out and unemployed.
Putin was right when he said in Davos that the Investment Banks have lost more in one year than they made in the previous 25.
What we have in this country is FASCISM. Plain and simple, when you socialize losses and privatize profits for corporations, that is FASCISM. And America has a history of liking fascists like Mussolini before WW2, Pinochet in Chile etc.
But in America dissent is not crushed, it is merely ignored. Dissenters can shout all they want about TARP, Geithner, Ineffective Keynesian theories that were discredited in the 70’s. It’s just ignored.
What the elite want in America, they get. And so expect more deflation, no way would the top 0.1% of Americans want their cash holdings deflated away.
Sorry I meant cash holding inflated away by the expected hyper inflation
Putin was right when he said in Davos that the Investment Banks have lost more in one year than they made in the previous 25.
I was just thinking about this the other day. If this bailout reaches a couple to three trillion, how many years of Wall Street profits is that? Is it 25 years of profits? 50 years?
There’s this notion that saving Wall Street is worthwhile (presumably because Wall Street creates value), but what if the losses over the last few years have wiped out 50 years worth of profits? Is that a business model that we want to try and save? I would say no.
The Obama administration is not likely to impose tougher restrictions on executive pay on most firms receiving aid under the government’s $700 billion financial rescue program, the Washington Post reported on Saturday.
http://www.reuters.com/article/bondsNews/idUSN3139921320090131
These two den of thieves need each other salary cuts ain’t gonna happen.
“I don’t see what’s wrong with golden handcuffs. A lot of places have vesting schedules. A lot of Wall Street firms (and other places) would give a portion of comp in restricted stock.”
For golden handcuffs to work they have to be percieved as being two way. I might be very good at my job, but the firm is likely to fire X% of the people this year, and Y% every year afterward (to keep up morale). Selling a long dated option with high volatility has to pay higher than a short dated option with the same volatility.
An insecure employee will not value defered comp nearly as much as a secure one.
The level of demagougery over executive compensation is getting uncomfortable.
So the POTUS only makes $400,000 per year ( while in office) but there are sizable perks including a fashionable home, a 747 for a private jet and deferred compensation through book deals and speaking fees if the ex POTUS chooses to cash in.
While our politicians rant and rave
about the excesses on Wall St. maybe they should take a closer look at what goes on on K Street. Ask their wives and brothers in law
just what they do to earn their huge compensation packages and compare the unfunded liabilities of our government to those of the banking system.
This is not to excuse Wall St of its gross excesses merely to point out pots calling kettles black is no solution to the problem. If excessive compensation for minimal
economic value is the problem why not cast our nets wider.
How is it that on many an American university campus these days the most highly paid ‘academic’ is the football or basketball coach? His pay may exceed that of the entire engineering faculty!
What of the cosmetology school dropout turned real estate broker earning more than the chief of orthopedic surgery at the county hospital? The illiterate ghetto gang bangers who are blessed with the ability to run fast, jump high or catch a ball getting multi-million dollar signing bonus? My dog can do all of those things and does it for some basic rations and the occasional massage.
Compensation is a tricky thing often with no apparent rhyme nor reason to it. That cosmetology dropout turned real estate broker who earns a fabulous income selling
McMansions earns that money because she can do it better than others. The NCAA coach you see in the Orange Bowl makes his money doing a very difficult thing. He has to recruit teenage athletes and get them to win football games 90 plus percent of the time. Even the leaping ghetto gangbanger with a ball has to be better at his craft than a legion of others who would take his position in a heartbeat. It ain’t easy staying on top, even on Wall St.
@bg: generally, and talking specifically from experience, deferred bonus schemes are not lost if the trader is fired. If a bank pays you 25% upfront and then 25% a year for three years, it cannot fire you immediately without paying you out entirely.
The Heads-I-Win attitude is rampant in banking. I know a dozen traders who have run up positions, held them through the end of the year, collected huge bonuses then happily accepted getting fired when the position lost tens of millions once the trader stopped propping it up.
If a trader is good, he makes money year in and year out so being held to five year results is not unreasonable. Senior managers should be held to a minimum of five years and probably longer.
Many argue that banker X who made money should not be penalized because banker Y lost money. but in reality, the banking profits of the past ten years are all built on the bubble. The profits were illusory. Once the risk is reduced and the economy returns to reality, those profits won’t exist.
And finally, if the trader or banker is so fantastic, then he SHOULD do it on his own or for a boutique shop or fund. Anyone working for a US bank today is now a public servant getting paid with MY tax dollars. I see no reason for them to get paid millions.
$400k is a lot of money. Too bad if Manhattan real estate “collapses” or Maserati dealers go out of business.
Regarding capping and deferring bonus income, as you know Yves I have been advocating much what you propose for a year (and before that but). I would further add that employees eligible for bonus pools need to have explicit language in their contracts that their firms can claw back any bonus income for bonus cycles in which deals signed off on by said receipient are demonstrated to have had inadequate due diligence or outright fraud or misrepresentation. In effect, that would make all of the top tier’s bonus income recoverable at any time since they sign off on the entirety of what is traded/shunted under them. The language of what constitutes failure needs to be clear to protect the bonus receipients from punitive recoveries, but still.
You are responsible for the good and the ill that you do—unless you are a financier (or a neocon). For them, it’s all jackpot, all the time; i.e. the game’s rigged. Is it any wonder, then, that many don’t care whether their deals are any good for _anyone_ at all? Why should they: there’s no penalty for failure, and stupendous riches for the appearance of success.
As for all those insecure employees who find intolerable the risk of waiting for their pools to prove out and hence vest, they are invited to exit now, start their own shops, and raise their own cash throughput. You’ll find that given that choice most of them will prove to have bigger mouths than ambitions. And as for the rest—good riddance: those are the boys who shut their eyes to risk or fake the numbers because they are Mr. Right Now all the time.
Two points, the smaller point first:
And given that “executive” is generally defined as the five most highly paid corporate officers, the ones whose remuneration is listed in the proxy statement, it covers only a trivial number of employees.
True, but setting a limit on their salaries will most likely have the intended effect of setting a limit down the chain, unless the execs are so generous to keep their underlings at far higher salaries.
The bigger point: The banks are no longer functioning businesses. The exist only because they are on the government dole. They are welfare queens. Driving far better than Cadillacs.
They are ex-banks. No longer of this world. Kicked the bucket. Sleeping with the angels.
If they think they’re worth more than $100K/yr, then let them go to that job. There’s plenty of qualified people now to backfill your place.
They are commodities, but are slow to realize it.
“Traders will argue that level is too low, that if they make $30 million for someone, they deserve a bigger cut.”
There are so many problems with that line of thought. What about the engineer making $90k/year who gets a patent and ends up making $100 million for his company? What about the EMT who responds to a car crash and saves a life (maybe that of the trader)? And the POTUS comparison is very apropos – this is a man who leads the free world and has the power to launch nukes at a moments’ notices, he is a real master of the universe in some sense, unlike the ego-inflated impostors on Wall Street.
But perhaps the biggest problem is the fundamental asymmetry with regard to gains and losses. If that trader causes his firm to incur a big loss, he still gets a salary and simply forgoes a bonus (maybe loses his job if he really screws up). He incurs no personal loss of capital. If he thinks he is entitled to more than he gets now, perhaps he ought to strike off on his own and trade his own account and actually face real gains and losses.
why not change the use of the term ‘bailout’ to ‘welfare.’ ‘Bailout’ doesn’t evoke appropriate contrition, shame, or fear of retribution that ‘corporate welfare’ should.
Americans are still reluctant to think of hanging the bastards, so lets do something collectively before that day comes -like using politically correct language.
LeeAnne
as a wallstreet worker, please don’t take away my bonus.
i have a drug habit, a hot piece of ass girlfriend who loves me for my money, a top of range condo, a sports car and a party lifestyle to fund.
i know i lose your hard earned tax money, but as you can see, it’s for a good cause, your money funds my happiness. we all like happiness don’t we? you wouldn’t deny happiness would you?
do the right thing, pay your taxes, fund my happiness.
correction:
why not change the use of the term ‘bailout’ to ‘corporate welfare recipients.’ …use correct language, not ‘politically correct language.’
Wall Street and the ideology of lawlessness led by Ayn Rand devotee Alan Greenspan (yes, it was and is a cult as insidious as any other with the power to appear benevolent but ultimately evil and deadly) have proven that ‘free markets’ work.
The ideology has led to failure and collapse.
Let it collapse. Let them collapse. There are honest people out there with integrity, talent and experience who could emerge and will emerge if we survive this.
All this chatter, as if these people and their system should be taken seriously let alone saved in their present form, is like discussing the idea that you can change doo doo back into filet mignon.
Expat said-The Heads-I-Win attitude is rampant in banking. I know a dozen traders who have run up positions, held them through the end of the year, collected huge bonuses then happily accepted getting fired when the position lost tens of millions once the trader stopped propping it up.
Wow-legal theft-How do I get into this business?
ok if you want talent to fly overseas. juat look at the difference in the private and public sectors. young workers don’t flock to the public sector becuase of its pay controls. and now you’d like controls across the board. very bad idea. let the market forces take care of salaries itself.
How about fraudster bank executives giving back all their 2008 bonuses in exchange of reduced prison term?
Agree with Anonymous at 6:49 am…why is POTUS getting $400k…average american gets 1/10th of that with housing, car payments and grocery bill to boot…the egregious POTUS compensation and pension need to be cut with 100% of speaking/book fees going to the exchequer…
"M&A is a talent business. You need pretty highly developed skills to master the technical aspects"
LMFAO!!
I though you stopped drinking the kool-aid.
Wall Street, especially PE and hedge funds, is about one thing -Leverage. Without it they have been exposed as nothing more than speculators who can increase their returns in bubble times and then beg the taxpayers for a bailout when the leverage needs to be unwound.
From the News Hour discussion of McCaskill’s $400,000 cap:
JIM LEHRER: Is that a moral — that’s a moral issue?
DAVID BROOKS: Well, I do think it’s a moral issue. I still think the McCaskill idea is just a terrible idea.
JIM LEHRER: Why? Why?
DAVID BROOKS: Because these are banks that depend on superstars. And there’s not an ocean of superstars out there. And we may not like these people, but the fact is, to get a good CEO who can lead a company effectively, there are actually, if they can do it well, if they’re Jack Welch or somebody, they’re actually worth the money.
Now, that doesn’t mean I’d buy into the hedge fund bonus structure, which was yielding $300 million bonuses. But, nevertheless, the reality is, to keep top talent from going overseas or wherever it would go, you’ve got to allow pay over $400,000 a year in New York City.
MARK SHIELDS: These are companies — let’s be very candid — they are now taxpayer-subsidized. If they have these superstars, they probably haven’t reached that point.
Now, last I heard there was a strain of thought in this whole mess called ‘moral hazard’. Evidently, according to Brooks, we’ve got that notion entirely backwards. We’ve been thinking the hazard lies in rewarding irresponsibility through such things as privatize gain and socialize losses. Brooks, who has never met a rhetorical challenge against his thread bare republicanism that he cannot slickly meet, now comes to tell us that the hazard in all this lies in the morality of superstar celebrities who, if not paid according to, like totally free markets, man, will find other work. Even if the taxpayers must fund those ‘totally free markets’ from time to time, we risk immorality in not paying these superstars what the market says they are worth.
Got it?
YS:
I have no sympathy for any Wall Street firm which got a bailout. People don't want to work for bailout recipients at $400,000 a year, $25 million a year traders included, leave. No entity that holds federally insured deposits should be in 80+% of the businesses Citibank is in anyway. They get cheap funding through FDIC insured deposits then pay it out in bonuses! What a scam. The WSJ writes today, "Many Wall Street employees work under employment contracts, that can't be unwound". The WSJ should stop shilling for Wall Street. Of course these contracts can be broken. That's one reason you file BANKRUPTCY! As a condition of getting federal bailout money all creditors and executory contract holders should have been told: you have 90 days to object to our tearing up your contracts. Not one dime goes into your firm until you waive objection. Don't like it, force the Wall Street house into bankruptcy. Do you think you'll get more in bankruptcy?
If the M&A guys are any good, their leaving won't hurt the Wall Street houses which employ them very much. Each is presumably being paid his marginal revenue product. It's the executives and traders who are wildly overpaid. What did a clown like Richard Fuld "earn" in the last five years? Not one cent in my book. The same goes for Robert Rubin, Lloyd Blankfein and who knows who else?
If the M&A guys want to stay, Citbank et. al. can rent them office space and let them use Citibank's telephone system. They don't even need to change physical offices.
How about using the same Buffett formula for politicians and government agencies. If their policies don’t pan out over 5 years, their pay and benefits are clawed back.
"M&A is a talent business."
Ok, I'll just pretend you didn't write this article. Quit blowing smoke up my butt.
ok if you want talent to fly overseas.
Hahahaha. Let them.
Send them to the competition; Let them wreck other countries banking systems like they’ve wrecked ours.
They need to be replaced. If they go away of their own volition, so much the better.
Failure is failure. Stop rewarding it.
“Put. That coffee. Down. … Coffee’s for closers only.”
Stop throwing money at these losers. Fire them. Let them go under. WATCH THEM BURN AND DANCE IN THE FIRELIGHT.
This is like the forest management idiots that won’t let anything burn, even though it’s healthy for the forest. You end up with a 20-year deferred powder keg that won’t stop burning until the entire forest is destroyed. Or, it’s like the “don’t shoot the deer” morons who ban hunting and let deer populations grow until they’re all too dumb and starved to keep the herd in good health.
Michael: “How bad do you think it’s gonna be?”
Clemenza: “Pretty goddam bad. Probably all the other Families will line up against us. That’s all right. These things gotta happen every five years or so, ten years. Helps to get rid of the bad blood. Been ten years since the last one. You know, you gotta stop them at the beginning. Like they should have stopped Hitler at Munich, they should never let him get away with that, they was just asking for trouble.”
Burn these useless maggots out and make room for people that know what the hell they’re doing. Stop rewarding failure. Stop propping up dysfunction. Most importantly, by the love of Christ stop insisting on doing it with OTHER PEOPLE’S MONEY. Specifically, mine.
I’m all for the cap on pay for wall street idiots, though shouldn’t there be a quid pro quo?
I’ll gladly settle for a $400k limit on Wall Street pay IF the government will mandate immediate and totally public and transparent audits (with prison penalties for tax evasion enforced!) for all elected federal government officials and senior cabinet level appointments and their subordinates. I’m just saying, fair is fair, is it not?
I’m just saying, fair is fair, is it not?
Sure, we should limit the salaries of anyone requiring welfare checks.
Right now, it’s the banks that require large sums of welfare money, so let’s start there.
David Brooks: “Because these are banks that depend on superstars. And there’s not an ocean of superstars out there. And we may not like these people, but the fact is, to get a good CEO who can lead a company effectively, there are actually, if they can do it well, if they’re Jack Welch or somebody, they’re actually worth the money.”
Mr. Brooks is often reasonably sensible, but this time his comment is just plain stupid. What is the economic value of any gambler in a zero-sum negative game? In the Panic of 2008 we have seen the aggregate value of all such gamblers.
A hard cap on income in any industry may not be smart, but income caps and penalties for any industry that brings the economy to its knees as Finance just did are by no means entirely unreasonable.
The board of directors (BOD) who oversee these companies are a major part of the overcompensation problem. They are in-bred cronies who take care of each other. I think making a law that allows them to serve on only one board at a time would constrain salary increases. BOD clawbacks are also important in the regulation scheme.
US wealthy lose $20 trillion, says strategist
This illusion was worth $50 trillion at the market's peak in 2007, according to Grantham. In his quarterly review he writes: "How could we kid ourselves that we were suddenly rich and didn't need to save for our pensions when were sitting in the very same buildings we bought in 1974? We have not lost wealth, but just the illusion of wealth."
He says the situation has led to a run down in savings and a build up in debt: "Now the illusion of wealth has been lost with formidably negative effects on animal spirits." Advisers serving the lower reaches of the high net worth community could be facing quite a challenge: profits growth at the majority of private banks is tending to ebb away.
Grantham points out that personal wealth following write downs in equities, housing and commercial real estate now totals $30 trillion while debt remains stuck at $25 trillion.
Credit standards have tightened up but more illusory wealth needs to disappear before the US economy will start to recover: "To be successful we need to halve the level of debt. Somewhere between $10 trillion and $15 trillion will have to disappear."
>> I say, so the F what, life goes on and life will go on, Spring will come, Summer will come and this to shall pass; crap happens, just like when the Large Hadron Collider screwed up not long ago. In no time at all, that baby will be fired up again and things will get back to where they were, before the black hole as opened… and then, making money will be like making a pie or burger.
I have been trying to make some sense of the financial collapse and government responses. I started my own blog, roylat.com, to help spread the wisdom I glean from blogs like this one. The more I learn, the dumber I seem to become. Perhaps others can help me.
*What is the problem with letting all of the failing investment firms fail, with the government guaranteeing all depositors of any size?
*Wasn’t the FDIC set up to take over failing bank? Why not let it?
*Wouldn’t it be a lot cheaper for the government to pay off bank depositors than to take over all of the nearly worthless toxic debt held by banks?
*Aren’t there some banks that have avoided the pitfalls of the big investment banks and would be in a position to take over the business of the failed banks?
*Instead of a “bad bank,” couldn’t the government establish a “good bank,” one that would lend to well-run, solvent banks with excess loan demand?
*Can some of the learned people that read these blogs provide some numbers on the amounts of bank deposits compared to loans at the big, failing banks, such as Citigroup and BofA?
I’m putting these questions up as a post at my blog, Roylat.com, under the title, “Some Dumb Questions About Dealing with Failing Banks,” so you can post your answers there. I’d really appreciate some enlightenment. These questions seem akin to, Is the Emperor without clothes?” But, no one seems to be asking them.
A simple self-executing solution to the toxic mortgage assets would be a fee based program of federal mortgage insurance. For a fee of 1% of the face value of the mortgage any existing mortgage would be able to be guaranteed up to 30%; if the mortgage holder wished to go to 40%, it would be required to reduce principal by 10%; if the mortgage holder wished to procure a 50% guarantee, it would be required to reduce the principal amount by 20% and 60% for a 30% reduction. This approach would provide a floor value for mortgage assets and perhaps a market for the mortgage backed assets. In order to qualify the lender would have to certify that the interest rate was market or adjust it to market. This approach would permit homeowners to stay in their homes. The lender would calculate the optimum guarantee/principal reduction formula to protect its interest thus limiting the government’s potential exposure. This would stretch TARP dollars- insurance has more leverage [bad word] than buying assets. The principal reduction amounts might vary based on regional basis – e.g. Los Angeles 12.5%/ Cleveland- 10%, This would permit hundreds of thousands of people to avoid bankruptcy.
liberals aren’t upset that there are so many poor people- they are upset that there are so many wealthy people.
Actually I have a very simple solution for the traders’ compensation (which seems to be the most controversial), and which also avoids the problems with deferrals.
Pay them a salary within the proposed limits (under 400,000), but also allow them, instead of a bonus, to invest a fixed percentage (chosen at the beginning of the year) of their own money alongside all the deals that they make for their employers. Some of the deals are short-term, some are long-term, some are profitable, some not. Traders who elected too high a percentage (such that they cannot pony up the necessary money) are not allowed to work on those too large deals.
I have been dissapointed so far with Obama. The country is screaming for populist measures such as salary caps on employees of these firms. They want blood and they deserve blood. But Obama has been blind to it so far. He might talk “shameful” etc but he has not acted on it. He needs to bust some balls and reign in Wall Street but so far he has acted to protect the elite. He needs to listen more to Buffett and Volcker and less to Geitner, Bernanke, Summers and Rubin.
The reason they have the bonuses is because of the salary caps of the 80s after the last time we went through this.
Short memories, I swear…
Sen. Chuck Schumer the banking industry lackey, interviewed by Charlie Rose last night, said that letting US banks fail and then nationalizing them is unthinkable because government shouldn’t be in the business of determining who should receive loans and deciding which companies/industries should succeed or fail. Unfortunately, Schumer doesn’t recognize that Congress is doing the exact same thing by bailing out their crony, bankrupt, incompetent, overpaid with taxpayer bonuses, Wall Street welfare queen bankers who ride around in jets. Slimy-on-the-take politicians only posture and offer specious rationalizations of the positions already decided upon by their controlling corporate masters and then sold to the masses on corporate controlled TV.
And the whole reason for IRAs was because people didn’t want to put their money into the market, so Saint Reagan gave us IRAs to keep the game going.
Hey, the last 30 years has really all been one big financial scam, and it finally busted. But we kept the party going as long as we could! Congratulations, America!
What stuns me is the entire Republican party (what’s left of it) being in such deep denial that the jig is up and the game is over.
McCaskill’s speech was just a stunt, designed to get a popular reception, and therefore let off a little steam in the country at large. Quite frankly, I found it patronizing.
If DC wanted to take action, then they would simply do it.
At the same time Dodd was feigning outrage about bonuses, he supposedly was using his chairmanship to block consideration of a House bill that would have clawed back those bonuses.
For two years, Obama has committed to EFCA, a bill that shoud make it easier for unions to organize. In the current economic climate, passage of this bill would lead to a complete transformation of the American workplace overnight: unionization on a mass scale, across all industries. On Thursday, Obama waxed eloquently about unions being central to thriving middle class, and a thriving middle class being central to a thriving overall economy…then he signs three wholly inconsequential bills, and slips Biden’s name onto the roster of committee. Meanwhile, Biden and others in the administration tell reporters that EFCA “probably won’t happen this year…maybe next”. And the event is billed as a great moment for American labor, whose leaders (in the room) applaud even as the shiv is fully inserted.
Look, the Dems could do just about whatever they wanted. They have large majorities in both houses, a president at the height of his popularity (which is very high), the country is in the midst of a major economic crisis, and their longstanding opponents (Wall Street) are exactly the ones in most dire trouble. Hell, you’ve even got a socialist running the IMF…I mean, to say “the rails are greased” would be an understatement.
But they won’t do anything. It’s because they simply don’t want to. They like the system. Mainstream liberals have always liked the system; they just make minor changes to it, to ameliorate some of its most glaring defects. Loosely speaking, most of them seem to share the same cultural sensibilities as their counterparts on Wall Street.
So I just ignore McCaskills bill, Dodd’s protestations, and Obama’s “committment”, because there is obviously nothing substantive to any of it.
“What stuns me is the entire Republican party (what’s left of it) being in such deep denial that the jig is up and the game is over.”
I watched the Kudlow show this week and all the “tax cut” crap is for saving the rich man his dough. Such sh*t. Kudlow is another example of economics ” gone mad”. He belongs with the Gary S. Beckers and Paul Wolfowitz thugs of this financially deteriating world.
I am a successful entrepreneur and tax cuts really to nothing for my business or my finanical behavior. But I can see capital gain tax cuts preserving the thieving by the Bush administration these past eight years.
Does anyone think for a minute about the $45 billion profit ExxonMobil generated in ’08!!! Oil is a commodity isn’t it! Our Presidencial institution has lead the thieving. We must punish this.
A bit of good news, I read last week that the WorldCom CEO (Ebbers) got 25 years in prison for his fraud. O.J. is in prison (finally).
Justice is what is needed for this cure.
The primary cause of the financial disaster we are in is the ludicrous wall street pay system. The system has created an incentive to bankrupt the country, destroy their own companies, steal peoples pensions, jobs, and way of life and, at the end of the day, their own industry.
If we ever want deep, liquid, and transparent markets again, we must destroy the bonus system. Not only are these scum bags not worth a fraction of what they are paid they are more dangerous, and have done more harm, to the security of our country than any terrorist organization on earth.
And for comparison…
“Teldar Paper, Mr. Cromwell, Teldar Paper has thirty-three different vice-presidents each earning over $200,000 a year. [some shareholders in the audience whistle in astonishment]” — Gordon Gekko, condemning the greed of incompetent corporate executives during (ironically enough) his classic “greed is good” speech in Wall Street
Sure, there’s been a spot of inflation since 1987, and these are mere industrial managers rather than financial industry masters of the universe, but still… it’s astonishing to hop into the time machine and see what was considered an outrageous level of compensation in an earlier golden era of largesse. Are we on the cusp of the mother of all reversions to the mean?
Bankers and banks only operate within the confines given. If they successfully lobbied Congress to redact existing law then who is to blame?
Sell or stop buying bank stocks, they’ll get the memo eventually.
Best analogy is sports players being multi-millionaires. If people didn’t like the game they wouldn’t exist.
Some data points:
Bonuses (excl basic) in GBP (gross), London credit structuring team in the markets division at a top European bank:
2002 Graduate recruit 4k
2003 Analyst 35k
2004 Associate 130k
2005 Associate 310k
2006 VP 450k
2007 VP 300k (cut in line with peers)
2008 quit, but old colleagues say they expect to be down 80% on 2007
This is before 40% tax. 15% of bonuses from 2004 were allocated as 3-5y restricted equity, i.e. they are now worthless. On top of this, my basic rose from about GBP 35k to GBP 80k (gross).
I was rather naive about pay when I joined the bank, so even the 35k bonus for 2003 knocked my socks off at the time. As you can imagine, I am a very happy person now.
I always saw my earnings as a huge stroke of luck and a windfall. I quit in March 2008 because I had reached my target of making my family totally financially secure, and wanted to do something more meaningful with my life. I did not see the financial crisis coming and expected bonuses to go up again in 2008, so from that perspective my timing was very fortuitous.
I don’t think any of the deals I worked on were inherently rotten and none that I know of has caused losses for my old employer (who was very strict on us about risk management). However I am sure that many of those deals will have been blown up by the crisis causing big losses for the investor clients that bought them.
Yes, I do think I and my colleagues were horrendously overpaid, and I actually never felt morally comfortable with the pay levels, which was a major reason for wanting to quit (I know this is easy to say now, but it is the honest truth as my ex-boss would testify). This was a fairly unique perspective and most colleagues had trouble understanding why I wanted to leave.
I spent the money on my family’s well-being (mortgage, kids’ nursery, pension, etc), not on a ferrari or a yacht. I know that some people will say I should donate my ill-gotten gains to charity, but I think that charity begins at home. Our lifestyle is standard middle-class, which is all I ever aspired too, but without all the debt worries.
JP,
On your point that setting a cap for the execs will lead to everyone being paid less, that is not a given.
In the days when Wall Street firms were private partnerships, non-hierarchical pay was the norm. The managing partner was understood to be less valuable than the top producers. But spans of control were also narrower (and the firms were smaller). For instance, the head of a product area would primarily be a producer, only secondarily a manager, which was possible if the business units weren't too large.
You had a few cases become public, for instance, Lauren Hilibrand, head of Salomon's bond arbitrage group, made $25 million one year, when managing partner John Gutfreund made less than $3 million. Mike Milken made $600 million in his peak year, vastly more than Drexel CEO Steve Joseph. I am not privy to what people at Goldman were paid, but I would be pretty confident that the head of M&A (Geoff Boisi) and the head of risk arb (Bob Rubin) were better paid than the co-chairmen John Weinberg and John Whitehead.
And in the bad old days, that tendency even began influencing commercial banks, which has had a very strong tradition of hierarchical pay. Mark Kessenich, head of Citi's money markets division in the 1980s, was better paid than anyone at Citi save CEO John Reid, even though hierarchically, he was much further down the food chain.
As for Donna's comment, re salary caps in the 1980s, with all due respect, I don't know what you are talking about. Do you means relative to dud S&Ls? There weren't any on Wall Street.
As for the "M&A is a talent business" point, I hate to tell you, it is true. There are a lot of mid level and junior practitioners who ride on the coattails of the top guys and are no doubt overpaid and overestimate their abilities. I am not talking about them. (And they do get premium pay by being associated with big producers, just as John Thain's driver, who made $230,000 last year, did by virtue of working for the Big Man). However, the very top people can and do leave, and often join or form boutiques and do very well with no big firm overhead or brand name behind them.
The business is a brokerage business. It does not depend on capital (look at the success of firms like Rothschild, Lazard, Greehill & Co, and Felix Rohaytn's boutique). The line at Lazard in the old days was that a banker should be able to make business from a phone booth with a roll of dimes (today it would be quarters, but you get the point). How many of you in ANY job could go rent office space and bring in enough to support yourself, your overhead, and the relevant support staff?
M&A does do better in the boom times due to leverage (it's a lot easier to do deals with borrowed money) and at cyclical peaks, the big firms with trading operations inevitably screw themselves up by competing in M&A by using their balance sheets. That inevitably leads to huge losses, but the industry has no institutional memory.
But the flip side in that M&A falls off even more dramatically in the bust times than other areas (save perhaps structured finance in this cycle, which is probably never coming back to anything remotely like its peak level). In the early 90s bust, 3/4 of the people in M$A lost their jobs.
So boutiques will rise again. Those who are in the non-capital dependent businesses (and really good, with established clients) will leave the big firms, the rest will stay.
In his last year at Drexel Milken made $550 million, easily $1.1 billion today. How’s this sound? I think Milken was underpaid at $550 million! Why? Unlike the trader clowns, Milken brought Drexel from being a small Philadelphia firm into the big leagues. He made that firm.
anon of 6:17am said:
“The Obama administration is not likely to impose tougher restrictions on executive pay on most firms receiving aid under the government’s $700 billion financial rescue program, the Washington Post reported on Saturday.”
What a joke!!!!! Every single large bank from JPM, to C, GS, to MS, are insolvent. So they don’t want to take the money for fear of losing their perq’s?!? That’s when Paul Volcker needs to come in and say:
‘You guys are going to take the money, because we know you’re insolvent. We’re going to cap your pay, and if you don’t like it, I will make a phone call, and you WILL lose your business to your competitors.”
The gov has to know these banks are insolvent and need to be taken over. If they don’t know, they needed to find out yesterday.
YVES —
Deferred compensation, a la Warren Buffett’s way, is pure brlliance. There’s a reason why he’s richer than anyone on Wall Street. Maybe we should listen to him!!!
"As for the "M&A is a talent business" point, I hate to tell you, it is true. "
I was part of a LBO with CD&R in the internet bubble era. Although I lost my shirt, I can tell you that the partners that I worked with there were brilliant. If M&A ceased to exists they would be able to create value in any number of roles in business. You can argue that too much talent went into the wrong field, but you cannot argue it attracted talent.
Now when it came time for the due diligence on the part of the banks placing the money, they sent around a small mob of zombies who asked boilerplate questions and then wrote down the correct answer before we could reply.
Independent Accountant,
I’m not saying Milken’s pay was sound, merely that the perceived producers have in the past been much better paid than the top brass, and so a pay cap at the top would not necessarily constrain pay to those below.
Miken had negotiated that he’d get 15% of the profits. Fred Joseph was under pressure to cut it back, but of course, that went no where. What one thinks of Milken very much depends on what one thinks of his business practices. Frankly, some of them were Mafia-like (a member of the legal team at one of the big raiders of the 1980s has told me a real horror story). And I don’t mean the prostitutes at his Predator’s Ball, either.
“@bg: generally, and talking specifically from experience, deferred bonus schemes are not lost if the trader is fired. If a bank pays you 25% upfront and then 25% a year for three years, it cannot fire you immediately without paying you out entirely.”
There are three ways to defer comp. One is stock, one is a formula that makes a future promise, and the last is a guaranteed annuity.
We know that nobody does #3, and we know how well #1 has worked for Fuld and others.
Perhaps Merrill ‘promised’ defered bonuses, but meeting that promise appears to have put them in the line of fire. I agree that jobs where defered comp is a majority of the comp do make exit packages more lucrative. However Insecurity and animal instincts drive perceived value, and non equity/long dated comp is really hard to sell outside of the most secure (read berkshire) environments.
So rathernotsay, I do not see your gains as particularly ‘ill-gotten’ in your parlance. You followed the rules; you wrote what you describe as essentially sound deals in the context you worked; you saw the imbalances which others saw as perquisites. If your bonuses were substantially pooled over five years, yeah, you’d lose a chunck—but that’s more because the environment changed. If in a larger sense your payouts were . . . large, to me that is something for the tax structure to balance out, not your firm. Personally, I do not have a huge opposition to pay-for-performance. The point is to make the system _require_ performance for pay, and to put on the pressure to reduce risk.
If having done well you had turned around, personally levered up, and were now waxed fruit, I’d say you drank the wood alcohol with the rest and not shed a tear: you didn’t do that. If your firm was down 80% this year, but you not only expected to get you 07 bonus or better but in fact connived with your management to draw that sum while your firm was blasted, I’d call you a fraudster: you didn’t do _that_. Let’s just say that you worked in a crazed industry, looked around and said, “This is crazy,” and got off the bus. Personally, I don’t have a big problem with that. People are responsible for what they do, not for what they can’t control; show me what you did wrong, I don’t see it. And I got eyes, man.
And Anon of 2:10, I could have written your comment myself. Except for the “Loosely speaking” clause where you went a bit wobbly near the end.
And, too, Donna at 1:55, I’m not the least surprised to see the Republicans honking on their tired, sick horn despite the changed environment. Here’s why: That party, and particularly the strata of participants left to it now, have lived on the Big Lie for thirty years. That was Reagan’s evil genius trick; find a lie, then top it with a whopper by 50% but tell it with complete conviction looking the camera right in the lens, and the media reports it as ‘truth telling’ which must be given air time and credibility ‘for balance.’ Each year, that party had to come up with a bigger lie to sell, and they never hesitated one bit.
The Republican Party has in no way been engaged with reality for many, many years. For the last fifteen years, it didn’t matter what they said, no one called them on a thing. The Republicans could pull any meritricious gobbet out of their collective arse, and no matter how rank, oozing, or patently false the media would coo about their ‘steely conviction,’ ‘bold vision,’ their outrage that anyone would question them. So the Republicans have been ‘socialized,’ if you will, to being able to get away with any blatant falsehood or ideological vapidity because the media ‘balanced in’ anything and everything that party vomited up.
Now that reality has forced its way into the policy debate, the Republicans have NO idea how to adapt and cope—because the have no intention of adapting. They are used to the media and the debate adapting _to them_ no matter what they said, even if they lost on occasion, and so that party has clearly decided to ‘go back to basics,’ i.e. huddle around their pet ideological shibboleths and lie themselves hoarse. . . . Doesn’t seem to be gaining them much, and it is a suicide pact for the 10 election, so I hope that they just keep on telling the public what lazy bastards we all are for not putting chin up during this bad patch. We are seeing them as they really are and always have been: these are the things they have been saying and believing for thirty years. Only now, the public would like another song. —Oops.
Shudder at $400k? Give them to me. I’ll make them shudder from cold, hunger, and waiting for their turn to die.
"Traders will argue that level is too low, that if they make $30 million for someone, they deserve a bigger cut.
No dice, Unless you are willing to pay back your share of losses, I don't accept the logic that you are entitled to a asymmetrical pay deal".
Ummm, you don't seem to know much about trading. Trading isn't like M&A. It is to a large extent, short term speculation. Now we can go from boom to bust within a short time and the price of assets (stocks, bonds, derivatives) can go from skyrocketing prices to fire sale prices very soon. Does that mean the client who has entrusted me with his money should be denied the chance to time the market effectively and cash out before the going get tough? I don't think so. Therefore, if I made my client $30million dollars in one year and the next year it was a recession, with prices crashing everywhere, I want to be compensated for making him $30million. I timed the market effectively and I want a substantial cut for making someone $30million.
Sometimes the game just has to be changed (i.e. during a recession). CEOs may just have to accept the salary caps for the time being. Lisa Myers (surprisingly) said it pretty well on NBC.
http://www.newsy.com/videos/obama_we_all_need_to_take_responsibility/ @ :55
“[The] culture has to change as soon as you need billions of taxpayer dollars to stay afloat.”
There are tons of skilled, educated Americans doing jobs now for less money than they may have in the past. Why should the financial industry be any different?