Standing In the Shade of Success.

[LargoWinch]

How long can this possibly last?

...

Nonetheless, recent reports, based on months of investigation into the compensation paid by Wall Street has revealed some shocking statistics. According to the office of New York Attorney General Andrew Cuomo, who wrote the report, some bonuses paid to executives at the nine banks were greater than the banks' net income.

The numbers are mind boggling: Goldman Sachs, for instance earned $US2.3 billion, paid out $US4.8 billion in bonuses and received $US10 billion in TARP funding, while JP Morgan Chase earned $US5.6 billion, paid $8.69 billion in bonuses and received $25 billion in TARP funding.

But perhaps most incredulous is what happened over at Wells Fargo, who, along with its fully-owned subsidiary, Wachovia, not only lost money ($42.93 billion, according to the report) but also managed to pay $US977.5 millon in bonuses.

The issue is this: when the banks do well, their employees are paid well, which is fair enough; but when the banks do poorly, their employees are still paid well. Then, as if to add insult to injury, when the banks do very badly (or in some cases, fail), they are bailed out by taxpayers and their employees are still paid well. Its ludicrous, and, quite simply, singularly defines exactly why consumers have lost faith in the banking system.

Full Article Here.

[dummass]

Re: Standing In the Shade of Success.

If one feels compelled to do something about this injustice, the answer is simple. Don't do business with these banks. Without customers feeding the system, they will fail. Government support would not be enough.

[MarkL]

Re: Standing In the Shade of Success.

There are two statements/implications that this article is making.
1: Wall Street can't go on as it has. I agree with this!
2: The employee bonuses are wrong and/or immoral.

The problem with the second point is that it doesn't consider the realities of business.

As a former VP of Sales in a couple of different corporate scenarios, I completely understand that paying out more bonuses than net income is completely understandable in a situation where a major portion of your employee incentive is tied to personal or departmental success, particularly in a situation where there's been an economic downturn.

First let's start with a general principle: It's better to pay employees whose results can be tied to sales or profit by bonusing them on that sales or profit.

In other words, if Joe-Sales is charted to bring in 20 mill of client deposits a year, and I can either: a:Pay him $500k/year salary or b:Pay him a 2.5% bonus, I'd much rather do the latter! That way poor performers get paid poorly and good performers get paid well. Remember, Joe-sales is a sales guy, and how much profit is made on that 20 Mill is out of his control. He just brings in the clients with the fat wallets.

Now I have another guy... "Trader-Jill" who is responsible for trading credit derivates. I pay her on the profit of her trades. She's chartered to take the 20 mill and turn it into 25 Mill or more. I pay her a 10% bonus on her 5 Mill target profit margin... so her on-target earnings are also $500k. If all goes well, the company should make 4 mill gross profit on the whole deal after paying Jill and Joe their $500k each. Jill and Joe have been doing this successfully for the last 10 years or so and we're very happy with the department. A decent plan eh?

In 2008, Joe does his job and bring in 20 Mill of clients. Great job Joe!
However, Jill loses money. In fact, Jill loses 50% of the 20 mill because the CDS market has crashed. Ouch. 10 mill gone! Of course our clients bear some of this loss, but we trade our own book as well, and we're not able to take our normal slice of our client's profit's either!!

Unfortunately I still have to pay Joe his $500k. He did his job and he has a contract. If I don't pay him he'll take me to the labor board and win. Jill doesn't get her bonus and gets nothing. The result? The company loses 50% of 20Mill AND has to pay Joe his bonus. More bonuses than earnings are paid.

Now in reality things get more complicated. Both Joe and Jill ALSO get a base salary that has to be paid regardless of profitability. I might tie SOME of of Joe's pay to corporate profitability, but naturally most will and should be tied to his job and his focus... bringing in new clients with bankbooks.

And there's a final issue as well.

If my company has 10 departments like this... and one department loses a HUGE amount of money, say hypothetically, in CDSs and CDRs, and the other 9 are normally profitable, say on trading oil, gas, gold, futures... I still have to pay my bonuses to everybody in the other 9 departments, despite the fact that one bad department lost the whole company a massive amount of money.

Remember, these institutions didn't plan for this implosion. If they had, they'd have traded it! This includes Goldman in my book, or they would've traded or bought protection on their AIG CDSs and CDRs. Of course once it had happened, Goldman, via government influence, came out squeaky clean. But, it's thus not surprising that the bonus plans for their employees don't plan for the crash either.

The article is right... the banks can't go on like this forever. But the bonus situation is understandable, and is not something they can get out of easily due to employment contracts, not wanting to lose valuable folks, needing to continue to bonus the successful, etc.

[dummass]

Re: Standing In the Shade of Success.

There are two statements/implications that this article is making.
1: Wall Street can't go on as it has. I agree with this!
2: The employee bonuses are wrong and/or immoral.

The problem with the second point is that it doesn't consider the realities of business.

As a former VP of Sales in a couple of different corporate scenarios, I completely understand that paying out more bonuses than net income is completely understandable in a situation where a major portion of your employee incentive is tied to personal or departmental success, particularly in a situation where there's been an economic downturn.

First let's start with a general principle: It's better to pay employees whose results can be tied to sales or profit by bonusing them on that sales or profit.

In other words, if Joe-Sales is charted to bring in 20 mill of client deposits a year, and I can either: a:Pay him $500k/year salary or b:Pay him a 2.5% bonus, I'd much rather do the latter! That way poor performers get paid poorly and good performers get paid well. Remember, Joe-sales is a sales guy, and how much profit is made on that 20 Mill is out of his control. He just brings in the clients with the fat wallets.

Now I have another guy... "Trader-Jill" who is responsible for trading credit derivates. I pay her on the profit of her trades. She's chartered to take the 20 mill and turn it into 25 Mill or more. I pay her a 10% bonus on her 5 Mill target profit margin... so her on-target earnings are also $500k. If all goes well, the company should make 4 mill gross profit on the whole deal after paying Jill and Joe their $500k each. Jill and Joe have been doing this successfully for the last 10 years or so and we're very happy with the department. A decent plan eh?

In 2008, Joe does his job and bring in 20 Mill of clients. Great job Joe!
However, Jill loses money. In fact, Jill loses 50% of the 20 mill because the CDS market has crashed. Ouch. 10 mill gone! Of course our clients bear some of this loss, but we trade our own book as well, and we're not able to take our normal slice of our client's profit's either!!

Unfortunately I still have to pay Joe his $500k. He did his job and he has a contract. If I don't pay him he'll take me to the labor board and win. Jill doesn't get her bonus and gets nothing. The result? The company loses 50% of 20Mill AND has to pay Joe his bonus. More bonuses than earnings are paid.

Now in reality things get more complicated. Both Joe and Jill ALSO get a base salary that has to be paid regardless of profitability. I might tie SOME of of Joe's pay to corporate profitability, but naturally most will and should be tied to his job and his focus... bringing in new clients with bankbooks.

And there's a final issue as well.

If my company has 10 departments like this... and one department loses a HUGE amount of money, say hypothetically, in CDSs and CDRs, and the other 9 are normally profitable, say on trading oil, gas, gold, futures... I still have to pay my bonuses to everybody in the other 9 departments, despite the fact that one bad department lost the whole company a massive amount of money.

Remember, these institutions didn't plan for this implosion. If they had, they'd have traded it! This includes Goldman in my book, or they would've traded or bought protection on their AIG CDSs and CDRs. Of course once it had happened, Goldman, via government influence, came out squeaky clean. But, it's thus not surprising that the bonus plans for their employees don't plan for the crash either.

The article is right... the banks can't go on like this forever. But the bonus situation is understandable, and is not something they can get out of easily due to employment contracts, not wanting to lose valuable folks, needing to continue to bonus the successful, etc.

This analysis does not hold up when you are talking about a bankrupt business. Without Federal bailout money, many of these banks would have been bankrupt. The employees would find themselves, in line, behind other creditors in the bankruptcy Court proceedings. Under a normal liquidation, the employees would not have received a dime.

Try as you might, your arguments will fail in the face of informed readers. The rule of law was not applied and a few, well connected, insiders, made off with a bundle. If you are interested in better understanding the scam, G. Edward Griffin gives all the details and historical accounts in his book, The Creature from Jekyll Island. This is not a new scam; it's been played out many time before by those who control our money supply.

[bcassill]

Re: Standing In the Shade of Success.

I used to work for Bank of America. I can personally tell you that if I managed a line of business at that company that produced the level of losses that has occurred, I would have been sent packing by Mr. Lewis personally. Interestingly enough, he has somehow managed to keep his job (so far) despite the horrendous losses. And don't give me any of that "no one saw this coming" excuse. There are plenty of banks (albeit smaller ones) that maintained sane risk management policies during the lending craze and are still in very good shape.

No, what we have here are a group of folks that went after a stream of easy money despite what must have been known of the risks. I know from someone who had been at Washington Mutual that the senior risk officer there resigned rather than put his seal of approval on the risky alt-A/option ARM mortgages that eventually brought the company down. Killinger must have been told the risk as all the CEO's have likely been told at some point.

The problem is that these clowns are still running the very companies they very nearly destroyed (except for Killinger, of course). This is not about retaining "valuable" employees. It is about keeping the game alive for as long as they can. This includes outlandish bonuses for non-performance. Yes, if I make money for my company, I should be well compensated. If I lose a bundle, I get fired. It's that simple. The problem is that none of these top folks have been held to account, and many of them are still raking it in. All of them should have been fired at the start of the crisis if the boards had had any backbone whatsoever. If you needed a government handout to keep your bank afloat, you must have been doing something wrong. Start with the CEO, and then fire the Chief Financial Officer, the COO, and the senior risk officer. Ban them from working in the industry ever again (I think the FDIC can do this, actually) or serving on the board of another financial services firm. God forbid they get a job running another bank.

No, this is about ego, greed, easy money, and outsized bonuses among people who felt they deserved as much or more in compensation as their peers. We now pretend they are still solvent by changing mark-to-market accounting rules and by goosing the equities markets with liquidity to keep their share prices up. David Copperfield could not have created a better illusion as has been perpetrated by the Fed and the Treasury.

But I think you are correct. This cannot last. It will not last, and the FIRE cabal will be broken for good (or at least for many decades to come). $24 trillion has been pumped into the system in terms of guarantees, direct purchases, low interest loans, and equity injections, and the banks are in no better shape today than when the crisis started. Congress does not appreciate the end run that has been done to them and will likely crack open the Fed's books for what must be some very embarrassing revelations. The large institutions will all likely fail under the crushing weight of remaining credit defaults over the coming years no matter what the government does. No, the party is over. Last call has been announced. The drunk party goers just haven't been kicked out onto pavement yet to wallow in their own stench. ;)

[rabot10]

Re: Standing In the Shade of Success.

I used to work for Bank of America. I can personally tell you that if I managed a line of business at that company that produced the level of losses that has occurred, I would have been sent packing by Mr. Lewis personally. Interestingly enough, he has somehow managed to keep his job (so far) despite the horrendous losses. And don't give me any of that "no one saw this coming" excuse. There are plenty of banks (albeit smaller ones) that maintained sane risk management policies during the lending craze and are still in very good shape.

No, what we have here are a group of folks that went after a stream of easy money despite what must have been known of the risks. I know from someone who had been at Washington Mutual that the senior risk officer there resigned rather than put his seal of approval on the risky alt-A/option ARM mortgages that eventually brought the company down. Killinger must have been told the risk as all the CEO's have likely been told at some point.

The problem is that these clowns are still running the very companies they very nearly destroyed (except for Killinger, of course). This is not about retaining "valuable" employees. It is about keeping the game alive for as long as they can. This includes outlandish bonuses for non-performance. Yes, if I make money for my company, I should be well compensated. If I lose a bundle, I get fired. It's that simple. The problem is that none of these top folks have been held to account, and many of them are still raking it in. All of them should have been fired at the start of the crisis if the boards had had any backbone whatsoever. If you needed a government handout to keep your bank afloat, you must have been doing something wrong. Start with the CEO, and then fire the Chief Financial Officer, the COO, and the senior risk officer. Ban them from working in the industry ever again (I think the FDIC can do this, actually) or serving on the board of another financial services firm. God forbid they get a job running another bank.

No, this is about ego, greed, easy money, and outsized bonuses among people who felt they deserved as much or more in compensation as their peers. We now pretend they are still solvent by changing mark-to-market accounting rules and by goosing the equities markets with liquidity to keep their share prices up. David Copperfield could not have created a better illusion as has been perpetrated by the Fed and the Treasury.

But I think you are correct. This cannot last. It will not last, and the FIRE cabal will be broken for good (or at least for many decades to come). $24 trillion has been pumped into the system in terms of guarantees, direct purchases, low interest loans, and equity injections, and the banks are in no better shape today than when the crisis started. Congress does not appreciate the end run that has been done to them and will likely crack open the Fed's books for what must be some very embarrassing revelations. The large institutions will all likely fail under the crushing weight of remaining credit defaults over the coming years no matter what the government does. No, the party is over. Last call has been announced. The drunk party goers just haven't been kicked out onto pavement yet to wallow in their own stench. ;)

"This cannot last. It will not last, and the FIRE cabal will be broken for good "

OMG I hope U R right

[LargoWinch]

Re: Standing In the Shade of Success.

MarkL, I believe that it is difficult to pay bonuses if bankrupt (and yes, that basic law of economics applies even for banks).

This situation is not understandable in my view.

[flintlock]

Re: Standing In the Shade of Success.

Maybe just maybe, these bonuses are a little too skewed in the favor of those receiving them.

[ricket]

Re: Standing In the Shade of Success.

The problem with the second point is that it doesn't consider the realities of business.

fail

(*shakes fist* at the 10 character minimum...)

[metalman]

Re: Standing In the Shade of Success.

imagine it's 2001 and the collapse is in the high tech industry.

cisco, microsoft & google all have to be bailed out by the government to stay in business... or the economy will collapse! millions will be laid off!

anyone think chambers, ballmer & schmidt will accept millions in bonuses and allow employees to earn millions in bonuses 9 months later?

gimme a ******* break.

only the fire econ boyz have the balls for that shit.

[Nivelles]

Re: Standing In the Shade of Success.

Any opinions on how much all this is affected by Bank of America (now including Merrill Lynch,) Citigroup, Goldman Sachs, J. P. Morgan, & Morgan Stanley being Primary Dealers for the Fed, and the Treasury? Without them, there'd hardly be a U.S. primary dealer left, and then who'd shuffle the Treasury paper? Suppose that's why they think they can get away with it?

[LargoWinch]

Re: Standing In the Shade of Success.

Any opinions on how much all this is affected by Bank of America (now including Merrill Lynch,) Citigroup, Goldman Sachs, J. P. Morgan, & Morgan Stanley being Primary Dealers for the Fed, and the Treasury? Without them, there'd hardly be a U.S. primary dealer left, and then who'd shuffle the Treasury paper? Suppose that's why they think they can get away with it?

Nivelles, the answer to your question is simple: if being a primary dealer is a viable business and all those providing this service go kaput, then the market will respond and create another player to fill in the void to seize this opportunity.

Regarding your second question: they can get away with it, because their political plans is much better than their business plans, at the expense of everyone else, including owner of dollars.

[Nivelles]

Re: Standing In the Shade of Success.

The market doesn't create Primary Dealers, the Federal Reserve designates them. And also un-designates them, "in close consultation with the Treasury." It is not a free market phenomenon.

[LargoWinch]

Re: Standing In the Shade of Success.

The market doesn't create Primary Dealers, the Federal Reserve designates them. And also un-designates them, "in close consultation with the Treasury." It is not a free market phenomenon.

I was unaware of that Nivelles, but I assume that the Fed would simply "designate" new ones from the remaining financial firms.

[Nivelles]

Re: Standing In the Shade of Success.

The Fed doesn't simply designate whomever it pleases. Banks or brokerage outfits that want to be Primary Dealers make an application to the Fed in NY, which then examines whether they're qualified. The main qualification is that they have, and maintain, a certain level of capital, to ensure the company has the financial strength to participate seriously in Treasury auctions. So, companies apply for the role.

But what if there was an audition, and nobody came? So to speak. What I was wondering about, was how much counter-pressure these U.S. companies could bring to bear - or have brought to bear? - by threatening to stop being Primary Dealers. Basically, "If you give us too hard a time over the bonus issue, we'll withdraw as Primary Dealers." If that did happen, it would have some practical effect for trade in Treasury bonds and notes, and the psychological effect would be dramatic, if a news story headline announced that all the U.S. Primary Dealers had withdrawn. The point was merely that the Primary Dealers do have some counter-pressure they could exert, if they wanted to. Not being privy to the smoke-filled rooms, I've no idea what's been said behind the scenes.