New York State Comptroller Thomas DiNapoli’s report on Wall Street bonuses set off a firestorm last month, but it was ill-conceived. Now his incendiary words have unleashed a populist uprising that is infecting the national conversation with ill-directed anger and hatred towards the wealthy.
At the House Financial Services Committee hearing Wednesday, Chairman Barney Frank (D.-Mass) bizarrely asked the eight Wall Street CEOs sitting before him: “Why do you need to be bribed? … Why do you need bonuses?”
Bribes, bonuses, what’s the difference? Similarly, DiNapoli lumped Wall Street bonuses together with private corporate jets and dividend payments to shareholders. Broadcast, cable, and youtube do-it-yourselfers have all picked up on the theme.
In its most recent show, Dateline dwelled on Wall Street honchos who don’t need to go through security when they hop on their private jets (I guess no one cares if they blow themselves up); Fox News anchors enjoyed chewing on a Wells Fargo defense of its corporate getaways for top-performing employees; CNBC has launched a Wednesday night series called American Greed; and one very funny youtuber has created a mock commercial asking for funds to support the lifestyle of a down-and-out CEO: “For only $3,700 a day … less than the cost of a thousand lattes.”
It won’t be long before we see barricades on Wall Street.
The original bonus news release is worth parsing. It is a study in middle-class rage, which the congressmen today are playing out as well.
First DiNapoli notes that the securities industry had slashed bonuses by 44% and that it “has already lost tens of thousands of jobs and the industry is still continuing to write off toxic assets. It’s painfully obvious that 2009 will probably be another difficult year for the industry.” He also states that the top managers aren’t taking any bonuses, either because the government restricted the payouts or they volunteered to forgo them.
So in the first two paragraphs we get the following picture: The most important taxpayer in town is suffering huge losses. The government lends a hand to help it from going under. And what does this critical employer do in response? Fires tens of thousands of people — those who are responsible for the mess and many who are not — slashes bonuses, and totally deep-six bonuses for senior management, even those brought in after the mess was unleashed. DiNapoli then observes: “Taxpayers have invested billions of dollars to stabilize the nation’s banks and financial institutions and there are plans to make additional investments to shore up the banking system.”
Given that the payroll is now lighter in every way and Wall Street is in the middle of one of the most fundamental restructurings in history, you would expect him to at least say it’s taking a step in the right direction. More than a month before this news release came out, Morgan Stanley had already announced its CEO was turning away bonuses and that the firm’s operation and management committees would be taking 75% and 65% cutbacks in salaries. CEO John Mack also announced a multi-year bonus system that included clawbacks. Other firms — both TARP and non-TARP — have since followed suit.
Those changes are huge. One of the fundamental problems on Wall Street — and Main Street — was the divorce of risk and reward. Mortgage brokers and real estate appraisers were paid for passing along happy customers. They didn’t make money if they turned down unqualified borrowers or they wouldn’t receive more referrals if they appraised a property for less than a loan was worth. Similarly, Wall Street bankers raked in their fees whether or not deals were toxic. Credit rating agencies didn’t think twice about the conflict-ridden relationship with the banks that allowed sub-prime junk to masquerade as AAA investments.
A somewhat chastened Wall Street has begun to address the disconnect between risk and reward. The path has not been straight and narrow (to wit, the Merrill Lynch scandal), but it’s a step forward. Was Mr. DiNapoli happy? Did anyone on the Financial Services Committee take note? No. According to the Office of the State Comptroller (OSC) statement, “There needs to be greater transparency and accountability in the use of these funds. Every dime counts, especially when they’re taxpayer dimes and taxpayers ought to know if these funds were used to buy corporate jets, pay dividends or bonuses.”
Speaking of transparency and accountability, I called and asked the Office of the State Comptroller to find out what percentage of the $18.4 billion in bonuses went to TARP firms. The agency doesn’t know because the numbers aren’t broken out by firm. Then I asked what percentage of the estimated 165,000 workers are employed at TARP firms. Again the OSC didn’t know. (To my surprise, neither did the Securities Industry and Financial Markets Association.) A spokesman said that TARP firms account for the “lion’s share” of the number, but didn’t have any specific numbers. Securities workers also include hedge funds, asset managers, and other non-TARP firms like UBS, Deutsche Bank, and Credit Suisse. In other words, the number itself lacks transparency and accountability. It is a faceless avatar waiting for someone to draw on. (And the number, by the way, doesn’t just include at-will bonuses or payments to workers outside New York.) What it does include is severance for fired workers as well as contractually obliged lump sum payments that could have been set up years earlier.
In any event, bonuses have become a symbol for obscene wealth. They are a misnomer. Bonuses account on average for 50% of compensation on Wall Street and are often contractual. As Morgan Stanley CEO John Mack noted in the hearings this morning, their roots go back to the days when investment firms were partnerships and profits were paid out at year end. This is indeed part of the problem. They developed in a different era when Wall Street spoke a different language. Bonuses were not bonuses in the conventional sense; they were an essential part of the compensation system. That doesn’t make them evil, nor does it mean that those who performed well and who are basic to the functioning of the financial industry should find themselves with their compensations more than halved. As it stands, from secretaries and IT managers to traders, their individual total comp packages are off on average by about 25%; no small potatoes.
If taxpayers want to get their money’s worth, they should demand that the firms be run well, which means paying employees competitively. Again, Mack told the Financial Services Committee that he has seen employees below the senior level defecting to European firms. The financial industry has always paid more than other industries — that’s part of its allure and it’s also a source of envy. Is it fair that investment bankers, even “good” ones, make more than teachers, especially the good ones? Of course not.
The bonus announcement poked at the sore point of our democratic society. It unfairly played on our sense of fairness. It would be a greater shame if these firms fell apart after taxpayers sent $350 billion their way as well as trillions in guarantees on bad investments. Are we betting on recovery or should we flog these institutions to a bloody death? Can we offer constructive criticism to reset Wall Street on a path that no longer rewards senseless risk or are we more interested in hissing at a lifestyle that many dream of privately but publicly decry?
Besides, the people we should be mad at are long gone with the dough. Or like former Citigroup director Robert Rubin and disgraced Fannie Mae CEO Franklin Raines, they have served as economic advisors to the White House. The people we’re castigating now are the ones left holding the bag, and it isn’t full of cash. They are now charged with putting back together Humpty’s financial Dumpty. Do we want them to succeed or not?