How Wall Street Keeps Dooming Itself

We’ve arrived at an aha moment.

Virtually everybody who butters their own bread is outraged that Wall Street, which is becoming a de facto government agency thanks to billions in bailout money, found $18.4 billion in bonuses for bankers who nearly wrecked the world’s financial system in 2008. President Obama’s criticism – “shameful” – is mild compared to what many of us think.

The bankers are bellyaching about a 44 percent decline in bonuses from 2007 levels. That’s like complaining about being served a 40-ounce porterhouse instead of a 70-ounce one.

Here’s a bit more perspective: Charles Payne, CEO of the research firm Wall Street Strategies, points out that in 1985, Wall Street bonuses totaled $1.9 billion. The average recipient got $13,970. Since 1985, inflation has run 97 percent in total, according to the Bureau of Labor Statistics. That means that something worth $1 in 1985 would be worth $1.97 today. So follow the math:

Wall Street bonus pool in 1985: $1.9 billion

Value in 2008, if indexed for inflation: $3.75 billion

Actual 2008 bonus pool: $18.4 billion

Amount by which bonus pool exceeded inflation: 490 percent

Average Wall Street bonus, 1985: $13,970

Value in 2008, if indexed for inflation: $27,580

Actual average bonus, 2008: $112,000

Amount by which average bonus exceeded inflation: 406 percent

So pay for top Wall Streeters has risen 4 to 5 times as much as the rate of inflation since 1985. Of course those bankers are worth it, because of all the great things they’ve done for America during that time, like engineer the Long-Term Capital Management meltdown in 1998, the tech bubble that burst in 2001, the housing bubble that’s still bursting, a credit freeze that’s producing hypothermia at hundreds of real companies that actually make stuff, and the near collapse of the financial markets.

If there’s a crowning absurdity, it’s that Wall Street mustered any bonuses at all in a year when the industry lost $34 billion. Does anybody else in America get a bonus when their company tanks? “Rewarding cataclysmic failure like this has to be what led to the fall of the Roman Empire,” Payne wrote in a recent note to clients.

It’s worth pointing out that not all Wall Street firms are as wayward as big offenders like Citigroup (C), Merrill Lynch (MER), AIG (AIG), and Bank of America (BAC). Many made money in 2008, and any firm that isn’t asking for taxpayer handouts should be allowed to pay its people whatever it wants.

But the bonus brouhaha reveals so many disconnects in the financial industry that it could end up being a pivotal moment in the dismantling of the old Wall Street. Derivatives and “funding facilities” are hard for most people to understand. But gimme gimme gimme is a corruption we all understand. If the politicians didn’t have a clear rallying cry for going after Wall Street before, they sure do now.

Comments

[vreporter:]

While I'd be the first to join this bashing on greed, many of us seem to be falling for some bad perspectives on the situation - yours included.

Please correct me if I'm wrong but:
1) We seem to be making much out of the term "bonus" whereas in majority on Wall Street it is a "salary" that's apportioned for various accounting, tax, savings plan issues - as a bonus. I know many back-office and support staff who work for 40k a year at some of the names you have mentioned. The large "percentage" bonus they receive still barely puts food on the table when one accounts for their metro NYC cost of living. So total compensation is actually quite modest and the bulk (not all) of these announced bonuses do apply here.

2) In making comparisons to prior years, I ahven't seen any of these arguments back up with the change in number of workers. I find it hard to believe that Wall Street employed the same number of workers in 2008 as they did in 1985. That would make your math on comparisons, not only poor, but possibly inflated in the wrong direction.

So, living in the metro NYC area is expensive, in general.
The change in the number of workers doesn't correlate with the likely change in bonus totals being scolded.
And the definition of total compensation seems to be lost in the definition of bonus.

Clarifying these points will probably bring you to a better conclusion on this topic. I'm sure there are still many who did receive outrageous and undeserving payments. But those numbers probably wouldn't make the headlines currently underway.

(a consultant to Wall Street on other unrelated matters)

Jan 31 11:19 AM

[PROXIMO:]

Nice try at a positive spin, but the greedy, thieving, incompetents in the Big Banks are utterly undeserving of any defense.

On Jan 31 11:19 AM vreporter wrote:

> While I'd be the first to join this bashing on greed, many of us
> seem to be falling for some bad perspectives on the situation - yours
> included.
>
> Please correct me if I'm wrong but:
> 1) We seem to be making much out of the term "bonus" whereas in majority
> on Wall Street it is a "salary" that's apportioned for various accounting,
> tax, savings plan issues - as a bonus. I know many back-office and
> support staff who work for 40k a year at some of the names you have
> mentioned. The large "percentage" bonus they receive still barely
> puts food on the table when one accounts for their metro NYC cost
> of living. So total compensation is actually quite modest and the
> bulk (not all) of these announced bonuses do apply here.
>
> 2) In making comparisons to prior years, I ahven't seen any of these
> arguments back up with the change in number of workers. I find it
> hard to believe that Wall Street employed the same number of workers
> in 2008 as they did in 1985. That would make your math on comparisons,
> not only poor, but possibly inflated in the wrong direction.
>
> So, living in the metro NYC area is expensive, in general.
> The change in the number of workers doesn't correlate with the likely
> change in bonus totals being scolded.
> And the definition of total compensation seems to be lost in the
> definition of bonus.
>
> Clarifying these points will probably bring you to a better conclusion
> on this topic. I'm sure there are still many who did receive outrageous
> and undeserving payments. But those numbers probably wouldn't make
> the headlines currently underway.
>
> (a consultant to Wall Street on other unrelated matters)

Jan 31 01:40 PM

[HBWOW:]

Bonuses now and then. Now the insiders, without performance, take massive compensation packages as they work harder at getting these monies than doing the required duties of their positions.

Many years ago, I saved my company 1 1/2 million dollars and the President told me, "Thanks, but what are you going to do for us tomorrow?"

TIMES HAVE CHANGED!!!!

Jan 31 02:01 PM

[Chris Henry:]

There is nothing wrong with giving them bonuses. There is something wrong with bailing out failed companies, regardless of what industry they are in.

The best thing we could ask for would be a complete failure of the banking system, we need a system based on sound money, the quicker the better.

If the government didn't bail out the banks the result would have been no bonuses for the bankers. It's that simple.

Jan 31 04:45 PM

[E.D. Hart:]

Profits are privatized and losses are nationalized. Absurdly, this is exactly counter to many of the dogmatic arguments for the superiority of the US system of capitalism which is said to raise all boats.

Jan 31 05:12 PM

[thatguy57z:]

Well leave it to are president to tell them shame on yourself to know that the public would here about the big bonuses that they got from taxes payer bailout, like they could have been a little more on the under, like Obama its OK for the bonuses just keep it under the table, its are government that lets this go on.

Jan 31 05:24 PM

[Leftfield:]

Let's see, to justify Wall St. bonuses to the bailed out and bankrupt, we have to surmise that it's not as bad as it looks. Or, that the talent there requires it.

Not everyone could run the planet into the ground, I agree. And, everything on Wall St. and in Washington stinks so much, it's worse than it looks.

The only thing left is that maybe it takes a crook to catch a crook.

Jan 31 07:30 PM

[Obama is Bu...:]

We should really look at the foxes guarding the hen house... Over the last 40 years, Congress has been controlled (at different times) by both major political parties. Both major political parties have controlled the White House. Both major political parties have controlled both Congress *AND* the White House.

They have never once run balanced spending. Yes, I am sure someone will whine that that so-and-so cooked the books and produced balanced "budgets" -- but no one ran balanced spending.

No one produced an energy policy beyond Jimmy Carter suggesting we all wear a sweater. No one properly funded infrastructure like railways and highways. Adjusted for purchasing power parity, the US spends more per student on education than any other country on Earth -- but I would suggest our schools do not reflect that. While administrators sit in newly refurbished offices, teachers are forced to buy their own supplies.

For this "public service", government bureaucrats (both elected officials and career bureaucrats) have enjoyed pay raises that exceeded CPI. While stated salaries are generally less than the private sector, productivity is WAY WAY less than the private sector -- adjusting for lower productivity, public sector workers get paid LOTS more than the private sector.

And that is before we take into account benefits that are much better than almost all private sector workers

These underworked, overstaffed and overpaid bureaucrats are the ones who are (and were) supposed to be regulating all these banks.

What right do voters have to whine about bank bonuses (which are admittedly obscene) when we have been tolerating the "pay for lack of performance" compensation of our so-called public servants?

Jan 31 08:37 PM

[chippo:]

Even more offensive is the pay that the top execs allot for themselves. John Thain 36 Million for 1 years work, Stan O'neal a 'retirement package' of 161 million, after taking 46 million in 06 and 10s of millions in preceeding years. This is while the company is being driven into oblivion and low level support staff are being given the boot. Honestly, how many 14 room mansions does a person need. These guys are such money grubbing toads that its obscene.

I thought there was a clawback provision in Sarbanes Oxley specifically for this sort of thing? Why are these guys getting away with it?

Feb 01 02:38 AM

[know nothing:]

Sports figures get paid multi millions, like the wall streeters, but we get to actually get to view the sports figures at work preforming at their jobs, while the wall streeters hide behind the walls of the ivory towers...

Feb 01 07:32 AM

[Peter Lecoq:]

John Thain should be tossed into a prison cell with an angry Mike Tyson while Tyson is having a bad reaction to a borderline lethal combination of PCP and Viagra.

Feb 01 09:50 AM

[jtjt:]

I have not heard what the average salary is under this average bonus level .....it is described as small, but then again so were the bonuses !

Feb 01 10:36 AM

[bertil:]

What continues to surprise me is that there has, as of yet, not been an actual large scale public protest in this oh so slowly sliding avalanche disaster. Are we all like the proverbial frog in the slowly warming water, who will just sit there till she boils?
What is gained by scapegoating? Or locking the barn when the horses left? What is gained by senators debating "our" stimulus package vs "theirs" ? What is lost is clear: time and opportunity!
Let's have three to five comprehensive plans published and then we - the people! - vote!
A revolutionary idea: democracy.

Feb 01 11:37 AM

[Ricard:]

Great article. When the goal of competition is to prove that your greed is greater than your peers, you sow the seeds of your own destruction. This is the end-game for Gordon Gekko.

Feb 01 12:49 PM

[monday1929:]

Then reduce the Bankers Bailouts and give the money to those who are going to lose their jobs because of the Bankers Treasonous acts. Hang those Bankers and re-claim the past ten years of criminally obtained bonuses. Add that money to the States unemployment and food pantry budgets. Paying criminals so they can trickle down some money is not the answer, nor is confirming a certified tax cheat as Treasury Secy. because he is the "only person" capable of dispensing Trillions to his banker buddies. THAT money should go to the community banks to lend, not to the money center banks who cased this.


On Jan 30 01:18 PM TRS wrote:

> A rather inconvenient truth is Albany and NYC also benefit from the
> mothers milk of Wallstreet bonuses. At a mere $18 bln the city and
> state are witnessing a $1.3 bln short fall in tax collections. Followed
> by an announced potential 20,000 job cuts in the service personel
> pool of NYC.
>
> Blasting the bonuses has far reaching consequences. Lambasting is
> easy by those not losing their respective jobs due to the fallout...
> and I'm not talking about wallstreet jobs! I'm talking about the
> better than 8 million people that live in and around Manhattan that
> depend on that injection of cash into the system for their livelyhood.
>
>
> The repercussions of government dictating private business practices
> is far more dangerous than the bonuses. Justified or not.
>
> For the sake of conversation... What do you suppose Wallstreet's
> adjusted hourly rate is? Just curious. Most I know don't work a 40
> hour week.

Feb 01 05:04 PM

[monday1929:]

You are now on a government watchlist for promoting Democracy. George Washingto would today be in GITMO. The public will become enraged at about S&P 500.


On Feb 01 11:37 AM bertil wrote:

> What continues to surprise me is that there has, as of yet, not been
> an actual large scale public protest in this oh so slowly sliding
> avalanche disaster. Are we all like the proverbial frog in the slowly
> warming water, who will just sit there till she boils?
> What is gained by scapegoating? Or locking the barn when the horses
> left? What is gained by senators debating "our" stimulus package
> vs "theirs" ? What is lost is clear: time and opportunity!
> Let's have three to five comprehensive plans published and then we
> - the people! - vote!
> A revolutionary idea: democracy.

Feb 01 05:06 PM

[James Wilson:]

AIG is hiding it's coverage of the Tobacco Companys now facing Trillion of losses from lawsuits.

Feb 01 06:58 PM

[Jason Rines...:]

The classic definition of this government type is Fascism. I have wrestled with the thought of leaving America since 2007. But I have family here and my Boston based mentors did not teach me leadership skills to flee. But it is sad I must spend sizeable portions of my day protecting my money from wolves.


On Jan 31 05:12 PM E.D. Hart wrote:

> Profits are privatized and losses are nationalized. Absurdly, this
> is exactly counter to many of the dogmatic arguments for the superiority
> of the US system of capitalism which is said to raise all boats.

Feb 01 10:45 PM

[WMBANZAI7:]

THE EMPEROR OF WALL STREET HAS NO CLOTHES
(The Emperor has No Clothes-Hans Christian Anderson)
WilliamBanzai7

Just a few years ago, there was a Wall Street CEO, who was so excessively fond of stacking new lines of business, that he spent all his shareholder's money on building a financial supermarket otherwise known a "universal bank". He did not trouble himself in the least about his shareholders; nor did he care about his other stakeholders; clients, customers, creditors, bondholders and the rest of the public, except for the opportunities they afforded him for raking in exorbitant fees, paying obscene compensation to himself and his soldiers and displaying his fancy new French Jet and haughty collection of French antiques. To support this bank juggernaut he cloaked himself in new and evermore sophisticated financial schemes for each passing hour of the day; and as of any other king or emperor, one is accustomed to say, “he is sitting in council,” it was always said of him, “The 'Emperor CEO' is sitting in his splendidly diversified wardrobe."

Time passed merrily in the city which housed his Headquarters; strangers arrived every day at his commodious office suite. One day, two rogues, calling themselves quantitative engineers made their appearance. They gave out that they knew how to structure exotic new securities offering magnificent risk free returns, the profits from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.

“These must, indeed, be splendid securities!” thought the Emperor. “Had I such structured products to hawk, I might at once find out what bankers in my realms are unfit for their office, and also be able to pull the wool over the eyes of both the wise and the foolish! These structured securities must be spun for me immediately.” And he caused large sums of capital to be given to both the "Quants" in order that they might begin their work directly.

So the two Quants set up shop, and affected to work very busily, though in reality they did nothing at all. They asked for the finest AAA mortgages to pool and the purest streams of income to repackage; after running out of both in short order; they substituted the AAA mortgages with toxic sub-prime mortgages they managed to scrounge up from a broker named Frankie the Flipper and continued their pretended work at the printers until late at night.

“I should like to know how the Quants are getting on,” said the Banker CEO to himself, after some little time had elapsed; he was, however, rather embarrassed, when he remembered that a simpleton, or one unfit for his office, would be unable to see the manufacture. To be sure, he thought he had nothing to risk in his own person; but yet, he would prefer sending somebody else, to bring him intelligence about the Quants and their work, before he troubled himself in the affair. All the people throughout the city had heard of the wonderful property the structured products were to possess; and all were anxious to learn how wise, or how ignorant, their neighbors might prove to be.

“I will send my faithful old Chief Risk Management Officer to the Quants,” said the Emperor at last, after some deliberation, “he will be best able to see how the structured finance business looks; for he is a man of sense, and no one can be more suitable for his office than he is.”

So the faithful old Chief Risk Management Officer went onto the floor, where the Quants were working with all their might, at their securitisation models. “What can be the meaning of this?” thought the old man, opening his eyes very wide. “I cannot discover the least bit of financial common sense in these spread sheets” However, he did not express his thoughts aloud.

The Quants requested him very courteously to be so good as to come nearer their computer screens; and then asked him whether the models pleased him, and whether the numbers were not very beautiful; at the same time pointing to tranches and tranches of securitised toxic sub-prime mortgages. The poor Chief Risk Management Officer looked and looked, he could not discover anything of value in the spread sheets for the structured products designed by the Quants for a very good reason, viz: there was nothing there. “What!” thought he again. “Is it possible that I am a simpleton? I have never thought so myself; and no one must know it now if I am so. Can it be, that I am unfit for my office? No, that must not be said either. I will never confess that I could not see the stuff.”

“Well, Mr Risk Manager!” said one of the Quants, still pretending to work. “You do not say whether the stuff pleases you."

“Oh, it is excellent!” replied the Chief Risk Management officer, looking at the spreadsheets through his spectacles. “These risk models, and the profits yes, I will tell the Emperor CEO without delay, how very beautiful I think them.”

“We shall be much obliged to you,” said the Quants, and then they named the different tranches and described the risk/return profile of the pretended stuff. The Chief Risk Management Officer listened attentively to their words, in order that he might repeat them to the Emperor CEO; and then the Quants asked for more working capital, saying that it was necessary to complete what they had begun. However, they put all that was given them into their bloated bonus knapsacks; and continued to work with as much apparent diligence as before at their structured finance models.

The Emperor CEO now sent a emissary from the Rating Agency of his court to see how the men were getting on, and to ascertain whether the structured products would soon be ready. It was just the same with this gentleman as with the minister; he surveyed the spread sheets on all sides, but could see nothing at all but financial schlock.

“Does not the stuff appear as beautiful to you, as it did to our Chief Risk Management Officer?” asked the Quants of the emissary from the Rating Agency; at the same time making the same gestures as before, and talking of the diversification hedges and safe returns which were not there, all as they signed the lucrative Rating Agency Contract of Engagement.

“I certainly am not stupid!” thought the emissary. “It must be, that I am not fit for my good, but very profitable office! That is very odd; however, no one shall know anything about it.” And accordingly he praised the safe returns he could not see, and declared that he was delighted with both the risk model and profits. “Indeed, please your Imperial Majesty,” said he to the Emperor CEO when he returned, “the structured products which the Quants are spinning are extraordinarily magnificent.”

The whole city was talking of the splendid structured product business which the Emperor CEO had ordered to be woven at the expense of his shareholders.

And now the Emperor CEO himself wished to see the costly manufacture. Accompanied by a select number of officers of the bank, among whom were the two honest men who had already admired the spread sheets, he went to the crafty Quants, who, as soon as they were aware of the Emperor CEO's approach, went on working more diligently than ever; although they still had not designed a single asset with intrinsic value.

“Is not the work absolutely magnificent?” said the officer and emissary, already mentioned. “If your Majesty will only be pleased to look at it! What a splendid risk model! What glorious returns” and at the same time they pointed to the toxic spread sheets; for they imagined that everyone else could see this exquisite piece of quantitative wizardry.

“How is this?” said the Emperor to himself. “I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor CEO? That would be the worst thing that could happen–Oh! the risk model is charming,” said he, aloud. “It has my complete approbation.” And he smiled most graciously, and looked closely at the toxic sub-prime spreadsheets; for on no account would he say that he could not see what two of the officers of his court had praised so much. All his retinue now strained their eyes, hoping to discover something on the screens but they could see no more than the others; nevertheless, they all exclaimed,

“Oh, how beautiful!” and advised his majesty the Emperor CEO to have a new sub-prime CDO suit made from the profits generated by these splendid toxic sub-prime assets, for the approaching Bailout Procession. “Magnificent! Charming! Excellent!” resounded on all sides; and everyone was uncommonly gay. The Emperor CEO shared in the general satisfaction; and along with a massive Multi Million Dollar bonus or two, presented the Quants with the riband of an order of Managing Directors, to be worn in their Ferragamo button-holes, and the title of “Gentlemen Investment Bankers.”

The Quants sat up the whole of the night before the day on which the magnificent Bailout Procession was to take place, and had sixteen mainframes running so that everyone might see how anxious they were to fabricate the Emperor CEOs new CDO suit. They pretended to roll a positive P&L off the toxic sub-prime spreadsheets; blew hot air with their pitch books and threaded mathematical needles without any thread in them. “See!” cried they, at last. “The Emperor CEO's new structured clothes are ready!”

And now the Emperor CEO, with all the grandees of his court, came to the Quants; and the rogues raised their arms, as if in the act of holding something up, saying, “Here are your Majesty’s Clothes! Here is the Level III scarf! Here is the sub-prime mantle! The whole suit is as light as an opaque toxic sub-prime cobweb; one might fancy one has nothing at all on, when dressed in it; that, however, is the great virtue of this delicate cloth.”

“Yes indeed!” said all the courtiers, although not one of them could see anything of this exquisite manufacture.

“If your Imperial Majesty will be graciously pleased to take off your bespoke Saville row clothes, we will fit on the new sub-prime CDO suit, in front of the financial looking glass.”

The Emperor CEO was accordingly undressed, and the Quant rogues pretended to array him in his new sub-prime CDO suit; the Emperor CEO turning round, from side to side, before the financial looking glass.

“How splendid his Majesty looks in his new clothes, and how well they fit!” everyone cried out. “What a model! What risk free returns! These are indeed royal robes!”

“The bailout canopy which is to be borne over your Majesty, in the procession, is waiting,” announced Hank Paulsen, the chief master of the ceremonies.

“I am quite ready,” answered the Emperor CEO. “Do my new asset backed clothes fit well?” asked he, turning himself round again before the financial looking glass, in order that he might appear to be examining his handsome sub-prime CDO suit.

The lords of the Finance department, who were to carry his Majesty’s bailout train felt about on the ground, as if they were lifting up the ends of the toxic sub-prime mantle; and pretended to be carrying something; for they would by no means betray anything like simplicity, or unfitness for their office.

So now the Emperor CEO walked under his high canopy in the midst of the bailout procession, through the streets of the Wall Street financial district; and all the bankers and traders standing by, and those at the windows, cried out, “Oh! How beautiful are the Emperor CEO's new asset backed clothes! What a magnificent train there is to the toxic sub-prime mantle; and how gracefully the Level III scarf hangs!” in short, no one would allow that he could not see these much-admired clothes; because, in doing so, he would have declared himself either a simpleton or unfit for his office. Certainly, none of the Emperor CEO's various suits, had ever made so great an impression, as these invisible ones.

“But the Emperor has nothing at all on!” cried a little child hedge fund manager.

“Listen to the voice of transparency!” exclaimed his father; and what the child had said was whispered from one to another.

“But he has nothing at all on!” at last cried out all the hedge fund managers and bear traders.

The Emperor CEO was vexed, for he knew that the people were right; but he thought the Bailout Procession must go on now! And the lords of the Emperor CEO's bedchamber took greater pains than ever, to appear holding up a train, although, in reality, there was no train to hold up.

Feb 02 03:38 AM

[mr freddo:]

The $20 billion in bonuses to Wall Street employees just shows the rest of us main streeters how stupid we were to pick a main street career where we make real products and sell them.

I owned a bakery for many years. My partners and I took a bonus on a monthly basis based on how much we made that month. When things got tight, no bonuses. That was the whole idea. The bonuses motivated us in the short run and helped to smooth the earnings. When we expanded our business with a new plant and almost went broke, we took no bonuses, we even deferred our salaries. If we went broke, their was no government money available to bail us out.

That's life on Main Street. You lose money, you go broke. On Wall Street, you start out making ridiculous money, and when you go broke because you were churning out crap and selling it to your buddies, when you not only destroy your own company, but also fry the entire financial system, you get a bonus!

Any Wall Street bonus paid that is over $100,000 should be confiscated with a 99% special income tax. We need to start penalizing this greed and rewarding the engineers, inventors and teachers. The only way out of this mess for the US is to start making and selling the best products in the world again.

Feb 03 01:21 PM