Meredith Whitney Needs Some Historical Perspective

Uber-bank analyst Meredith Whitney really needs to read some of the works of Paul Kennedy and/or Kevin Phillips to understand why some might view today's comments on Wall Street compensation as being not too different from Erin Burnett's views expressed recently on Meet the Press and skewered by my new-favorite website The Daily Bail in this memorable riposte:

CNBC's Erin Burnett, Banking Apologista, Leader of Idiots

Ms. Whitney is apparently under the mistaken impression that history began in 1982 and that smart college kids have some inalienable right to move directly to Wall Street after being handed their diploma and then proceed to buy their first of many Maseratis before they've reached the age of thirty.

While it's true that, as Ms. Whitney says, "no one goes to Wall Street to save the world" it is equally true that no one on Wall Street should be permitted to destroy the world...

If, as she continues, "compensation is the motivating factor for our people" and what we are now dealing with is the result of their highly motivated efforts over the last few years, maybe we shouldn't be paying them so much money.

Maybe they're a little too motivated.

It's amazing how someone so smart could be so absolutely ignorant of the bigger historical perspective - skip directly to about 12:20 for the discussion on compensation.

Click to play in a new window

There's more in this summary at Bloomberg:

Wall Street pay is getting scrutiny after New York banks and securities firm paid $18.4 billion in bonuses for 2008 while the six biggest New York-based financial companies lost a combined $42.4 billion and got $90 billion in government bailout funds. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said yesterday that “pay got a little exuberant.”

President Barack Obama will today announce a cap of $500,000 on compensation of top executives at companies that receive significant federal assistance, according to an administration official who requested anonymity.

The failure to pay employees well may drive away “the best and the brightest,” Whitney said.

“If you can’t compensate your employees, they’re going to go somewhere else,” she said. “You’re going to get a different variety of folks who are going to come in.”

And ... what's wrong with that?

They'll somehow be less competent at bringing the system crashing down?

Comments

[Morg:]

The best and brightest didn't cause the financial calamity, it was the idiots. Now there are likely quite a few idiots on wall street making to much bloody money, but if you can't properly compensate the good people they are going to recruited away. All we will have left in the end is the idiots to run our banks.

Just this week 8 analysts left BofA for UBS. Compensation limitations was the given reason. One has to assume that UBS did its homework before hiring these guys away from BofA which means that our domestic bank just lost 8 good people and the foreign bank gained them. What we have left are the people it didn't want or hasn't lured away yet.

UBS being a foreign bank has recieved no TARP funds and is not subject to its compensation restrictions or Obama mandates. Companies like UBS are not going to recruit away our Chuck Princes (Former Citi Bank CEO and confirmed idiot) they are going to take away our Meredith Whitneys (who is a very intelligent and capable individual).

On a side note the author states Meredith Whitney is ignorant of the historical perspective but then provides no historical evidence to show why compensation limits will improve the current situation.

Feb 04 07:59 PM

[prudentinve...:]

"The failure to pay employees well may drive away “the best and the brightest,” Whitney said.

If that's where "the best and the brightest" brought us, perhaps it's time we tried the "worst and the stupidest", and see what they can do. At least they may work for less than millions per year.

Feb 04 08:05 PM

[TomOfTheNorth:]

While I'm not too fussed about the loss of bankers' tax revenue nor the poor state of their morale, JJB is correct in implying that the moral outrage over Whitney's compensation remarks is much ado about nothing. The segment is a brief reply to questions about the propriety of Government mandates on private enterprise comp In the context of a lengthy interview. She's against it. That her cited reasons were relatively weak is more likely attributable to being asked a queston she hadn't thought too much about in advance. Really, given the scale of the problem, the issue is a proverbial drop in the bucket. That said, Whitney has been a strong voice for constructive change since well before the magnitude of this disaster was widely appreciated. She doggedly insisted that management was blowing it even as Dick Bove was predicting an imminent end to the crisis. The debate over comp is a perfect example of "penny wise & pound foolish". We need to get worked up over millions lest we notice the trillions sneaking out the back door.

Cheers!

On Feb 04 04:47 PM JJB wrote:

> The author of this article merely lambasts Whitney without offering
> any concrete reasons as how limiting executive pay will further the
> economic recovery. Limiting compensation will affect morale and further
> diminish spending. Additionally, it will reduce the tax base. Moreover,
> many banks were forced to accept TARP money (ex., Wells Fargo) so
> it makes no sense to have them adhere to such salary regulation.
>
>
> As to the author's proposal to bring in "replacement" workers, that
> it is simply an inane, populist proposition. Who does he suggest
> run the banks? The Americans who "did not understand" their mortgage
> documents? The same people who bought homes they could not afford?
> The people that did not understand simple interest rates?
>
> Right now, America's best and brightest (every math nerd you ever
> knew) is working 70 + hours per week to clean up a mess that the
> "average" American largely brought upon himself because he did not
> understand a basic mortgage contract. I think Americans should start
> treating Wall Street with a little more respect.

Feb 04 08:56 PM

[The Daily Bail:]

I am a huge fan of Meredith usually. But she made a mistake of wasting her public capital with this interview.

She should have just let this issue pass without comment.



35 most interesting financial articles from wednesday...links with thumbnails of every story inside one link.. bit.ly/XHOB

Feb 04 09:22 PM

[otbricki:]

Banks should be excoriated as much as possible when they come to the public trough under circumstances such as these so that they will fear the process and work to see that it does not happen again.

I am surprised that more is not being said about misleading financial statements and potential legal repercussions arising therefrom.

Yes it means that some banks will lose top talent to competitors. Tough. When a corporation acts in a reckless and irresponsible manner there will be defections. If the Federal Government was not intervening the lost of talent would be far greater as the bank is forced into receivership.

Boards of directors and senior executives have responsibilities to shareholders that were clearly neglected.

Feb 04 10:37 PM

[tj987:]

Even though yes it is a big pay cut, it is still 10X the median income. Many people work way harder then the wall street folk and make way less. However The street motivating factor is cash but 10X is not bad, and there really is not many jobs that will pay you that..

Feb 04 10:56 PM

[Mr. Ed, Jr.:]

JJB,

I thought you were doing great right up until that last paragraph, when you went over the cliff.


On Feb 04 04:47 PM JJB wrote:

> The author of this article merely lambasts Whitney without offering
> any concrete reasons as how limiting executive pay will further the
> economic recovery. Limiting compensation will affect morale and further
> diminish spending. Additionally, it will reduce the tax base. Moreover,
> many banks were forced to accept TARP money (ex., Wells Fargo) so
> it makes no sense to have them adhere to such salary regulation.
>
>
> As to the author's proposal to bring in "replacement" workers, that
> it is simply an inane, populist proposition. Who does he suggest
> run the banks? The Americans who "did not understand" their mortgage
> documents? The same people who bought homes they could not afford?
> The people that did not understand simple interest rates?
>
> Right now, America's best and brightest (every math nerd you ever
> knew) is working 70 + hours per week to clean up a mess that the
> "average" American largely brought upon himself because he did not
> understand a basic mortgage contract. I think Americans should start
> treating Wall Street with a little more respect.

Feb 05 12:01 AM

[CRS:]

The problem was not with the people who played the game, but with the rule of the game itself. Bashing Wall Street employee comp is missing the point and inappropriately personalizing this issue. Kick senior management out, but for the most part the folks in the trenches are the exact resources we now want to employ to dig us out. Point the carrot in a different direction but don't remove it all together.

Feb 05 12:06 AM

[The Premium...:]

Great article. Greed and failure shouldn't even be paid the 500K in my opinion. Obama is right on.

Feb 05 12:10 AM

[James H. Wang:]

You're taking a small part of the entire whole and calling it the entire thing.

Populism is prevailing right now to a great degree.

It's not a matter of historical perspective. For you, I have to say, there is a deficit of a perspective of scope.

Feb 05 12:43 AM

[Gene Shorts:]

All the losers who structured CDO's have been laid off for a year now. These whelps now living in their parent's basements in Levittown and Hackensack are going to be flipping burgers with their finance degrees from Hofstra and Rutgers. A million tiny violins for these schmucks. I'm going to venture out on a limb and guess that Meredith might be referring to the indviduals who understand Citi and BAC's capital structure thoroughly and might be able to steer their sinking ships into harbor; which might actually limit taxpayer loss.

Feb 05 01:11 AM

[emily x:]

Welcome, "best and brightest," to the employment environment the rest of us have been in for several years now. Go ahead and try to replace those insane amts of money you've been getting. Because you're SO VALUABLE.

Feb 05 09:33 AM

[Hmm?!:]

Top executives should never be rewarded for losing money or jeopardizing the future of their organization.

Since thay all lost money, what are the bonuses for???

Feb 05 09:45 AM

[kelm:]

I hope that the best and the brightest do leave Wall Street or do not target their careers towards the place. We would have more medical researchers, engineers, physicists, entrepreneurs building real products, new patents, new technologies, increased exports etc.

Wall Street has gotten into the mode of thinking they are a key industry in the nation - and they have become one but that is a distortion. Wall Street and banking, including investment banking, are a service industry that exists to support and facilitate the growth and evolution of the real economy. You see this mindset when the talking heads say things like "in order for the stock market to recover such and such has to happen". Wrong. In order for the economy to recover certain things need to happen and the stock market will rise or fall as it serves it's function as a forum to raise capital and perform price discovery of existing economic entities.

We have to get back to viewing markets in the context of what they were designed to do and that is as support to the real economy.

Whitney and Dimon don't get it.

Feb 05 10:54 AM

[Mark A. Sad...:]

In 2006 Thomas Philippon and Ariell Reshef published a paper showing that compensation, adjusted for education, in the financial sector was 40% above the national average (trust me they're not as bright as people think, I've tutored a lot of them). They also demonstrated that this excessive compensation was correlated to deregulation in the financial sector. And, they further showed that this had happened before, in the years leading up to the Great Depression:

pages.stern.nyu.edu/~tphilipp/papers/pr_r...

So how did this come to pass? It's all a matter of rent seeking. In 1982, Mancur Olson expanded his "Logic of Collective Action" in an attempt to explain "The Rise and Decline of Nations". The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions (and bankers) will have the incentives to form political lobbies and influence policies (such as financial deregulation) in their favor. These policies will tend to hurt economic growth (especially in a huge financial crisis); but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the "Logic" dictates that there will be little public resistance to them (until now). Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline.(Let us hope we can avert the last part.)

P.S. There's also some forthcoming research by Thomas F. Cooley and Gian Luca Clementi that evidently will show that in the financial sector, CEO wealth is far less sensitive to changes in shareholder value than in any other sectors, in spite of the fact that equity holdings are a more important component of compensation. In other words top managers of financial firms do not suffer as much when their firms perform poorly.

Feb 05 12:39 PM

[Mark A. Sad...:]

For some reason the link didn't paste. Here's the address:

pages.stern.nyu.edu/~t...

Feb 05 12:41 PM

[Mark A. Sad...:]

I give up. Just google it.

"Wages and Human Capital
in the U.S. Financial Industry: 1909-2006"

Feb 05 12:43 PM

[Concerned_C...:]

Why does it matter what these people are paid? The "A" players will leave to banks that didn't take TARP money, it's already happening. They will bring their book of business with them and the TARP'ed banks will get even weaker. The people left at the banks will be the weaklings, who think $500K is a good deal, which if you are not a performer...maybe it is! These are the people who wanted to work at a steady, safe job and not kill themselves too much.

The real issue is that we have no business bailing out shareholders and the counter-parties to the derivative contracts these banks entered into. THAT is who is getting bailed out.

The insolvent banks need to go bankrupt. The bailout should be spent to guarantee the depositor's money. The equity gets wiped, the debt is converted to equity and they get to own the bank. These new owners can decide how much to pay their employees.

To do otherwise is to continue to pour trillions down a rathole with zero chance of any economic return.

Feb 05 04:27 PM

[silver-bullet:]

Employees' pay is just like the stock market - it can't go up forever.

At some point it will have to drop, if it is absurdly too high.

Feb 05 09:20 PM

[Did U Think...:]

Executives are the new lords and corporations are their kingdoms. Workers are indentured serfs, debt slaves.

You want a real historical perspective on things? People are the real power. Limit the wealth and power of kings before popular uprisings do it the old fashioned way.

Feb 05 09:44 PM