Wall Street's High Compensation Game Plan

by: Kimball Corson

The Financial Crisis Inquiry Commission held its first hearing on Wednesday and already, amidst Wall Street bankers’ apologies, a key but unspoken point is emerging. It is this: why was and is compensation in the Wall Street banks so high if their officers, strategists and traders missed the prospective housing collapse, relied on credit default swaps without reserves and served their institutions so badly as to render them insolvent and subject to FDIC insolvency proceedings and possible reorganizations – unless, they knew precisely what they were doing and knew they could get Uncle Sam to pick up the tab for the damage to the banks if that became necessary?

The damage was merely the side effects of the transactions they engaged in which lead to their high salaries and bonuses. In other words, did they intend the mess, profit immensely from it and know all along that, if necessary, the government would step in and bail the big banks out? I submit that in their heart of hearts, the major players knew going in what the likely outcomes would be. They played the system supremely well and that is why they were and are so well compensated. Note that they do not apologize for their compensation packages. This is why.

I further submit that, as the trial lawyer I was, I could persuade a reasonable, unbiased jury of the truth of this scenario.

Do you believe for a minute that if the major players did what they did and the government did not step in to bail them out -- so their banks would be forced into FDIC insolvency proceedings and perhaps stripped of their debt, management and shareholders to be then sold off by the government -- that they would be entitled to and would get those high salaries and bonuses?

Not for an instant, I contend. Yet, in the normal course, when a bank becomes insolvent, FDIC insolvency proceedings, which can go so far as to what amounts to a bankruptcy reorganization, are essentially required by law if the insolvency is not remedied forthwith. But, surprise of surprises, that did not happen here.

But why were the major players so confident of being bailed out by the government from their messes that were so supremely profitable in the short run, you might ask. Answer: Because they had “ins” with Treasury and they had paid dearly for control of Congress on banking matters. It was not a question of being too big to fail. It was a question of being able to control the use of the government’s purse when it was needed. Sure, a few sacrificial lambs had to be thrown to the wolves – Bear Sterns? Not really, Merrill Lynch? Not really either, but Lehman Bros? Most definitely – but the strategy overall was clearly worth it. Why?

Because throughout it all, the major players continued to get the big money compensation, regardless of the changing circumstances and regardless of the impacts on the big banks, right down to the present moment. Even now, they are still able to generate large profits and pay the big salaries and bonuses because of the relaxation of the mark to market rules they so aggressively sought. They have played the economic and political system extremely well. That is why they think they are entitled to the compensation they get.

And we are being played like the fools we are. No, of course not every trader, officer or strategist understood this consciously, but the big controlling players certainly did and they ran the show. As far as the mega salaries and bonuses are concerned, they have been being paid consistently right along almost as if nothing has happened.

It is too much. I really wish we had smarter people in government.

Disclosure: none relevant