Bankers: Our bonuses aren't big enough

[DairyFarmer 1]

IMHO the far reaching ramification of so many companies going under has been taken into account before deciding on these bailouts. I also feel the delayed passing of the bill and suggestion the bill wouldn't be passed helped escalate the worldwide market drop. We can look to the last 6-7 months to see the recent effects of a few companies collapsing and can only hypothesise how bad it could have become.

I admit there is always a point where you need to let go and let a company fail. Whilst you use the Redwood as an example there are other trees which when the top is cut off they thrive, others fail to thrive until a bush fire comes through and yet others where the tree bleeds which causes the two parts to meld.

I bet there are a lot of people out there working in these companies glad to still have a job. After all how many no longer have a job at all. The numbers escape me but I'm sure AJ will post something soon.

[Brad and Vika 129]

As much as I'm against bailouts and socializing losses, the purpose of the bailout is to "knock" the company back into productivity and efficiency.

When government decides to use regulation to reduce profits and bonuses; What it's really doing is reducing incentive for these corporations to become efficient and productive. Just as we saw with the New Deal, when maximum prices were set, this reduced incentive to be productive, remain in the field, and even enter the field. This is because these maximum prices were actually limiting the prospect of profit in these fields.

So again, as much as I was against the bailout, I am even more against the idea that the money used to bring these companies to life are littered with such incentive damaging conditions, that it's basically being flushed down the toilet, and we will see no return at all for our suffering.

That is correct. The attack on bonuses generally accomplishes two things; 1) it creates a huge disincentive for the most productive to work hard, and 2) it allows corporations (like the bank I work for) to begin reducing all types of compensation for the average worker. We have mostly been kicked out of our stock incentive plan, for example. Executives have not, and will defend their compensation at the expense of ours. Our bank is VERY healthy, and this financial mess is being used to punish the rank and file. Historically, in times of poor market performance, simply shift executive compensation from cash to stock options any way, and that will happen here. For example, the price of our stock went from the mid-forties (per share) a little over a year ago, to the low twenties today. So they stop giving regular folks options, then take care of the execs. Instead of a $10 million bonus, they now get $10M in stock options exercisable in three years a $22. When the price returns to normal, the effective bonus is increased - in addition to the multi-million dollar salaries they enjoyed all along.

That's fundamentally no different than any industry, Brad. When something goes afoul, it's always the rank and file that takes the hit first.

But this really takes the cake, you know. Bailout money being used to fund bonuses? That's just wrong.

And Congress is to blame for that. A two page application for the bailout money? Please! I give more data when I take out a car loan. And after the fact, Barney Frank goes on TV to say that his committee is shocked that the banks are not lending the money to each other like Congress thought they would. Based on what? Any corporation will 1) act in the interest of shareholders, according to the direction of their Board, and 2) take care of their executive inner circle, at the expense of the rank and file if necessary. In other words, they are funding bonuses because no one forbade it when the money was forced on them.

And I agree absolutely rebeccajo that this is the same as any business. I was pointing out that the WAY that the government is punishing the banks (not Wall Street Investment Banks, but Main St. banks) is sloppy, and hurting regular employees more than the executives at whom the punishment is directed. No politician wants to take on the heads of banks, they are part of the same club. So the poster I was responding to was fundamentally wrong, reasoning that the controls being imposed will solve any problem. IMHO, the problem is cyclical any way, and the whole bailout is prolonging it.

[Brad and Vika 129]

It seems to me a lot of commentators in general and here seem to be focus' on $150k salaries. This is not what the rank and file are paid.

The key aspect to any business is its people. Compensation is a big motivator.

Bailing out a company means keeping it running, to keep it running it needs the people, if these people have been hired with the promise they will be compensated for performance, for this company to continue it needs to pay the bonus' these people were promised.

Having said that, obviously not everyone is performing and it is the CEO's, CFO's, COO's who should be held responsible and their bonus' are the ones who should not be paid. This also goes for the stock options.

It takes more than just an army of laborers to run a company or business. It takes the ability to efficiently earn a profit over your costs. Which is why the bailouts were such a horrible idea to begin with, because these bailed-out enterprises, while failing, were proving that they could no longer cover their costs.

Injecting capital into a falling enterprise is analogous to using a crane to hold up a dying California Redwood; You may be able to create the appearance that this tree is still living and thriving, but it's not. What is not seen however is the detriment that this causes to the other trees and would-be trees, for when this tree eventually decays completely and falls, it will create the rich soil, and unshield the sunlight necessary for new trees to grow and thrive, and other trees to grow bigger. Same with the market, these enterprises allowed to unnaturally survive are prohibiting new, younger companies from using these assets to grow themselves, or other companies from acquiring these assets to grow larger.

These companies have proven that they cannot create a profit, and no matter how much capital is thrown at them, if they cannot efficiently manage it, which they can't, they will still die. So now, after the government has already socialized their failure onto the Americans, they are not so naive as to not see that these companies cannot create a profit and survive with their current business practices, so bureaucrats and advisors attempt to change the direction of these practices so they become profitable. The funny thing is this; Changing these businesses to become profitable is exactly what would be attempted if a company were to purchase these fire-sale assets with their own wealth. It could've been possible without our money, new trees could've grown all on their own. (Ok, I'm done talking about trees)

All this is hindsight, I know. Because now, these companies have already recieved our money, so it really makes no difference. I hope they spend that money the same way they have been. Lavish expense accounts, leer jets, six-figure salaries, vacations to Cabo, and other fruits of profitable labor, even though they cannot attain it. At least somebody will be getting some enjoyment from the money.

I disagree with some of this post fundamentally, although I respect your well thought-out opinion. The trouble with the finance industry was that a particularly smart bunch of money men figured out how to package a derivative-of-a-derivative and market it to the whole world, then get out before any one figured out how badly it was put together. They filed all the correct disclosures, and did all the necessary research, and had all the required government oversight and approvals. The problem is that the regulators could not understand the instruments they were looking at and approving. Now we are spending billions to punish the evildoers (who are long gone) by proxy - nailing the companies holding the toxic derivatives instead of the people who created them, and trying to regulate and solve the LAST financial crisis insteadt of avoiding the next one. The companies can make a profit, and have for years, but for this latest big, bad, toxic instrument.

The situation is cyclical, and not at all new. Remember the derivative problems of Orange County, CA in the 90's, The dot.com crisis, the S&L failures in the 80's? What about Black Monday? All caused by sloppy regulatory oversight. We have to force our government to look ahead, and stop the next big ponzi scheme before it gets going, and that means curbing the desire of corporations to take ever more risk, and brokers to find ever more exotic ways to make a buck. A tough sell when the most political money around comes from guess who?

[mRx 16]

I disagree with some of this post fundamentally, although I respect your well thought-out opinion. The trouble with the finance industry was that a particularly smart bunch of money men figured out how to package a derivative-of-a-derivative and market it to the whole world, then get out before any one figured out how badly it was put together. They filed all the correct disclosures, and did all the necessary research, and had all the required government oversight and approvals. The problem is that the regulators could not understand the instruments they were looking at and approving. Now we are spending billions to punish the evildoers (who are long gone) by proxy - nailing the companies holding the toxic derivatives instead of the people who created them, and trying to regulate and solve the LAST financial crisis insteadt of avoiding the next one. The companies can make a profit, and have for years, but for this latest big, bad, toxic instrument.

The situation is cyclical, and not at all new. Remember the derivative problems of Orange County, CA in the 90's, The dot.com crisis, the S&L failures in the 80's? What about Black Monday? All caused by sloppy regulatory oversight. We have to force our government to look ahead, and stop the next big ponzi scheme before it gets going, and that means curbing the desire of corporations to take ever more risk, and brokers to find ever more exotic ways to make a buck. A tough sell when the most political money around comes from guess who?

Hey Brad. I really don't understand why all the blame for the crisis is pointed towards derivatives. A derivative's value is based on the underlying asset or index from which it's derived from.

Now, the problem with our current crisis, as I see it, was that the underlying assets were actually in a credit inflated bubble, which drastically skewed the system. I have a problem with the idea that these major corporations are recklessly leveraging themselves. For they became such major, wealthy corporations by making sound financial decisions which yielded them a profit, so why knowingly take on such toxic risky debts? Why were all the wealthiest corporations, who made such wise profitable decisions in the past, suddenly making grave forcasting errors?

These problems can only be explained by cyclic infationary policies. When the Federal Reserve cut the rates, this led to the incredibly low mortgage rates which created this credit bubble. The derivative's value, be it MBS's, CDO's, and CDS's, was merely derived from these toxic bubbled assets. They weren't toxic until the bubble started to burst. This particular bubble was allowed to get very big as GSE's such as Fannie and Freddie were pouring out billions in mortgages for home ownership. This created the "false" prospect for profit that corporations saw. So while they are not necessarily failing by their own fault, they were tricked into chasing the mirage profit that inflation brings.

So while the derivatives indeed became toxic losses, it was the bursted inflated assets that caused the problem, and the massive derivative losses were merely the effect.

You seem to know about the derivatives market, so if I'm missing something, please correct me.

[Dan J 277]

It seems to be a lot of commentators in general and here seem to be focus' on $150k salaries. This is not what the rank and file are paid.

The key aspect to any business is its people. Compensation is a big motivator.

Bailing out a company means keeping it running, to keep it running it needs the people, if these people have been hired with the promise they will be compensated for performance, for this company to continue it needs to pay the bonus' these people were promised.

Exactly, DF. Exactly!

There is a disconnect really. Bonus should reward helping bring a company to profitability. But it should also be a risk, if the company sustains large losses or has other problems, no or few bonuses should be paid.

The disconnect is that some expect these bonuses to be there regardless of the performance of the company. In that case, more compensation should be paid as Salary and not as bonuses.

[Jasman0717 9]

There was none of the old swagger at Citigroup headquarters on Friday. The bonus checks had landed — and some of the bankers were grumbling.

After a year of yawning losses at the company, employees lamented that times were getting lean. The giant bank, the recipient of two multibillion-dollar rescues from Washington, had paid out only about $4 billion in bonuses.

Only?

If you've never worked on Wall Street, it is hard to wrap your head around the idea that a company that lost nearly $19 billion in a single year, as Citigroup did in 2008, could still pay its employees billions in bonuses. It is probably even harder to believe that some of those employees grumble about it.

"I feel like I got a doorman's tip, compared to what I got in previous years," said a 30-something investment banking associate at Citigroup's offices in Lower Manhattan.

That kind of glum talk is being heard all over Wall Street, where money is the measure and bonuses the ultimate yardstick. To bankers and traders, bonuses, which account for the bulk of their pay, justify those long days and sleepless nights spent crunching numbers or watching bond prices dance across computer screens.

But with everyone from President Obama on down chastising bankers for paying themselves billions in bonuses at a time taxpayer money is propping up the financial industry, once-unthinkable questions are starting to arise. Could bonuses, the stuff of Wall Street dreams, become a thing of the past? Could this decades-old incentive system, born of the private partnerships that once ruled Wall Street, be replaced? If so, by what?

For all the tectonic shifts reshaping the financial landscape, one thing has not changed: the bonus culture. Wall Streeters who make a lot of money for their employers expect to reap the rewards. In the parlance of the industry, they expect to eat what they kill.

...

The bonus culture runs deep. Executives and rank-and-file workers argue that lawmakers and others who complain about bonuses do not understand how this industry works. Bonuses, Wall Streeters say, are a crucial part of total compensation, and are often treated as deferred salaries. And generally bosses weigh individual performance more heavily than the company's overall results.

...

"Without a doubt, $18 billion is a lot of money, but it's a drop in the bucket on Wall Street," said Gustavo Dolfino, president of the WhiteRock Group, a headhunter for the banks. "These bonuses are down, and the salaries are not enough for these people. They can't live on $150 to $180,000, so they haven't saved any money. They put it on credit lines and at bonus time, they thought they'd pay it off."

http://www.nytimes.com/2009/01/31/business/31bonus.html

To quote Artie Lange, 'Waaaaaaaaaaa'

[Brad and Vika 129]

I disagree with some of this post fundamentally, although I respect your well thought-out opinion. The trouble with the finance industry was that a particularly smart bunch of money men figured out how to package a derivative-of-a-derivative and market it to the whole world, then get out before any one figured out how badly it was put together. They filed all the correct disclosures, and did all the necessary research, and had all the required government oversight and approvals. The problem is that the regulators could not understand the instruments they were looking at and approving. Now we are spending billions to punish the evildoers (who are long gone) by proxy - nailing the companies holding the toxic derivatives instead of the people who created them, and trying to regulate and solve the LAST financial crisis insteadt of avoiding the next one. The companies can make a profit, and have for years, but for this latest big, bad, toxic instrument.

The situation is cyclical, and not at all new. Remember the derivative problems of Orange County, CA in the 90's, The dot.com crisis, the S&L failures in the 80's? What about Black Monday? All caused by sloppy regulatory oversight. We have to force our government to look ahead, and stop the next big ponzi scheme before it gets going, and that means curbing the desire of corporations to take ever more risk, and brokers to find ever more exotic ways to make a buck. A tough sell when the most political money around comes from guess who?

Hey Brad. I really don't understand why all the blame for the crisis is pointed towards derivatives. A derivative's value is based on the underlying asset or index from which it's derived from.

Now, the problem with our current crisis, as I see it, was that the underlying assets were actually in a credit inflated bubble, which drastically skewed the system. I have a problem with the idea that these major corporations are recklessly leveraging themselves. For they became such major, wealthy corporations by making sound financial decisions which yielded them a profit, so why knowingly take on such toxic risky debts? Why were all the wealthiest corporations, who made such wise profitable decisions in the past, suddenly making grave forcasting errors?

These problems can only be explained by cyclic infationary policies. When the Federal Reserve cut the rates, this led to the incredibly low mortgage rates which created this credit bubble. The derivative's value, be it MBS's, CDO's, and CDS's, was merely derived from these toxic bubbled assets. They weren't toxic until the bubble started to burst. This particular bubble was allowed to get very big as GSE's such as Fannie and Freddie were pouring out billions in mortgages for home ownership. This created the "false" prospect for profit that corporations saw. So while they are not necessarily failing by their own fault, they were tricked into chasing the mirage profit that inflation brings.

So while the derivatives indeed became toxic losses, it was the bursted inflated assets that caused the problem, and the massive derivative losses were merely the effect.

You seem to know about the derivatives market, so if I'm missing something, please correct me.

Hi Matt - I was blaming sloppy regulators and the government for goofy oversight (or lack thereof) over the above securuties. My company for example, avoided these things because we never could really understand the risk/return. Our quants were correct too, regardless of the short term profits that were made. No long term investor should have held those things. And punishing banks who hold them now is like closing the barn door after the horses have left.

And the problem was that the regulators apparently failed to grasp that tranches of subprime mortgage backed ####### are NOT diversified because they are from different parts of the country. If they are all subprime and the entire real estate market goes south (a new problem for us), then all the securuties AND derivatives sink. Sloppy oversight IMHO.

Edited February 3, 2009 by Brad and Vika

[mRx 16]

Personally, I don't think any oversight or regulation is necessary at all. After the facts are reviewed, it's very easy to place all the woes of this financial crisis at the door of regulation, albeit, some have wrongly tried to push it towards free-market capitalism.

The problem here was that the government made loans that the free-market would've never allowed via Fannie Mae and Freddie Mac. Subprime mortgage loans with high default risks are not risks companies are jumping to take, unless of course, those businesses believe the propoganda nonsense of "backed by US Government" and "too big to fail". This is the moral hazard. This is how successful businesses went belly up.

Granted, I think it's wrong that these businesses were duped into failure. But the decisions they made were theirs alone, and under no circumstance do they warrant a subsidy from taxpayers.

It's a good thing your company stayed away from the "too good to be true" moral hazards that the government served up. Avoiding this catastrophe should bring alot of clientele your away.

[w¡n9Nµ7 §£@¥€r 123]

Subprime mortgage loans with high default risks are not risks companies are jumping to take, unless of course, those businesses believe the propoganda nonsense of ...

Matt,

If you haven't seen this, I think you'll like it. It speaks to the impending bust in pension funds and how the cause traces back to fiduciary responsibilities being sacrificed for feel-good social agendas.

http://www.visajourney.com/forums/index.ph...&hl=boomers

[Brad and Vika 129]

Personally, I don't think any oversight or regulation is necessary at all. After the facts are reviewed, it's very easy to place all the woes of this financial crisis at the door of regulation, albeit, some have wrongly tried to push it towards free-market capitalism.

The problem here was that the government made loans that the free-market would've never allowed via Fannie Mae and Freddie Mac. Subprime mortgage loans with high default risks are not risks companies are jumping to take, unless of course, those businesses believe the propoganda nonsense of "backed by US Government" and "too big to fail". This is the moral hazard. This is how successful businesses went belly up.

Granted, I think it's wrong that these businesses were duped into failure. But the decisions they made were theirs alone, and under no circumstance do they warrant a subsidy from taxpayers.

It's a good thing your company stayed away from the "too good to be true" moral hazards that the government served up. Avoiding this catastrophe should bring alot of clientele your away.

Honestly Matt, sometimes I think that our execs are so scared of risk that they were just behind the curve. If the bubble had continued for anothe year there would have been lots of other companies in the mess too. And I don't disagree about needing less regulation. If politicians are going to appear to "do something", and creat more regulatory oversight, I think that it just makes common sense that the regulatory authorities should not approve any investment instruments that they cannot evaluate for risk. And I think that the actual subprime instruments at Fannie & Co. were just the first wave of the problem, and the easiest to grasp. The mortgage backed derivatives are the piece that is much larger, and so opaque that no company can be sure even how much of its own portfolio is worthless, let alone a competitor's. That is the root cause of the liquidity trouble.