MONEY FOR NOTHING MERRILL LYNCH lost $27 billion last year, and yet still managed to rush through $4 billion worth of year-end bonuses in the days before it was taken over by Bank of America. Because both companies have been the beneficiaries of the Treasury’s Troubled Asset Relief Program, news of these bonuses was met with predictable uproar: Attorney General Andrew Cuomo of New York threatened to investigate; any elected official with access to a microphone joined in a chorus of “shame on you”; and around every water cooler and on every cable channel, pundits offered up scathing commentaries of Wall Street greed. Merrill Lynch is not the only irresponsible institution out there. Despite a year of record losses, despite all the taxpayer money being injected into our financial institutions, bonuses for 2008 were, in some cases, down less than 50 percent from those the previous year. This is shocking, of course, but what’s been missed in these discussions is how completely the culture of executive compensation has permeated the financial industry. One need not even be an executive to receive a bonus far in excess of the yearly salary of people in most other professions. Bonuses, which typically consist of some multiple of an employee’s base salary, are doled out to everyone from the 22-year-olds just out of college (these are called analysts) to managing directors (banker parlance for the most senior rank attainable). I spent much of my early career at Merrill Lynch, and I can still remember how I yearned for the holiday season, because it signified bonus time. And by “bonus time,” I mean that brilliant 10-minute conversation during which you learned how many zeros would be on that year’s check. The euphoria that followed justified the days on end of working into the wee hours, the months on end without a single day off, the never-ending “fire drills” — when a client wanted something and wanted it now, whether it was 7 p.m. or 7 a.m. — that kept the stress and adrenaline levels high. For some, euphoria quickly gave way to anger and envy upon hearing what their colleagues got paid. Luckily for management and shareholders, that anger twisted itself into motivation to work even harder, get even less sleep and put up with even more in order to get a better bonus next year. For others, the days after bonus distribution were the perfect time to jump to another firm for more responsibility, authority and, no surprise, more money. That’s not to say that bonuses are always bad. When I graduated from business school in early 2000 and returned to Wall Street, there was a war for talent raging. Without those bonuses, firms simply couldn’t attract the best and brightest and certainly couldn’t get 100-hour work weeks out of them. And when profit is created through ingenuity and hard work, it deserves to be rewarded handsomely — that is the American way. But we’ve come to the end of outsized paper profits generated from proprietary trading operations and 30-to-1 leverage. So too has the war for talent waned. Firms are disappearing or laying off thousands. In this environment of bleak job prospects, investment bankers who got a smaller bonus in 2008 than they did in 2007 won’t be running for the exits and the greener pastures of Lehman or Bear Stearns. Yet some institutions that begged for taxpayer aid to stave off bankruptcy — simply to stay alive — made 2008 compensation packages their first order of business after receiving their bailouts. This speaks to how completely foolhardy behavior has overtaken our industry. It certainly defies logic and sensible business practice. After all, it’s one thing to reap great rewards when creditors are being repaid and shareholders are earning a return; it’s quite another to reward failure almost as well. Year-end bonuses also undermine the efforts of the troubled assets program. The whole point of the program was to bolster the equity capital bases of recipients. But any bonuses paid just reduce the earnings or increase the losses sustained by the firms paying them, which in turn decreases the equity capital base of those firms. Shareholders are justifiably angry and have plenty to sue about; the case could certainly be made that management and compensation committees ignored their fiduciary duty when 2008 bonuses were scheduled and paid. Honestly, I’m not sure if I should be more offended as a taxpayer or as a shareholder of Merrill Lynch. I suppose there’s no difference nowadays, because we taxpayers are among the largest shareholders of many American financial institutions. Regardless, financial institutions clearly relied on Uncle Sam’s largess when they agreed to authorize 2008 incentive compensation packages. Politicians will continue to wag their fingers at the greedy executives, but Washington’s actions enabled these bonuses to occur. Without the United States government’s open wallet, after all, these teetering companies would have had to decide between offering healthy bonuses and complete insolvency. Luckily for them — and most unhappily for us — it was a choice they never had to make. We all got screwed by corporate greed. They were not entrepreneurs. They stepped into ready made jobs to make nothing but the “filthy lucre”. If the spread between the haves and have nots do not change, we are in for real class warfare. Remember the march on Washington by the “bonus army” that were promised bonuses for fighting and dying in World War One. That Army was “smashed” by General Douglas MacArthur, who was Chief of Staff at that time. Roosevelt, through his pragmatic approach, some of it did not work, saved capitalism. This is one of the models of Barrack Obama. The Republican ideologues are still spitting in his eye. If he loses control, and the unemployed and homeless are left with no “hope”, there will be chaos in this country. That is how revolutions are born. Martin S. Friedlander, Esq. freedompost.typepad
Posted on: Mon, 06 Oct 2014 22:57:33 +0000
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