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Kill or Tax Wall Street Bonuses?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Henry Blodget and Aaron Task of Yahoo tech ticker had a very interesting interview on Tuesday with MIT's Simon Johnson:
Bashing big banks is all the rage this week, with White House officials and New York Attorney General Andrew Cuomo scolding Wall Street fat cats ahead of the Financial Crisis Inquiry Commission, which gets underway Wednesday.
At issue is what level of bonuses are appropriate for publicly traded firms that posted record profits in 2009 thanks to the government's largess and after being rescued in 2008.
Simon Johnson, professor at MIT's Sloan School of Management and former chief economist of the IMF, says there's a simple solution to this seemingly complex problem: "People working at our largest banks - say over $100 billion in total assets - should get zero bonus for 2009."
Looking back, all the big firms were saved by the various government programs, including Goldman Sachs and Morgan Stanley were allowed to convert to bank holding company status in 2008, Johnson says. "There were unconditional bailouts for all our big banks - it was a decision made on the fly in the crisis. Let's not second-guess," he says.
"But no way that strategy implies, requires, or is consistent with the banks then paying all that money out to their employees."
By contrast, when the government instituted a similar "recapitalization" strategy for banks after the Latin America debt crisis of the early 1980s, the banks retained the money to help rebuild their balance sheets, he recalls. "In this case they're going to pay out 40% [of profits] - that's not good economic policy."
But, let's put our selves in the (expensive) shoes of the bankers for a moment. Henry points out in the accompanying clip, on Wall Street it's a 'bonus' in name only. Most bonuses are part of a guaranteed pay package negotiated when employee contracts are signed. The Wall Street Journal notes limiting bonuses after the fact will create some high class problems. "Since many people plan their household budgets around bonus expectations, they may need the cash to cover mortgages, school tuition and other expenses." Of course, firms that limit pay always risk the threat of a brain drain.
Johnson discounts these arguments wondering, if Goldman Sachs paid no bonuses this year, would employees really leave? Where would they go?
If the "too big to fail" banks insist on paying bonuses for "retention" purposes or other reasons he deems fallacious, Johnson says they should be subject to a "steeply progressive windfall income tax" -- paid by the employees and not the firms, as is the case with the U.K.'s recently announced 50% bonus tax.
Professor Johnson is absolutely correct. You can watch the whole interview below. U.S. government officials should stop pooing on bankers on Sunday talk shows and start implementing windfall taxes on these outrageous bonuses.
Government officials should also read Dean Baker's Big Bank Theory and think about structuring regulation in a way that advances the public interest, not in a way that allows the financial sector to profit at society's expense.
And the banking industry better wake up and smell the coffee or else they're going to get socked with more regulations than they can possibly conjure up in their worst nightmares. Stop paying bonuses based on short-term speculative calls. Start taking into account the risks that your prop desks are taking to deliver those spectacular returns.
[Note: I heard of one Canadian bank where more than half of the profits last fiscal year came from capital markets. It's much worse in the U.S. Are you banks or hedge funds (with no skin in the game)?]
The same goes for public pension fund managers here in Canada. They too want to get paid like Wall Street or Bay Street titans but their bonuses do not take into account the risks they take to deliver their "alpha" targets.
If you sit back and go over the major trading scandals in history, you'll find that behind every rogue trader there was a weak operational environment that allowed them to mask enormous losses. But the culture of bonuses at the major banks and even some of the larger pension funds here in Canada also promotes excessive risk taking with little or no regard to downside risk.
If governments do not nip this bonus bonanza in the bud, then the next financial meltdown is only a matter of time. How long will we allow the rest of the economy to be subservient to the reckless arrogance and greed of a financial sector gone rogue?
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A buddy of mine who trades currencies told me that this fiasco is the fault of regulators. He told me that if they did their job properly, setting stringent controls on leverage and off balance sheet manipulations, we wouldn't have seen anything resembling this mess. For him, the problem isn't bonuses, but regulators.
A consultant that works with me thinks the problem is both social ("why do we pay sports athletes ridiculous compensation?") and economic. He thinks that tax treatments have to target bonuses at the corporate level because if you target individual bonuses, they'll find a way around this by demanding higher fixed salaries or by leaving to join an unregulated hedge fund.
One thing he told me is that for years, the US refused to join Basel I and Basel II. He also told me that one easy solution to control these "hired guns" is simply to place clauses with caps on bonuses. "This way the hired guns do not take stupid risks to maximize their bonuses and the banks limit their downside risk."
Professor William Black was interviewed on Yahoo tech ticker discussing the bonus controversy and what needs to be done. Among the fixes, he proposes:
The former regulator during the Savings & Loan Crisis also recommends reinstating mark-to-market accounting. Until that's done, he says, there's no way to tell whether 2009 paper gains won't be wiped out in the near future if the market sours again. Black argues "people are being paid bonuses when the company, the bank has actually lost tens of billions of dollars. That's an obscenity."
Which is precisely the liberal plan. Try to truncate individual outcomes. Dictate the maximum amount people can make and give it to those below (who already live like kings by world standards). Hence the increased references to socialism of late.
What would it take for some tens of millions of taxpayers to obtain class action status for a suit against Goldman Sachs? (I know a suit against the governmnet would never get to first base.) My idea is we claim damages for all the taxpayer $ being siphoned off to bonuses.
As long as we also round up those folks who are not paying back the loans they swore they would pay back. Because their irresponsiblity is costing me money. They too "are siphoning off" money that is not theirs and costing taxpayers money. So let's get them too.
I am surprised most of the contributors take the view that smbdy else is responsible. No-one forced anyone to buy BB tranches on subprime, cpdo-s or quadruple cdos. As 192260 I am also from a post communist country and the results of finding common enemy and blame smbdy else was used extensively. No need to speak of results. If you think smth is expensive short it, but dont complain if it goes up.
Pension funds bought boatload of CDOs and other toxic waste durig the heyday of structured finance. Don't get me started on that stupid move!
I think those pension funds were just duped. They are vulnerable yield hungry simpletons who just did not understand what they were buying (much like the majority of borrowers of the underlying loans did not understand) -- so let's round up those greedy evil bankers and get 'em. The left is in full control.
192320
You say the bankers broke the law? How about the millions who TOOK the loans knowing they couldn't pay. How about all those who LIED on their applications. The American people are to blame not the bankers. And the Fed even more. If you jail the bankers jail the millions of amrican taxpayers too.
The banksters aren't to blame?
For anything? For taking money from the taxpayers to bail themselves out via an elected official's appointment to the Treasury who kept secret what he was doing?
For paying themselves record bonuses on the money that we were forced to give them by the very same thieves in congress thru the TARP program that we overwhelmingly voted against?
You're a fuckhead.
Banks did not take any money that was not given to them by the government. And you want to focus on blaming the banks rather than the government??? That is ABSURD.
No one forced the government to do so. If the government felt it was in their best interest to do so, that is their (and your) problem.
If you do not like what banks have done with government supplied capital, direct your wrath at the government that gave them the money and structured the terms in such a way you now feel cheated. Vote your elected official out in November or shut up -- the government is more than culpable.
Again You guys SIMPLY DO NOTY GET IT. There is no difference between the bankers and all those millions of Americans who enjoyed low interest rates and the myth of prosperity generated by pure greed. America AS A WHOLE was greedy. The banks and the bankers ARE NO DIFFERENT FROM AVERAGE americans and if you want to tax bank bonuses there is NO EXCUSE not to tax every single person who took out a loan they couldn't afford. Really what is the difference. As a country we were greedy and as a country we have failed. I blame the voters in Barney Frank's district much more then Goldman or Morag. GReenspan, Bernanke, Frank, Dodd. Those are the criminals.
# 192260, you are kidding right ? These bankers broke the law period. They pushed this stuff knowing it was toxic to line their pockets and now the fed lets them make obscene profits while putting the taxpayers more at risk while the economy is in shambles. What the fed is doing now is basically giving them free money to make it easy to get their billions in bonuses which doesnt help the country and puts it more at risk. All you would need to do is get their e-mail, phone and other financial records that have leaked out and you have a rock solid case and they would be in prison. The only reason they arent in prison is they are buddies with the powers in Washington.
192320 That is it , crooked, corrupt, and you are correct.
"These bankers broke the law period. They pushed this stuff knowing it was toxic to line their pockets and now the fed lets them make obscene profits while putting the taxpayers more at risk while the economy is in shambles. .... The only reason they arent in prison is they are buddies with the powers in Washington".
Did you read the risk factors disclosed in the prospectus of this "toxic stuff??" (I know you didn't). Issuers told folks really bad things could happen to the value of these securities for a variety of specific reasons. But everyone was greedy in all of this - somehow "greedy" only gets attached to "bankers."
No one foisted a loan on a greedy borrower and no one foisted the securities on an institution buying these securities. No one focuses on these equally culpable parties to this mess.
You acknowledge the ineptness and corruptness of government, yet are in favor of more of it in more areas of life. Not too bright.....
Turn on the tv and watch the drug commercials. They are full of "risk factor disclosures" and does this stop anyone from purchasing them? I guess not.
Wall St. KNOWS that just about every financial transaction (including paying your credit card online) has "risk factor disclosures" - and that most people are simply too overwhelmed and accustomed to ignore that gazillions of "risk factor disclosures" that they are exposed to in just about every facet of their life.
Therefore, Wall St provides pages and pages of "risk factor disclosures" and, gosh, few people pay a lot of attention to them - do you?
The difference, though, is that we are now witnessing Wall St. about to pay themselves around $100B in bonuses - earned primarily because of being bailed out by the taxpayers - and that's alright - because, hey, most people didn't take the "risk factors disclosures" seriously.
Gosh, do you think that Wall St spend ANY time highlighting the "risk factor disclosures" during the presentation?
People are "overwhelmed and accustomed to ignore" risk factors??? What a stupid comment and/or a incredibly low view of people (although one shared with most in government).
So borrowers and anyone using medications is protected because they did not read or believe the risk factors?? Or should just everything bought or sold carry NO risk?? Has to be one of the two for your world to exist. Absurd.
If you are unhappy with the banks for what they have done with government supplied capital, direct your wrath at the morons in government that gave them the money and structured the terms in such a way that you now feel cheated.
Government is the primary source of the problem and are clearly deflecting anger away from themselves by focusing on bonuses (they know that will get you off-focus). Government should not be in the pay setting business, but they know you will not be upset with them and vote them out of office in November if they can shift the blame spot light.
I see this a little differently. This whole dog-and-pony show from the White House is simply to deflect the blame and make a feeble attempt to boost poll numbers. The problem lies in how the TARP payments were structured in the first place. The govvies put nothing in place to ensure that TARP funds weren't used to pay bonuses. Also remember that a some firms were forced to take TARP funds even if they didn't need them. Then they tipped their hand on MBS and Treasury purchases, effectively allowing FICC desks to front-run the trades (read: back door recapitalization). And they've kept rates obscenely low so prop desks could put on a carry trade and goose the markets.
So in other words, the government completely fucked up from the get-go. Yeah, it sucks that the bankers are making off with all the money and looting the companies, and they deserve scorn for that. I do not absolve them of any blame whatsoever. But since when is it ok to start regulating pay? If they can do it for bankers they can do it for any industry, and I have a huge problem with that.
The answer is: do nothing to their pay. Voice displeasure (loudly) at bankers for taking the bonuses and vote the mofo's out who set up scenarios that allowed it to happen.
Agreed. The government does not know what it is doing. Yet many on this post want them to do some more. Folks, we are governed by morons (and they are on both sides of the aisle). Stop giving them more say in our lives.
Not sure bankers are "looting the companies." But if they are, unless you are a bank shareholder, why should you care?? I don't like athletes' pay, but I am not a party to that transaction and have no reason to express it encourage others to take shots at them. If the argument is "the government gave banks money," then tell the government not to give them money. That should settle your concern. Vote your elected official out of office to communicate such (I know you all won't - you really just want to complain).
Keep government and the public out of pay setting. We defeated a form of government that was big on doing that.
There is nothing legal that can really be done about it. That being said, an international "shun in" would make their lives pretty miserable.
Its hard to enjoy your money when internationally: your dinner orders are either over cooked, under cooked, or just wrong; the valets won't park your cars, the hotel staff are slow or non existent, the suits don't get clean at the drycleaner; everyone treats them like the plague; businesses say "you're money is not good here, beat it."
Nothing illegal, repeat nothing illegal-- just all those little inconveniences or unpleasantries that make every day a very miserable day.
Someone with clout and good PR simply has to post pictures on the internet and make suggestions.
So they can take the money, they'll just wish they never had.
There are a lot of Tylers out there.
It is really funny .... The society as a whole has profited enormously from the developments in capital markets and I am sure that, if America had lived with a very timid , controlled and limited financial market, the country as a whole would be much smaller , much less important and income per capita would be at most half of what it is now ... Lots of inventions and patents would not had happen and thousands of brilliant brains would not be working in this country .. The main culprits behind this fallout are the politicians, who by the way are elected by the American people ....3/4 years ago they were turning a blind eye to the scams that were happening because it was politically interesting to “surf the wave” of home ownership .... How many times we saw politicians praising the high level of ownership ??? And EVERYBODY knew that something really wrong was going on ( given that illegal immigrants that worked as maids were getting $ 1 mio mortgages without any effort ...) but EVERYBODY was happy and enjoying the ride .. People were buying leisure boats with second mortgages and using the balance to visit the Eiffel Tower in Vegas .... I am not saying that the banks are innocent .. They had a considerable role in the problem , especially the very top management ... Lehman Brothers did not go down because its traders were wrong or taking an enormous amount of wrong risk ( actually the traders were super bearish on real estate and the legacy positions made money afterwards ) ... Lehman went down because the top management was buying condos, malls and so on ... BUT DO NOT FORGET THAT THE POWERS TO BE IN DC WERE WHISPERING ON THEIR EARS TO CONTINUE BUYING THAT EVERYTHING WOULD BE FINE AT THE END instead of regulating and checking WTF was going on with those crappy mortgage generators in California ... So , as I said the Politicians , i.e The People, were the main culprits on this debacle ... In brief , the society as a whole is to blame for this crisis ( that is why the society as a whole had to pay for it, but I can reasonably guarantee that net-net , even after the crisis the society is much better off in the last 20/30 years and big part of the living standards improvement happened because we had a very agile and efficient financial system ) and now we have the politicians DEFLECTING all the blame to the bankers ( actually , blame deflecting and finger pointing is a field of expertise where politicians really perform well ) and the society begging to have a more SOCIALIST guidance ... Let me tell you something .. This country ONLY became what it is because everybody believe that meritocracy was reigning here ...In theory , ANYONE could move upwards on the social ladder on the basis of its own effort and work ...And actually that was true for the most part .. And now we are flirting with a very dangerous love affair with socialism .. And if we go that path, this country is toast .. And believe me , I come from a country that lived under a huge, socialist government for decades and the end result is a income per capita that is 20 times lower than the US and a humungous amount of corruption , almost a cleptocracy ... The US do not know what misery and poverty is and its people keep playing with fire ... My mother used to say that who plays with fire ends up burnt .... In a society some people will always make more money and get richer faster than others .. The difference is that in a free capitalist society anyone can get there ( and in reality , the average moves up in tandem with the rich ) in a socialist the few continues making a fortune but ANYONE else has the less remote possibility of joining them and keep going lower ... Think about that and please do not forget , BE CAREFUL WITH WHAT YOU WISH FOR ... Do not kill the engine that moved us forward ...
Thats very true, but America is but 5% of humanity. The system of profit as it now is , has put America at risk through the fanciful illusion of Globalization. America never needed to be the safe haven , police force , center of justice to the world. Liberal stupidity is to blame for our currrent demise.
The entire problem we face is a lack of enforcement of existing laws. It is not my fault the SEC failed to prosecute - corruption has replaced the Rule of Law.
The People do not have the power anymore. We need a Revolution of that power back to the People. The only blame that can be placed on the People is that we have become complacent, distracted, and even apathetic to our heritage of Liberty. We can only be found guilty of not exercising our Duty to "alter or abolish" this current gov't.
So, maybe the American People are to blame. We have dangerously allowed ourselves to feel alone in a room full of people.
@ Anon #192260,
Using this logic, we can say society as a whole benefitted from the Iraq War because what's good for Exxon Mobil and Halliburton is good for S&P profits and American growth. If you don't see the problem of an economy that is overleveraged to the FIRE sector (finance, insurance, real estate), then don't be surprised if you get burned in the end. And by the way, real and sustainable growth doesn't come from financial engineers but scientists that discover new applications that benefit society. We have to many "wizards" on Wall Street and Bay Street earning bloated bonuses, wasting precious human capital on figuring out ways to package and offload risk, instead of figuring out important scientific discoveries. It's a monumental waste of talent.
Spoken like a true leftist central planner who frankly knows better than every individual what is good for them to do and to want. Scary.
Just need to search for the key words .....Halliburton...Wall Street bonuses....
Well, clearly society and the world benefited from the Iraq War. Look at Iraq then, look at it now.
Dunno if XOM or HAL are doing better, probably they're struggling (like all of us) with this economy.
Let us clear the air here. So you want to blame everybody? Well, there may be a few of us who do not want to live off the largess of others, voted for the least odiferous choice, wrote to our elected representatives about how we believe they should address the public good, saved for a rainy day, paid our bills, and worked hard each and every day so that our families can pursue happiness. That's right! Happiness is not an entitlement as directed by our astute founding fathers.
The politicians, regulators and banksters are to blame and should be held accountable. The people who scammed the system should also be held accountable. There is a lack of accountability created by a Statist mentality that presumes someone else (big government) will take care of all. And when everybody - banks, car makers, insurance companies and the putz who borrowed more than he should, gets bailed out it makes me mad as hell. Why? Because I'm gonna help pay for it. That isn't fair to me or anyone else who is on the hook for this crap. Until the actioner feels the consequences of bad actions, there is no hope for any of us.
And no, I do not want to kill a free market. I just hope that the manipulated poor excuse for a market we have doesn't end up killing us all.
You guys all just dont get it. The real scandal here is the federal reserve. The banks were only doing the bidding of the Fed. Forget bank bonuses and stop spreading the myth that banks caused the crisis. Greenspan, Bernanke and Barney Frank caused it and they are causing the next one as well. The banks and the American people collectively then jumped on the greed bandwagon. But "main street" and "wall street" deserve equal blame. Why not tax the salaries of the people who took out liar loans. The problem is the Fed. And the biggest problem we have going forward is the "Professor" in charge of the Fed.
YOU don't get it.
The FED is certainly not innocent but the blatant collusion between the Paulson and Geithner at Treasury, with Bernanke and Greenspan at the FED, and the top people at Goldman Sucks and JP Morgan, and the likes of Steve Friedman, Bob Rubin and other Goldman Sucks employees stinks like rotting fish on a Naples beach.
If you don't see that you really don't have any clue what is going on at all.
Let's not exclude the likes of our elected "representatives" (from both parties) who gladly looked the other way during this whole process. When Barney Frank says that allowing bad loans was "policy," that ought to tell you that the supposed protectors were gladly letting the thieves loot the rest of us.
Like it or not, Big Government enabled this theft to happen, thus Big Government should be the last institution to trust to fix it.
@ Anon #192255,
The big banks own the Fed, not the other way around. Yes, greed ran wild on Main Street too, but nowhere near the levels on Wall Street. The mortage companies and Wall Street preyed on vulnerable people for years. It's really twisted logic to tax the salaries of people who are now facing foreclosure on their homes. Taxes are meant to redistribute income, not to exacerbate income inequality.
Disagree. The PRIMARY source of the problem is the government - which is why your elected official should be voted out in November.
Regardless, between the banks and the Federal Reserve (or the government more generally) who has the greatest duty to the public?? By far, the Federal Reserve / government -- which is who the primary focus should be on.
This issue is not a predatory lending issue. All leftists see "the people" as "vulnerable" and frankly not very bright. Hence government must tell them how to buy a house and borrow money among lots of other things.
Borrowers were equally as greedy as the lenders. They wanted a house they could not afford (along with their two cars, big screen TV, restaurants, movies, vacations, cell phone, cable TV, etc -- all now necessity / entitlement items). Borrowers screwed up massively. They projected their house value rising to the sun. They bear equal responsibility with lenders for a poor loan.
Government policies (Fannie & Freddie) and the Federal Reserve materially supported all of this for years.
+1
Bull. The banks should not have given mortgages to unqualified borrowers. Period. That's the way it used to work, that's the way it should be now. They did it because they knew they could foist the risk onto someone else.
So unqualified borrowers bear no responsibility for borrowing money that were likely to have difficulty repaying. Because this country does not really want to promote the idea of personal responsibility (which means doing things in a way that does not result in someone else paying for their bad behavior). Because borrowers are morons who can not take care of themselves. Which is why we need more government to lead them through life. Got it.
If banks are solely responsible for the bad loan, seems they should have the ability to unwind the transaction. Folks should give the house back to the bank NOW. Get out.
No one compelled anyone to take any risks they did not want or knew about (although they probably never fully read the documents).
You must be one of the helpless rubes just unable to figure out how to get through life. Man up.
The public is getting outraged, and they do not understand "deferred compensation" or "restricted stock" or "vesting period". They just see the bottom line number, and compared to what the average J6P makes, it is huge. The faux contrition being acted out by the IB and BHC CEO's will not work. It's too late for contrition. If....if the economy does not recover soon, bankers and anyone who looks like a banker are in trouble. Time to ditch the Brioni's and John Lobb's and start trying to blend in. Better yet, cash out and get off the grid.
Forget bonuses. Focus on RICO.
TARP put out the fire. Now it is time for the arson investigation.
The possibility of going to prison will do more to cure moral hazard than any compensation claw-back scheme.
Nip it in the bud, Leo - it's a gardening term. The bonuses bite the taxpayer in the ass.
Crime of the Century,
Thanks, I edited that expression. I was thinking about the Congressionally supervised rape of U.S. taxpayers (who keep getting butt f*cked by these arrogant financial oligarchs and their political patsies!!!).
So those same political patsies who are "butt f*cking" us taxpayers are now going to miraculously bring us justice? What, precisely, will cause them to do that Leo? Because you wrote an indignant article? Seems to me that you like getting "butt f*cked" but don't want to make it too obvious.
Politicians will cave if public pressure is there and their jobs are on the line. Last I checked, nobody was butt f*cking me...thanks for your concern.
Why does no one talk about Stephen Harper or Jim Flaherty's(or for that matter Michael Ignatieff) support for big banks. Flaherty has rejected bonuses taxes, bank fees, transaction taxes and is clearly trying to undermine the G20 so Toronto can become a bigger financial center vis a vis NYC. I have also heard the Alberta Securities Commission and the Stelmach government is trying to undermine any international controls on oil specultion by encouraging speculators to move north if the US CFTC imposes controls.
I have also heard that Gordon Brown and Nicholas Sarkozy are furious at Obama for letting Harper host the G20 this summer in Toronto because they feel Harper is trying to advantage of the crisis for his own benefit internationally.
Why arent these guys in jail ? They broke the law pushing those MBS 's as safe knowing they were toxic and that is against the law. The case would be just as easy to win as the Enron case but instead they get bailed out and given billions in bonuses making money executing transactions that a 6 year old child could do with the current zero rate of interest money they are given and will get to walk away with those billions when their actions finally put us into a depression. Unbelievable.....
More populist rant.
They did not push MBS as "safe" - I think that was the rating agencies. Did you read the risk factors in the prospectus?? Of course not. No one foisted this stuff on buyers and they were warned, but just did not want to believe the pages of risk factors. The buyers were as greedy as the sellers.
If they don't pay bonuses then their disgruntled employees will rat them out...
and then they're f****d, and so are Geithner, Bernanke and Obama.
It's protection money
Separate banks from the securities business....
Enforce size limitations....
Putting any additional taxes on banks will not work....
as this will just tax the public....
This is a structural issue....not a tax issue...
If they can....they will....
If they cannot....they cannot....
...............................................
Banks will pay for the problem created by them by no
longer allowing them in the securities business....
This is only way to really tax them....
unrelated:
this is a curious development:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDH7KBnSmLdI&pos=1
Mr Nice Guy (china) takes off its mask. Let's continue pretending their business practices are fair. (20 sites w/n various industries - sounds like industrial 007, were targeted :)