The Bailout and the Bonuses, Part 2

Wednesday, October 29, 2008

The Outrage: With $125 billion of taxpayer funds disbursed to nine major banks (Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, State Street, and Wells Fargo), $108 billion of it is being held for employee compensation and bonuses by those same banks. That is why banks are not lending the money as intended by the TARP plan, and credit is still frozen.

No Oversight: $125 billion of public funds goes out and no one is overseeing it on behalf of the taxpayers and public. Though the Wall Street bailout package includes modest restrictions on CEO pay, it hardly prevents participating financial firms from paying bonuses to top executives and others.

And it seems many on Wall Street are expecting some big money. Rich Layne of eFinancialCareers tells Fast Money, "I thought you'd be interested in the results of a post-bailout survey of Wall Street professionals on their bonuses expectations. 2/3 are expecting a 2008 bonus; 36% are expecting that bonus to be higher than their 2007 bonuses. There's even a minority - 10% - that expect this year's bonus to the 33% higher."

The Bonuses: Every year those extravagant Wall Street bonuses become the talk of the town, but this year it could be for a whole new reason.

New York Attorney General Andrew Cuomo is demanding information about executive compensation and bonuses at nine banks that have received federal funds under TARP, the U.S. Treasury's Troubled Asset Relief Program.

In a letter to each institution's Board of Directors, Cuomo warns the bonuses could violate New York's state fraudulent conveyance law.

"Obviously," he writes, "we will have grave concerns if your expected bonus pool has increased in any way as a result of your receipt or expected receipt of taxpayer funds from TARP." In the letter, Cuomo demands information on how this year's bonus pools were calculated, as well as details on each bank's 2006 and 2007 bonus payments.

There are also rumblings on Capitol Hill that lawmakers might look to limit or even do away with bonuses this year.

The first salvos were fired late Tuesday when Rep. Henry Waxman, who chairs the House Committee on Oversight and Government Reform, said he sent letters to the first nine major banks set to receive a capital injection from the government, seeking information on their compensation and bonus plans for 2008 and other years.

He wrote, "I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record."

Although the Wall Street bailout package includes modest restrictions on CEO pay, unfortunately it does not prevent participating financial firms from paying bonuses to top executives and others. No one is looking out for the taxpayer, certainly not the Congress who is dropping our money from helicopters. Who is assuring that there is not self-dealing, a former Goldman Sachs CEO who is directing it all, Treasury Secretary Paulsen?
CNBC’s Dylan Ratigan, like many others, is outraged by the news in general. He can't believe that financial services sector could take on so much risk that they need a $750 billion taxpayer-funded bailout and then turn around and still provide their upper echelon with bonuses. Managers who ran their companies into the ditch and had to take a federal bailout should be penalized. When businesses fail, executives should be paid no bonuses, especially if they take taxpayer money. Why don’t they know that, it is only common sense: no bonuses were earned because there was no value added to the businesses. Where are the Boards of Directors of these companies, and why do they exercise no restraint?
The Boost: The system is set up such that if you buy a house you cannot afford because you were dumb enough to do it or whatever your reasoning was, through foreclosure the system will throw you out of that house. However, if you manage to alter legislation and financially engineer tottering derivatives and you take 40:1 risk (and the Treasury Secretary was one of the people who advocated the SEC to boost that leverage) and go nakedly long the housing market taking through those derivatives more risk than you could bear, then bonus yourself all this money, and then want to stick it to the taxpayer on the way out, that apparently is okay. It is an insane system.
The Coming Change: The fact is that compensation is going to come down on Wall Street and really smart people who worked on Wall Street now will have to do things that are not financial engineering, they will have to go into fields like alternative energy, medicine, healthcare or teaching, or civil or chemical engineering, and those who are good at allocating capital and managing risk will remain on Wall Street and make vast sums of money for doing it a la Warren Buffett and Carl Icahn, etc., and we will get rid of the financial engineers who put the entire financial system, and global economy, on the verge of collapse.


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