Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stop Believing The 'Economy' Is The Same As The Stock Market - 12th Jul 20
Spotify Recealed as The “Next Netflix” - 12th Jul 20
Getting Ahead of the Game: What Determines the Prices of Oil? - 12th Jul 20
The Big Short 2020 – World Pushes Credit/Investments Into Risk Again - 11th Jul 20
The Bearish Combination of Soaring Silver and Lagging GDX Miners - 11th Jul 20
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Wall Street’s Bonus System Major Catalyst for Financial Crisis

Stock-Markets / Credit Crisis 2009 Feb 05, 2009 - 09:00 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleShah Gilani writes: In a report released last week, New York State Comptroller Thomas P. DiNapoli estimated that the securities industry granted its employees $18.4 billion in bonuses – a revelation that President Barack Obama characterized as “shameful.”

Not surprisingly, the audacity of The Street's greed is far more shameful than people realize, because the total payout was actually much higher than the report found.

What wasn't widely reported is that the $18.4 billion was only the cash portion of the bonus payout and only accounted for the money paid to securities-industry employees who worked in New York City. In other words, bonuses paid to employees working outside the city weren't included. The Comptroller's estimates also didn't include stock options that have not been exercised, but that could easily increase the value of the bonus-related compensation by as much as 25% to 100%.

Wall Street's greed precipitated the banking-and-credit crises, leaving taxpayers to foot the bill.  Now those same taxpayers are being asked to finance Wall Street's bonus payouts, which were actually a proximate cause of the crisis. They fueled a culture of greed and avarice, and created incentives for actions that led to the near-collapse of the U.S. banking system.

The Street's greed, deceit and indifference are not only shameful; each is also a travesty of a mockery of a sham.

Understanding the compensation equation requires a look at more than just the numbers.

Backgrounder on Bonuses

Proxy season is fast-approaching: It's the time of year when U.S. public companies – in advance of their annual stockholders' meetings – send out the proxy statements that detail such items as shareholder resolutions and top-executive compensation. The American business press typically uses that as an opportunity to declare open season on executive compensation, running long stories that detail the seemingly huge payouts in cash, bonuses and grants of both restricted stock and stock options.

This year, however, due to the ongoing financial crisis, the executive-pay controversy has been elevated to an even-higher higher level. Companies that accepted government bailout money have still paid out big bonuses, attracting the ire of federal lawmakers and the new U.S. president alike.

Just yesterday (Wednesday), in fact, President Obama announced a salary cap of $500,000 for top executives at companies that receive large amounts of bailout money, calling the step an expression of both fairness and “basic common sense.” [For a detailed report on this executive-payout salary cap posted elsewhere in today's issue of Money Morning , please click here ].

For the past decade, the New York State Comptroller's office has released estimates of bonuses paid to New York City-based securities industry employees. The $18.4 billion paid out last year represents a 44% decline from the $32.9 billion dispersed in 2007.

However, the decline isn't as steep as Wall Street would have us believe. First, since New York firms last year cut their payrolls by about 19,200 people, or roughly 10.2%, from the 2007 level of 187,800, the average 2008 bonus of $112,000 was dispersed over fewer employees, meaning the payouts resulted in an actual drop of only 36 %. The average cash bonus in 2007 was $175,186.

These cash bonus figures are averaged. Not everyone gets a bonus and some folks get very large bonuses. A clerk making $35,000 a year is not going to get a $112,000 bonus; however, a trader making a salary of $150,000 might get a bonus of $2 million.

It's important to remember, too, that while all employees are paid salaries, bonuses make up the bulk of compensation packages for bankers, traders, brokers and managers.

Top-employee salaries typically run between $100,000 and $750,000, but generally fall into the low-six-figure column. At the end of last year, the top executives of Goldman Sachs Group Inc. ( GS ) decided to forgo any cash, stock or options bonus compensation for 2008 , stating that it “was the right thing to do.”

Goldman's top executives had to make do with their $600,000 salaries. As for the rest of the firm's employees, it has been reported that they will have to share a paltry 2008 bonus pool that a Goldman spokesman said could total only $2.6 billion. But not to worry: The firm likely will say that none of the $25 billion of Troubled Assets Relief Program (TARP) money it received courtesy of American taxpayers will go for bonuses. Perhaps some Wall Street accountants can explain that to me.

While forgoing 2008 bonus compensation after receiving only a $600,000 salary may seem noble, no one is shedding a tear for the Goldman executives. In 2007, Chief Executive Officer Lloyd C. Blankfein took in $68.5 million; co-presidents Jon Winkelried and Gary D. Cohn each made $67.5 million; and David A. Viniar , the firm's chief financial officer, made $57.5 million.

A Move to Regulate?

While President Obama called the $18.4 billion bonus pool “shameful,” U.S. Sen. Claire McCaskill , D-Miss., was more pointed, stating that “they [just] don't get it. These people are idiots.”

To make her point, McCaskill cited a report (also carried by Money Morning ) stating that executives at 116 banks that got government bailout funds were paid an average of $2.6 million in bonuses . She condemned Citigroup Inc. ( C ) last week for even considering taking delivery of a $50 million luxury corporate jet after having received a direct government investment of $45 billion, as well as an additional $300 billion in government insurance against losses on its toxic balance sheet. Citigroup demurred, and cancelled delivery of the jet, because of the direct pressure from the U.S. Treasury Department.

McCaskill is not just vocalizing her anger; she has sponsored a bill called the Cap Executive Officer Pay Act . Her bill proposes that any company taking any bailout money from taxpayers limit compensation, for anyone at the recipient firm, to $400,000, which as it turns out is $100,000 less than President Obama is willing to grant executives. McCaskill said she picked $400,000 because that's the salary paid to the U.S. president, and incidentally is also eight times the median U.S. household income – and which, by the way, may not seem too shabby, unless you're Goldman's Blankfein, who made more than that every two days back in 2007.

Sen. McCaskill didn't want to take away the punchbowl entirely, however; she suggested that once taxpayers receive what a company owes them, the firm is free to pay its executives whatever they want.

The Treasury's aforementioned TARP initiative requires that senior-executive compensation be subject to “clawback” provisions in the event compensation was based on inaccurate information. But for all the executives who artfully escaped with fat severances and golden parachute deals after bailing out or being pushed out of the companies they helped wreck, there's no such provision.

Perhaps there should be.

Taxpayers as well as shareholders should be able to claw back compensation from the likes of former Merrill Lynch & Co. Inc. CEO E. Stanley “Stan” O'Neal, who retired after announcing losses of $8 billion (an amount that ballooned to more than $27 billion, by the end of last year), and took a pay deal worth more than $161 million.

Then there's Citigroup boss Chuck Prince, who tiptoed off with a $38 million “bonus” after announcing billions in losses and steering the bank to the brink of insolvency.

And of course there's Martin Sullivan, the former CEO of insurance giant American International Group Inc. ( AIG ), which needed $85 billion in cash infusions and another $45 billion in backstopping by U.S. taxpayers . Sullivan, who made $39.6 million in his last three years at the firm's helm, ambled away in June with a severance package of $47 million, regulatory filings state. Sullivan got a $15 million severance, and a $4 million bonus for the portion of the year he actually worked. According to the filings, he also got to keep already-outstanding stock and long-term cash awards worth about $28 million.

In the final analysis, the fundamental question that needs to be addressed is a straightforward: Are Wall Street executives worth what they are paid, given the risks they take with money that actually belongs to shareholders (and, now, the U.S. taxpayer)?

The short answer – and I say this as a formerly well paid Wall Street executive – is   “no.” The prevailing school of thought, as espoused by those who earn such outsized compensation packages, those who are paid to do the bidding of the well-heeled and greedy, and those who aspire to the mantle of “Master of the Universe,” is: “We want the smartest people running these firms and in order to get them you have to compensate them or they will go elsewhere.”

That is the biggest sales job on all of Wall Street. No one is that smart.

There is not any value added by the majority of highly paid Wall Street bankers and traders to the economy at large. The discernable value they add is actually the value of their compensation as it becomes an element of gross domestic product (GDP). The same money would better serve the economy and GDP if a large portion of it was channeled back into shareholder value, dividends or simply resided as accumulated capital on the balance sheets of banks that would have cheaper better capital to make lower cost loans.

Now, that's an idea whose time has come.

America should always be diligent about shepherding free markets, domestically and internationally, and compensation should not be regulated by any government. There are, however, limits that need to be applied to compensation if public companies are allowed to leverage their shareholders' balance sheets and create the systemic risk that threatens us all. There were no regulators shepherding the system, which is a travesty. There were no shareholder advocates taking down greedy and profligate boards of directors, which is a mockery. And, if inordinate greed continues to undermine free markets and our capitalist system, then everything Wall Street stands for will be a sham.

[ Editor's Note : As the controversy over executive compensation on Wall Street underscores, the damage wrought by the ongoing financial crisis is both widespread and deep. After all, why else would the federal government push to limit how much the top “rainmakers” of a Wall Street firm earn each year? Clearly, it will take time to make the needed changes, meaning that uncertainty will remain the watchword for years to come. And that means investment profits will be tough to come by.

But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat - right? You'd know what to anticipate, could craft a profit strategy designed to specifically capitalize on those market shifts … and could then just sit back, watching as the profits roll in from the very marketplace events you predicted.

To make this scenario a profitable reality, however, you need an experienced navigator to guide you. R. Shah Gilani - a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – is just that guide. Gilani has identified five new financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist , Gilani uses these “trigger events," as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report . Also, check out Gilani's first-person sidebar on executive compensation, located elsewhere in today's issue of Money Morning . Just click here to access that other story. ]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules