Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

It's Time For Shareholders to Squeeze Greedy Wall Street Bank Bonuses

Companies / Credit Crisis 2010 Jan 13, 2010 - 05:48 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Wall Street bonuses are back in the news again, as the Obama administration scores cheap political points by bashing bankers.

Wall Street's investment-banking houses correctly claim that they are paying out a much-lower-than-usual percentage of their profits in the form of bonuses - in some cases, less than 50%.


So what's the problem?

After all, Wall Street earned the money legitimately (aided and abetted by foolishly lax monetary policy, which will come back to bite us). So these firms should have the right to pay out lots of those profits as bonuses - so long as shareholders don't object.

The problem is that shareholders ought to be objecting - and objecting loudly.

You see, the money that Wall Street is using to pay those big bonuses rightfully belongs to the shareholders.

Banking and investment-banking businesses have grown substantially during the last 30 years.

They've also changed a lot.

Thirty years ago, almost all the investment banks were partnerships, with the partners putting up all the capital. Naturally, having put up the money, the partners got the profit. They also took the risk of something going wrong; when a slew of investment banks went bust in 1970, after a horrendous back-office disaster, it was their partners who took the losses, not outside shareholders and certainly not the U.S. taxpayers.

Starting in the late 1970s, investment banks moved increasingly into trading. Before that time, they had been almost purely advisory houses (For instance, Morgan Stanley only established its first trading desk in 1971).

The firms very quickly discovered that - in order to trade as aggressively as they wished to - they needed more capital. So led by Salomon Brothers in 1981, the partners began selling out to other public companies, or raising money (and taking on shareholders) by conducting initial public stock offerings (IPOs). The last true large-scale partnership was Goldman Sachs Group Inc. (NYSE: GS), which did its IPO in 1999.

Initially, the intention was to use the outside capital only to supplement the partners' capital. Starting with the 1980s, however, the business focus became more and more aggressive - and increasingly focused on short-term results. (This trend was again started by Salomon Bros. - and if you've read the investment classic "Liar's Poker" by Michael Lewis, you'll understand the atmosphere that held sway at the time).

Naturally, partners didn't want to have all their money tied up in such a risky business, so they increasingly sold out and relied on stratospheric bonuses to supplement their already substantial fortunes.

As a result, top Wall Street management came to own less and less of their institutions. Even at Goldman Sachs - where as recently as 11 years ago, right after the IPO, management still owned 48% of the company's shares - management's stake in the company is today a puny 5%.

Institutions and mutual funds - now the ultimate "dumb money" - own 80% of the stock.

It used to be that most of an investment bank's profits came from deal fees and from processing other investors' transactions. But as they've grown in size and market stature (or, like Merrill Lynch, have been bought by commercial banks), more and more of their profits are being created by taking "proprietary trading" positions with outside investors' money.

That tendency is likely to continue because of the conflicts of interest involved. If you're a big corporation planning a new deal, the last thing you want is your investment bank trading the hell out of your stock and playing games with your credit. So the advisory business is moving to such "boutique" investment banks as Greenhill & Co. Inc. (NYSE: GHL) and Evercore Partners Inc. (NYSE: EVR).

There's a term that describes a huge institutions whose business is dominated by trading. And it's not an "investment bank."

It's called a "hedge fund."

But hedge-fund management doesn't take anything like 50% of the income in "carried interest" - the hedge fund equivalent of bonuses. In fact, the typical carried-interest percentage is a mere 20% of the firm's profits, and that ratio is actually going down, not up.

It's a logical trend: No matter how skilled the trader or investment manager, institutional money pools won't give away more than 20% of the profits made with their money. These investors have learned from their own experiences that their investment returns after doing so are grossly inferior: Hedge-fund returns are only a little better than those of the broader market, and after the 20% carried-interest charge is backed out, market returns often trump their hedge-fund counterparts.

These days, that should be true for Wall Street also. By all means, allow the corporate-finance types who make the fees to keep, say, half of their net profits - after expenses. After all, transaction fees are now only a modest piece of overall Wall Street profits.

For the traders and investors who manage the capital - the vast bulk of the profits for a modern Wall Street investment house - the bonus percentage should be no more than 20%.

The bottom line here is clear: Both the Obama administration and Wall Street are wrong. The government shouldn't be meddling with Wall Street's bonuses. It's the shareholders who should be meddling - and demanding to keep 80% - not 50% - of the profits being made with their money.

Source: http://moneymorning.com/2010/01/13/wall-street-bonus-bashing/

Money Morning/The Money Map Report

©2010 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: customerservice@moneymorning.com

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 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

assignmenteditor@yahoo.com
03 Feb 10, 11:15
Market O Fan

President Obama, Bernanke, and Jim Cramer are in a MOVIE about hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked-short-sold to near bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and reveals some of their secrets. DVD is everywhere but cheaper at www.stockshockmovie.com


Post Comment

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