Amid record losses, Wall Street awarded itself $39 billion
By Andre Damon
21 January 2008
The five largest Wall Street banks doled out a record $39 billion in bonuses
last year, according to data collected by the Bloomberg news service. After
driving hundreds of thousands of families into foreclosure, causing a financial
crisis affecting hundreds of millions, and pushing the US and world economies
closer to recession, it appears Wall Street is rewarding itself for a job well
done.
The banks announced record losses in the fourth quarter, wrapping up the
financial industry's worst year since 2002. All in all, Wall Street wrote off
more than $90 billion in bad debt for the year, and the five largest banks saw
their profits drop more than 60 percent. Three of the five firms posted losses
in the fourth quarter.
For all that, the bankers made out like bandits. Despite the firms' abysmal
performance, Wall Street buffered its traders from any shocks to their incomes
by increasing the ratio of compensation relative to revenues. Typically, banks
try to keep compensation below 50 percent of revenues; in 2006, when the five
firms paid out some $36 billion in year-end bonuses, the figure was
approximately 45 percent. In 2007, it jumped to more than 60 percent, according
to figures released by the New York State Comptroller's office.
While the $39 billion was divided among 186,000 workers at the five
firms-averaging $211,849-the lion's share was reserved for a few thousand
high-level managers, traders, and senior executives, who took in
multimillion-dollar bonuses in addition to their salaries. Rank-and-file
clerical workers took home a few hundred dollars. Bonuses for traders in
subprime-related securities are reported to be about 30 percent lower this year
in comparison to other sectors.
Morgan Stanley wrote down some $10.3 billion in bad debt in 2007, but increased
its bonus pool by 18 percent all the same. Its CEO, John Mack, declined his
bonus last year after collecting a $40 million bonus in 2006.
E. Stanley O'Neal, the former chief executive of Merrill Lynch, collected a
severance package worth some $161 million, or 3,500 times the yearly income of
a typical US household, after losing his job in October. Merrill Lynch wrote
down some $20 billion in subprime debt during the fourth quarter of 2007, and
saw its value reduced by some 43 percent.
Charles O. Prince II, the former CEO of Citigroup, which announced similar
losses, will walk away with some $68 million. Lloyd C. Blankfein, the Goldman
Sachs CEO, set a new record with his bonus of $60.7 million. The firm put its
chips on different numbers than the other banks and had a good year overall.
The firm's two co-presidents, Gary Cohn and Jon Winkelried, each collected a
stock bonus of about $40 million, in addition to as-yet undisclosed amounts of
cash.
Ike Suri, the managing director of a Finance Executive recruitment firm, told
the Los Angeles Times that "compensation in the brokerage industry is
increasingly tied to volatility-so the more volatility in the markets, the more
investors are trading and the more they make." He continued, "The marked
increase in volatility in the markets in 2007 really benefited the brokers."
Volatility, we might add, which bankers created themselves by gambling-and
losing-on risky securities.
The absurdity of this standard is self-evident. But, for all that, no major
public figures have called for the leaders of these banks to be held liable for
the destruction they caused, much less even called for hearings into their
massive pay. Executive compensation, we are told, is a private affair between
shareholders and executives, whatever its effect may be on the rest of the
population.
Outside the mass media, however, these issues are being hotly debated. In a
widely discussed Financial Times column dealing with the issue of banker pay,
former IMF chief economist Raghuram Rajan writes that executive compensation
practices among Wall Street firms "probably contributed to the ongoing crisis"
in the financial sector. Rajan goes on to explain the means by which bank
managers systematically underpriced and hid risk with the intent of inflating
their personal compensation.
Securities trading, according to Rajan, rests on the ability of funds managers
to generate returns over and above market expectations, while minimizing
overall risk. Rajan notes that differences between a security's real yield and
its evaluated growth potential "are quite hard to generate since most ways of
doing so depend on the investment manager possessing unique abilities-to pick
stocks, identify weaknesses in management and remedy them, or undertake
financial innovation. Such abilities are rare. How then can untalented
investment managers justify their pay? Unfortunately, all too often it is by
creating fake alpha-appearing to create excess returns but in fact taking on
hidden tail risks, which produce a steady positive return most of the time as
compensation for a rare, very negative, return."
The boom of Collateralized Debt Obligations and other risky mortgage-based
securities was probably exacerbated by bankers' attempts to, in Rajan's words,
"create fake alpha," that is, to buy securities whose risk was nominally
underrated and therefore paid disproportionately high returns. The foreseeable
prospect of the real estate market cooling down, resulting in the writing off
of billions of dollars of bad debt, massive losses for shareholders, and
turmoil in the wider economy, paled alongside the bankers' own grasping for
massive amounts of compensation.
For the bank managers themselves, it made perfect sense. Once the racket that
they had been running came to light and the securities they bought rendered
worthless, the managers would simply lose their jobs, collect millions in
compensation, and move on to some other firm. This is exactly what happened at
Bear Stearns, Merrill Lynch, Citigroup, and others.
The more farsighted representatives of the establishment recognize-at least in
part-the dangers posed by unmitigated greed to the long-term stability of the
capitalist system. Martin Wolf, the associate editor of economics at the
Financial Times, recently wrote in response to Rajan's article: "I now fear
that the combination of the fragility of the financial system with the huge
rewards it generates for insiders will destroy something even more
important-the political legitimacy of the market economy itself-across the
globe."
Wolf proposes that the US government step in to regulate banker pay so as to
prevent such discrediting spectacles as those seen on Wall Street in 2007. But
such action would require an unimaginable sea change in the policies of the US
ruling elite, which has sought for the past three decades to break any
restrictions on its own blind pillaging of society.
As the Wall Street speculators raked in their bonuses, recent government
statistics demonstrate that, for average working people in the US, 2007 spelled
a further decline in living standards as consumer prices driven by fuel and
food rose sharply and the paltry growth in wages recorded the previous year
stalled. Average weekly wages last year fell approximately 1 percent.
The combination of record bonuses for Wall Street's wealthiest and a drop in
real wages for hundreds of millions recorded in 2007 is only the latest episode
in the protracted process of transferring wealth from masses of working people
to a tiny financial elite. The outcome is a level of inequality that is
politically and socially unsustainable and which makes open class struggle
inevitable. This is what is meant by the destruction of "the political
legitimacy of the market economy itself."
See Also:
Bush announces "stimulus" plan as recession fears grip Washington
[19 January 2008]
As Wall Street posts sharp losses, Washington promotes "stimulus package"
[18 January 2008]
US bank losses intensify recession fears
[15 January 2008]
US Federal Reserve chairman warns of recession danger, promises more rate cuts
[12 January 2008]
Sharp rise in unemployment rate
US jobs report shows slide into recession
[5 January 2008]
The Mulindwas Communication Group
"With Yoweri Museveni, Uganda is in anarchy"
Groupe de communication Mulindwas
"avec Yoweri Museveni, l'Ouganda est dans l'anarchie"_______________________________________________
Ugandanet mailing list
Ugandanet@kym.net
http://kym.net/mailman/listinfo/ugandanet
% UGANDANET is generously hosted by INFOCOM http://www.infocom.co.ug/
The above comments and data are owned by whoever posted them (including
attachments if any). The List's Host is not responsible for them in any way.
---------------------------------------
