As we approach the traditional time of the year when Wall Streeters start salivating like Pavlov's dogs over their year-end bonanzas, surely this year there will be many going home empty-handed. Or maybe not. At least not those still employed. Bloomberg reported yesterday that Wall Street firms have been setting aside money for year end bonuses, and the numbers don't reflect the hemorrhaging of cash at the major financial institutions.
Goldman Sachs and Morgan Stanley will both earn a profit this year, but much lower than last year. But Goldman's profits dropped 47% this past year and its stock price is down 53%. For Morgan, earnings are down 41% while the stock has lost 69%. Both have reduced their bonus pools accordingly, but are still setting aside a shocking amount of money -- $6.85 billion for Goldman (an average of $210,322 per employee; down from $339,408 per employee last year and a total bonus pool of $10.15 billion) and $6.7 billion for Morgan Stanley (an average of $138,749 per employee; down from $168,067 per employee last year and a total bonus pool of $8.02 billion)
Even Lehman Brothers Holdings, after having filed the largest bankruptcy filing in US history, will pay bonuses to some of its employees.
Now, let's get some things out of the way. First of all, many of the employees at these institutions have just been doing their job and have not been responsible for the financial crisis, so they should not necessarily be punished for the misdeeds of others, especially if their division or group was profitable.
Second of all, companies need to reward their producers so they don't lose them. Even (especially?) in a tumultuous market, big producers have great job prospects. This is why I think the average numbers are misleading and you will see the big producers get huge bonuses -- maybe even bigger than the last few years -- while a large number of workers will get nothing, or a token bonus.
But there is undoubtedly something distasteful about Wall St. handing out gobs of cash at a time when the country is just starting to grapple with the new reality caused by the irresponsibility (or worse) of these very same firms. It becomes unfathomable when these institutions have all just accepted billions of dollars ($125 billion in aggregate) of taxpayer money from the federal government. And that is why Representative Henry Waxman has been holding hearings and why he sent letters on Tuesday to the nine mega-banks asking them to explain why they are setting aside these large sums for bonuses at the same time they are taking money in a bailout.
As Waxman wrote, “According to one analyst, ‘Had it not been for the government’s help in refinancing their debt, they may not have had the cash to pay bonuses.’”
What many people have tended to misunderstand over the last few decades is that our regulatory system is not holding our economy back, our regulatory system is the reason we have been so successful. It is the reason people have flocked to the US stock market; because they thought they could trust the rules of the game. It is the reason why even today, in the midst of this crisis, the US dollar is rising fast, because our system is considered fundamentally trustworthy and safe. We need to enhance our regulation of the market so that investors can trust it, and they will come back.
Let me be clear -- I generally think it is a bad idea for the government to set a limit on executive compensation. Government has a role to play, perhaps by taxing the corporation for compensation above a certain level or other types of nudging of private enterprise in the right direction, but should not set ceilings on pay. That is a matter for the shareholders, management and the board of directors. When the government is giving lump sums of cash to companies though, the rules have changed. In that case, the government has a fiduciary duty to the American taxpayer to make sure it uses its influence to institute sensible and responsible policies and safeguard the taxpayers' investment.