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Our Take: Bonuses - What's At Stake

How should financial institutions receiving taxpayer funds compensate their employees?

That question is igniting a heated debate in Washington and on Wall Street, which will soon reverberate around the world. The viewpoint that's gaining momentum right now could make it difficult for banks and entities like American International Group to ever re-emerge as viable institutions with no government ties.

The viewpoint was expressed most clearly by New York State Attorney General Andrew Cuomo. In a letter to directors of nine large banks receiving funds from the U.S. Treasury Department under the Troubled Asset Relief Program, Cuomo warned not to enlarge their firms' bonus pools after signing on to the relief program. He demanded - with a one-week deadline - details of how each firm totes up and divvies up bonus amounts.

Cuomo's wording leaves no doubt he's interested in all bonuses, not just those of top executives who fall under the scope of TARP's compensation provisions. In fact, he pointedly asked each bank to provide "a description" of the bonuses awarded to employees whose compensation exceeded $250,000 in either 2007 or 2006.

Taxpayers Become Activist Shareholders

Cuomo's letter, dated Oct. 29, goes on to say: "Now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are in many ways, now like shareholders of your company, and your firm has a responsibility to them."

Taxpayer are now like shareholders of your company. Indeed they are. Therefore it's no surprise to see taxpayers' elected representatives demand "their" management show accountability for major expenditures past and present. Rep. Barney Frank (D-Mass.), who heads the powerful House Financial Services Committee, actually called for a "moratorium" on bonuses among all financial institutions, on grounds that bonuses in their current form motivate employees to make overly risky bets. Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, expressed displeasure that the nine largest banks' accrued compensation expenses through September are holding near last year's levels, instead of shrinking.

These officials evidently feel banks, once brought under the public umbrella, should be run not like businesses but like public agencies, where salaries are set by published charts rather than managers' discretion - and where bonuses don't exist. A great many voters seem to share that view. It all sounds fair - even logical. Until, that is, you stop to ponder what's the exit strategy. If every banker's pay is effectively subject to congressional review, who will want to work for banks? Individuals who seek public service careers, and no one else. The longer it goes on, the more the industry's ranks will fill up with such individuals. After five years, it might no longer be practical to return a partially nationalized bank to the rough-and-tumble of life in the private sector.

A Perverse Outcome

If Cuomo, Frank, Waxman et al succeed in imposing a radically different compensation model - eliminating substantial bonuses for most employees, slashing total pay, and subjecting individual and aggregate compensation decisions to high levels of transparency and public oversight typically associated with public services such as school systems - the predictable outcome will be to transform Wall Street into a subsidiary of Washington. Instead of limiting taxpayers' exposure to financial-sector troubles, the reforms would have the perverse effect of locking in that exposure for a decade or more.

Many in government might like nothing better than seeing Fannie Mae, Freddie Mac, AIG, and a large swath of the banking industry not merely regulated, but under full or partial government control - forever. Corporate chieftans have a well-known fondness for empire-building. Does anyone seriously believe that politicians are any different?

AUTHORJon Jacobs Insider Comment
  • Ma
    1 April 2009

    If one is worried about accountability by taxpayer shareholders, why are none of you that support the Congressional takeover of the financial industry complaining about your employees not listening to you and taking on extreme risk. Yes, I mean Congress. It was Congress that started this. Congressional greed for votes and power is why Barney Frank, et al, corrupted the balance between banking, investment and government and why Fannie/Freddie were allowed to act as they did. You are a shareholder in the gov't. Why should you have more power over your fellow citizen than your representative?

  • pa
    28 March 2009

    It's also ironic that when gasoline was at $4.50 a gallon congress made noises that ExxonMobile's earnings were too much.

    So, bring on the socialism. If you make more than $250k, you need to stop it and give it to the average american.

    Personally, I think I'm going to begin donating my time and capital development skills to raising funds to whomever is runing against Rep. Frank in 2010. Banking certainly won't pay, but there's no cap on campaigner salaries!

  • Jo
    Jon Jacobs
    7 November 2008

    ManofScience: No matter how much you and others wish that "nobody is interested in reducing the income of the fairly compensated or salaried class. It targets the so called rainmakers," that is demonstrably untrue. All you need do is look at the wording of Cuomo's letter to the nine banks (the first link in "Related Links" box, above), and Rep. Frank's various pronouncements quoted in the media. Nowhere does either politician say they're concerned only about executive bonuses - in fact, at every juncture, they make a point of mentioning a bank's or the industry's entire, aggregate bonus pool as the target of their "moratorium." Likewise, if you visit the chat boards, running the gamut from the Wall Street Journal to the Motley Fool, you'll find rampant denunciation of bonuses for anyone in finance, combined with near-universal ignorance that the mass of a bank's workers actually are the people who receive most of the bonus pool. For an update and further explanation of this, see my follow-up column, "I'm Cinna the Poet. Don't Kill Me!", at http://news.efinancialcaree... -- Jon Jacobs, eFinancialCareers News staff

  • To
    7 November 2008

    As a banker whose expertise is centered on infrastructure, power and energy I can honestly say that I am not part of what most people fear about banking. The reality is that while greed was a big factor in driving us to the brink it is also a characteristic often associated with drive, creativity and innovation. The difficult part is creating the right balance. For this, we all rely on rules, regulation and government. Let's face it - the same guys who allowed this situation to transpire are now telling us how to fix it. Talk about absurd. God help uthis country if it's left in the hands of the politicians.

    The fact is that some bankers should be paid no bonus this year and many more should lose their jobs. That said, many of these are the same bankers that have been peddling questionable structures and financing methods for the past two decades. The difficult part is finding ways to continue to reward those bankers who have responsibly lent money to value creating companies and projects.

    I think the reality is that the real culprits in this mess are the sub prime brokers and investment bankers who really shouldn't be categorized with us at all.

  • Ma
    6 November 2008

    Jon Jacobs, you are posting strawman arguments here, since I do not think anyone here is targeting 'regular working stiffs'. We might quibble over whether a lower threshold of $250K is too low, but nobody is interested in reducing the income of the fairly compensated or salaried class. It targets the so called rainmakers whose rain has proven to be caustic to the financial system, and the management now proven to have extremely poor judgement.

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