Oh, I need a new round of black humor as a coping device to deal with the predictable but nevertheless disheartening news that banksters are getting record pay for 2010, after having gotten record pay for 2009…after having wrecked the global economy.
If this isn’t incentivizing destructive behavior, I’d like you to suggest how we could make this picture worse. A newspaper ad for the swaps salesman that tanked the most municipalities? Ticker tape parades for the deal structurer that was best at pulling most fees out of clients in ways they wouldn’t detect? (Oh wait, you’d have to include pretty much every derivative salesman) Honorable mention for the banker with the biggest expense account charges in the industry? (Oh wait, that’s not the right metric, we learned in Inside Job that the drugs and hookers get charged to research budgets. Damn).
My pet joke from the dot bomb era scandals is now looking a bit tired:
If you steal $1000 from the local convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and get called bad names for ten minutes.
You need to add at least another zero to the amount you need to steal before Congress can even be bothered to take notice.
Seriously, thought, this is just continued looting. The profits the banking industry is showing is heavily dependent on government subsidies: super low interest rates, regulatory forbearance, and its kissing cousin, dubious accounting (for instance, a lot of banks have been underreserving). So these are not in any normal sense private sector profits, yet we allow the banking industry to maintain that they are and pay a ton of these fictive returns out rather than retaining them to bolster their equity bases.
The particulars per the Wall Street Journal:
In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009.
The increase was fueled by a revenue rebound as the financial crisis recedes in the rearview mirror. At 25 large financial firms that have reported full-year results, revenue rose to $417 billion, another all-time high, even though last year’s 1% increase was just a fraction of the industry’s revenue jolt from 2008 to 2009 as trading and investment banking sprang back to life.
So pay increased out of proportion to revenue gains, and we know the quality of earnings is suspect. (The article has a cute interactive that didn’t quite work for me, in that it said you could view individual firms as well as sectors, but I use Safari which can have problems with some web pages).
The Journal argues that this isn’t as bad as it appears, since the banks are paying out less in current dough and more on a deferred basis:
Last year, deferred compensation made up as much as half of total pay, up from about a third previously, estimates Alan Johnson, managing director of Johnson Associates Inc., a New York pay consultant.
Banks and securities firms are deferring a larger percentage of compensation than they used to, trying to counter criticism that yearly cash bonuses encourage unwise risk-taking by executives, traders and other employees aiming for a big payday.
The problem is that this “deferred pay makes people more responsible” was shown to be false in the runup to the crisis. Bear and Lehman had the highest levels of employee stock ownership on the Street, and Lehman in particular was big on keeping people tied to the firm by using restricted stock as a significant component of pay, particularly for top staffers. Similarly, even though the very top brass at both firms suffered large losses in wealth, they were still remained very rich by any normal measure.
The best methods to induce a real change in values would be criminal prosecutions, barring lesser miscreants from the industry for life (and we don’t mean young insider traders, but business unit managers for more complex abuses), and measures that come closer to approximating unlimited liability, like clawbacks (if someone who leaves his firm with a big hole in its balance sheet can have pretty much all of his tangible wealth seized, that might focus a few minds).
While we invoked Croesus, perhaps the better metaphor is that of Crassus, the richest man in the history of Rome, and arguably one of the wealthiest men ever. He made most of his fortune via the proscriptions (basically legalized theft) under the dictator Sulla, and increased it via a combination of investment and opportunism (he was famous for buying buildings as soon as they caught fire, as well as the ones immediately adjacent, then having his well organized fire brigade put the blaze out, which usually resulted in him getting the neighboring properties on the cheap and fully intact). He nevertheless also became a general, since even with his riches, top status was accorded to conquerers, not mere plutocrats.
His relentless pursuit of wealth was his undoing. Crassus attacked Parthia, a rich prize, and underestimated the prowess of its army. The accounts of his death vary, but he was preparing to meet with the Parthian king when he was killed in a skirmish. One account says that the king, upon receiving his corpse, poured molten gold into his mouth to punish him for his thirst for wealth.