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Croesus Watch: Banker Pay Levitates to New Highs

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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.

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34 comments

    1. Koshem bos

      Not really, I haven’t seen a single demonstration in the whole country. Let stick to the Egyptian people: why aren’t we out demanding the disbanding of the corrupt congress, the corrupt Obama and the outlawing of the Republican party that caused us enormous damage for 30 years.

  1. David Porter

    The most elegant solution to banker looting I have seen is to pay ALL of their bonuses in Tier 3 “assets” at the value that they are held on the banks’ books at. Beautifully poetic.

    Not my original idea, but one i read a few months ago – unfortunately not remotely possible to enforce.

  2. dave

    According to Barry Rithowitz:
    “There is nothing wrong with most of the compensation that is paid to Wall Street.”

    __________________

    The word “most” is certainly debatable. Let’s start with the first straw man: the # of employees argument. You cite AIGs 116,000 employees, but almost none of them were big time financial dealers making outrageous bonuses. Nobody is going after some lucky insurance salesmen who manages to make 100k one year, or some IT guy with a few degrees getting 120K to set up the trading systems. We are talking about those in financial front office positions making incredibly large (often 7 figure) bonuses of dubious value. Of people making that kind of money its certainly debatable whether “most” of it is deserved.

    Veering away from AIG to wall street proper, I find a great volume of its business has low social value. I worked in derivatives, and I can tell you I don’t see how the growth of the derivatives market helps capital markets function better or helps raise funds for businesses. I’ve seen the garbage of the theoretical arguments for myself firsthand. For your assertion to be true most of the growth in Wall Street compensation would have to have come from bread and butter financial functions like IPOs and bond placements to raise capital for business to put to work, better financial research and guidance, and value positive investment banking services. Putting aside whether any of those things has gotten better (and I can make convincing arguments it hasn’t) most of the growth on Wall Street has come from more exotic financial products that I don’t see as valuable to society. Thus, such compensation is undeserved, even if there is no wrong acting on the part of participants ( in my time, I witnessed plenty of wrong acting, but leave that aside).

    Properly regulated so as to eliminate finance activities that can generate revenue, but are harmful to society, many on Wall Street would be out of a job, even relatively honest players. Thus, on can conclude that there is something wrong with most compensation on Wall Street, because the product its producing is not improving society. Its ok to value a consumer products value based on its sale price where the seller and buyer have very clear information and motives. I’m not here to question the pricing mechanism of capitalism across the board. However, financial markets are littered with asymmetric information and principal/agent problems that make use of the pricing mechanism as the sole determinate of the value of financial products questionable, and thus calls the outsized compensation of most of Wall Street into question.

    _________

    I understand how difficult it is for him, after all he got rich off trading so he needs to justify it. I find morality arguments by people who took their Wall Street payout, kept the money, and now rail against injustice pretty hilarious.

    1. liberal

      Great comment.

      In addition, note that the fraction of GDP going to FIRE has increased a lot (doubled?) since 1980. The usual argument is that it’s legitimate (ie, adding value, not just rent collecting) because it leads to more efficient capital markets, and thus a more efficient economy. Yet looking at GDP overall, growth in this period has been pretty anemic by historical standards, so the claimed value added isn’t there.

    2. Mannwich

      Spot on, Dave. I think that’s why BR’s comments are way down lately. People are beginning to realize that disconnect. BR will only go so far. Remember, he’s got money to manage and much of that money is likely “dirty” in some way.

      1. McMike

        Whether they are crooks or just numbers runners, it remains that as a group they add little of value to society or the economy and merely extract rent, in support of a system that is worse than useless.

        They are the ten city workers all leaning on their shovels while one guy digs a hole to nowhere.

    3. Barry Ritholtz

      1) I am hardly rich, dont make anywhere near 7 figures. I drive a Honda, and live in a middle class neighborhood.

      2) I have no problem with Capitalism or Free markets. If Steve Jobs or John Paulson earn a billion dollars legitimately, that’s fine by me.

      3) My beef is with the Nardellis and O’Neals who ransacked their companies with the aid of their crony boards. (This should be your beef too, as its a)true, and 2) fixable)
      Or, you can keep going on, tilting at windmills, accomplishing nothing.

      4) I have repeatedly stated the Financial sector became WAY too large over the past decades. I have repeatedly written that one of the evils of the bailouts is that they stopped the process of DEFINACIALIZATION of the USA from moving forward.

      5) Income inequality is a legitimate issue and often leads to civil unrest (Ask Marie Antoinette or Herbert Hoover). But that is a different issue than legitimate pay for Traders, Asset managers, and iBankers.

      The BURN HER, SHES A WITCH approach has been tried previously and was proven ineffective.

      Please disprove this: The vast majority of people who work on Wall Street did not cause the crisis, and are not a problem currently.

      Sorry if that’s not populist, but I write what I believe, and have no interest in ignorant but populist rants against everything.

      Its pretty funny that I of all people — I lambasted wall street in my book — have to say this stuff.

      1. Francois T

        Hey Barry,

        Agreed with pretty much everything you wrote, save this: one cannot address this issue without mentioning the system of perverse incentives on Wall Street as a big responsible for what happened. Plus, booking as actual revenues what turned out to be leveraged phony (funny?) money does not strike anyone as a plausible, honest way to earn a living.

      2. liberal

        The vast majority of people who work on Wall Street did not cause the crisis, and are not a problem currently.

        LOL. It’s mostly economic rent.

      3. Mannwich

        BR- My apologies for the poor word choice in my above post. I honestly wasn’t looking to disparage you or your firm (or anyone for that matter). As someone who’s struggling to start a business myself, it’s just a bit frustrating to read some of this stuff every day. There wasn’t any malicious intent there. I was simply trying to disagree with your post. Once again, I regret and offer my apology.

      4. ben there done that

        “Please disprove this: The vast majority of people who work on Wall Street did not cause the crisis, and are not a problem currently.”

        You are absolutely dead wrong about your contention. Having worked on the derivatives desk, risk and capital markets platforms, I can assure all that there is no way just a “few bad apples” can run a complex and highly profitable business unit without at least the tacit consent (read fear and/or wish to be just like) of their staff, their colleagues and their managers. And you know full well that the dollars were showing the love every bonus season to everyone in a profitable unit, even the admins. (and if you don’t know this, then you are not close enough to the action). And everyone knows what units are throwing up the big numbers, because that is all management talks about every quarter and every time a big win comes in. It’s the frat house everyone wants to belong to and you belong by playing the game more ruthlessly than anyone else. Ruthlessness leads to profit which leads to ignoring questionable actions on the basis they will “hurt the unit.” Or better yet, “we are making so much f-ing money I don’t care if I get dinged $1 million for a bad deal”. I could go on and on and on.

        You are wrong – a huge number of people contributed to and caused the crisis and they are still laughing all the way to the bank.

      5. Just A Theory

        [quote]Please disprove this: The vast majority of people who work on Wall Street did not cause the crisis, and are not a problem currently. [/quote]

        Someone failed logic.

        Firstly, that statement is complex. It is similar to asking “when did you stop beating your wife?”. It is a qualitative statement designed for use as a talking point for which there are many avenues for dispute over the poorly defined qualifiers in the statement itself.

        “Vast majority” means little unless one quantifies how it is to be measured. If you mean numerically, then I’d agree. All those janitors are probably not much of a problem and didn’t really cause the crisis.

        If instead you mean those who control the “vast majority” of the power and/or money and who are the real drivers of economic activity then I think you would have an uphill battle demonstrating the veracity of your statement.

        “cause the crisis” – which crisis? If you mean the overall GFC including all possible ramifications of it, then Yves Smith has done a great job of demonstrating the complicity of entire firms and the economics profession in her book.

        The term is loose and ambiguous.

        “not a problem currently” – overall bonus compensation figures tell a different story. These schemes are draining the wealth of the middle class to feather nests in the Hamptons.

        Is Joe the trader a problem currently? Who knows? The economics profession as a whole is so piss poor at modelling risk and the industry so wedded to the Mark to Fantasy accounting standards which currently exist that no realistic evaluation of “problem” can be undertaken.

        Your statement is worthless, your challenge unanswerable and it contributes nothing to the dialogue.

    4. Francois T

      Barry’s right, since the bulk of the “bad compensation” (as in totally untied to long term performance) goes to a small group of decidedly overpaid people. People like Andrew Carr do not deserve 100 millions in compensation. As an aside, I’d love to see this particular asshat hit it on his own, trading his own money, running his own trading busisness. *evil grin*

      By the way, since I’m in a bad mood with toxic mojo today, I do not give a hoot, nor will I engage anyone in a debate of “Yes…but! Define “rich”!” To those, I say: Spare me! If incapable of seizing any abnormal discrepancy between contribution and associated compensation, pity and commiseration are the only feelings I can muster.

      1. Yves Smith Post author

        Francois.

        You are dead wrong here. The problem goes deep within these firms, well down into the “producer” ranks. Derivatives are probably the worst area, since the customers just about never understand how they are priced, but pretty much all the illiquid and opaque markets are rife with abuse, as well as some of the simpler ones, like muni finance, which is full of out and out corruption.

        The area Barry works in, equities, is heavily regulated and comparatively clean. That’s why he doesn’t get it.

  3. liberal

    One thing I don’t understand is: who’s the customer for all this crap?

    I completely agree that a large fraction of FIRE revenue is just economic rent (aka legalized theft). What I don’t understand is, who are the idiots on the other side of the transactions?

    Yes, a large fraction of the rent results from the inordinate privileges government grants the FIRE sector. E.g. the ability of commercial banks to create money out of thin air, lend it out, and pocket the interest. But many of those benefits existed before the post-1980 boom in FIRE rent collection. How is Wall St “forcing” the rest of the economy to buy their crap, in a way that allows them to capture the post-1980 rents?

    For example, all these derivatives products that ultimately don’t appear to make the capital markets more efficient. (Obviously, in the wake of the Crash, it’s difficult to argue that they don’t make them more _inefficient_.) Who’s buying this crap?

    If Wall St were just profiting off private parties who are suckers (day traders, wealthy individuals, etc), then I wouldn’t care so much. But I assume they’re also leeching off the great bulk of the population via pension funds, local governments, hidden costs in retail products that all of us use (checking accounts, mortgages, etc).

    It’d be nice if a more detailed outline of Wall St. theft could be enumerated.

    1. steelhead23

      Originally or currently Liberal? Originally it appears that the purchasers were a wide array of institutional investors, pension funds, insurance companies, banks, etc. But today, an enormous amount of this junk resides at the Fed, purchased to prevent a collapse of AIG and currently being managed by Morgan/Chase through its Maiden Lane trading arm. As the assets purchased by the Fed are perceived to be assets of the U.S. of A., the marks in this Ponzi are We the People. Oh, BTW – a number of folks believe that the rampant inflation seen in places like Egypt that peg their currencies to bucky is a direct result of the increased money supply provided by the Fed, ala QE, so one might argue that the Fed is screwing the world.

  4. liberal

    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).

    Almost all (if not all) of the inordinately wealthy get that way via rent collection.

  5. duffolonious

    “Egyptians choose revolution, Americans stay home and watch super bowl :)”

    Damn straight. Go Packers.

    Homer (The Simpsons):

    Yeah. You help me, and I, in turn, am helped by you.
    And so, ladies and gentlemen, we have come to the start of Super Bowl XXXIX!
    This brand-new $300 million stadium was completed just one short week ago,
    and it’s scheduled for demolition early next month.
    America’s priorities are a joke.
    Now, here’s the kickoff!

  6. Ep3

    I think we are not looking at is in a larger context.
    What has happened to our economy? Worker wages are pathetic. The middle class is being eliminated. All manufacturing, heck all work that isn’t walmart cashier, is being moved to china. The rich elites have determined that the u.s. Is tapped out. They have destroyed the economy of the country so bad that what they are doing with “executive pay” is basically sucking all the last bit of wealth out of the economy. by trading, which produces nothing, they don’t have to invest any money. And, unlike gambling, the money they put up front is backed by the u.s. Taxpayer.
    Isn’t this what they do to 3rd world nations?

  7. Paul Tioxon

    Crasus convention update. The Koch brothers have convened a caucus of billionaires annually and hosted militant right wing radicals, including Supreme Court Justices, US Senators, radio talk show luminaries and assorted paid agents against any change in the status quo. A recent Politico article shed some light on this annual affair, as well as other organized efforts to expose and widely broadcast this group as intending to make government run so much like a business, it will be little more than a limited partnership of billionaires.

    Well, they don’t like publicity.

    http://www.politico.com/news/stories/0211/48624.html

    The military industrial complex, the banking cartel and other cartels have been developing policies to dominate the national political process and tax policies to maintain their exalted wealth, power and privileges.
    Their interlocking directorships as well as cultural influence via foundation policy initiatives, show a pattern of the privatization of what was public policy, now paid for by the profits of wealthiest of the wealthy, who masquerade as philanthropists. Venture philanthropy is taking over our public school system lead by 3 of the richest people in the world. Gates, Walton and Eli Broad. They have funded a school for education superintendents, populated with former successful CEO types and military brass. After a short 2 month training on education the billionaire way, over 3 dozen major urban school districts have been staffed by these 60 day wonders.

    http://www.dissentmagazine.org/article/?article=3781

  8. Aquifer

    Yves,

    I use Firefox as a browser, has some definite advantages and your “cute interactive” worked pretty well with it – very interesting.

    Thanx!

  9. timotheus

    Crassus also suppressed the slave revolt of Spartacus and crucified 6,000 captured slave rebels along the Appian Way. We don’t remember any names since none happened to be the Son of God. In any case, we can expect about as much magnanimity from the current crop of consuls and their centurions.

  10. Max424

    YS: “…he was famous for buying buildings as soon as they caught fire…”

    That’s beautiful.

    Goldman, Greenspan, J. Paulson, the Bernank, et al., have refined the Crassus technique; they set the fires.

  11. deeringothamnus

    Pension funds buy this crap to deliver the risk free 9% returns promised by their states. This is of course an impossible goal that ether needs the likes of a Bernie Madoff to facilitate, or a bailout backed institution. The only thing that will clean this out is a genuine crash. I hope the American people take them up on their dare next time. We were denied the capitalistic retribution of a crash to redistribute these ill gotten gains.

  12. lynda scott

    ….how come my pay hasn’t levitated to a new high ? In 1970 when I was working @my summer job, I was earning $2.64/hr. Today, 42 years later, I am working at TARGET for $8.50/hr. It my wages had kept pace with the stock market or kept pace with inflation I’d be making $150/hr !!

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