Wall Street Calculus: $74 Billion in Losses, $38 Billion in Bonuses

When Sallie Krawcheck (now head of wealth management at Citigroup) was an equity analyst covering Wall Street at Sanford Bernstein, she remarked, “It’s better to be an employee of an investment bank than a shareholder.” This year’s results certainly bear out her observation.

From Bloomberg:

Shareholders in the securities industry are having their worst year since 2002, losing $74 billion of their equity. That won’t prevent Wall Street from paying record bonuses, totaling almost $38 billion.

That money, split among about 186,000 workers at Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos., equates to an average of $201,500 per person, according to data compiled by Bloomberg. The five biggest U.S. securities firms paid $36 billion to employees last year…..

Goldman’s record earnings and gains at Morgan Stanley and Lehman mean all the New York-based firms will be forced to pay more in a year when all but Goldman lost more than 20 percent of their market value, said Charles Geisst, finance professor at Manhattan College in Riverdale, New York.

C’mon, forced?. The reason to match the pay of other firms is to prevent employees from defecting to them. Do you really think Goldman, Lehman, and Morgan are going to be poaching staff in a contracting market? UBS recognized that wasn’t likely to happen when it imposed what is considered to be a low cap on cash compensation ($750,000).

Nevertheless, arguing that pay is market based seems to silence critics, even when the market isn’t trading. But it is simply a symptom of what in finance is called the agency problem, which means that the inmates are running the asylum. Shareholders are unable to make much headway against outsized CEO pay. They are similarly are unlikely to be able to influence excessive Wall Street bonuses.

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  1. pjfny

    off- topic:

    Swiss RE losing 1.2 bil on credit default swap (underlying asset not disclosed)…..imagine a weaker seller of CDSs not being able to perform on its obligations…..the cascading effect and the potential systemic risk!

  2. Yves Smith


    Thanks for the alert on credit default swaps. That is a possible area of real trouble that I haven’t seen anyone mention yet. I am reluctant to stick my neck out there simply because I don’t have enough data. However, CDS are a completely OTC market, and as I believe you pointed out earlier, therefore dependent on counterparty creditworthiness. And it has become fundamental to risk management (!) and is also widely used as a way to buy corporate bonds synthetically.

    What is worrisome is the volume of CDS relative to the underlying credit. When Adelphi defaulted, 10 times the amount of cash bonds of CDS was submitted. Mind you, most of the contracts should not have been honored, since the swaps contracts call for the bond to be submitted along with the CDS in order to collect the “event of default” payment. But the ISDA waived that provision in order to keep the CDS market from falling apart.

    The other reason for worry is one of the big (biggest?) types of counterparties is hedge funds. Leveraged players whose balance sheets you can’t assess on one side of an insurance product. Why would anyone buy that?

    If you have a good source for basic data about the market, I might take a stab at something. Thanks!


    It seems inevitable that Cit will have to sell assets to shore up its balance sheet. Unfortunately, Rubin has been reported to want Citi to sell its retail businesses, which is a huge mistake. Wall Street undervalues cash cows and seems to like companies to have to be dependent on the capital markets for funding. We are about to go into a period of inflation, which make funding scarce and costly. Precisely the time you don’t want to have to go, cup in hand, to the markets.

  3. Anonymous

    Rubin will degrade Citi even faster than Prince did – if such a thing is possible. His tenure as Treasury secretary was marked with nothing other than the persistent drive for the removal of regulation — which, as we have seen, is a recipe for unmitigated disaster.

    Unlike the stipulations in the unfounded link above, this pundit is 100% certain that Citigroup will continue to champion Wall Street’s headlong plunge into mediocrity and bankruptcy. Er, not bankruptcy.. hyperinflation.

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