Heard on the Street article on bonuses

I might as well keep on the bonus beat - somebody's got to do it.  Here's an article from the Heard on the Street section of the WSJ:

Heard on the Street:  For Wall Street, Less is More

Bring out the hair shirts? The decision by top executives at Goldman Sachs to join peers at Deutsche Bank and UBS in forgoing bonuses for the year is asensible act of contrition. But it is hardly radical.

Against the backdrop of a financial crisis and intense public scrutiny --particularly after government capital injections -- they had little choice. And, from a purely self-interested perspective, executives have more to gain from getting their share prices up again.  [a here -- Or from keeping the government at bay, so the pigs can return to the trough next year]

Now that Goldman has made its move, Morgan Stanley will surely follow --something potentially painful for its chief executive, John Mack, who made the same gesture last year.

Cutting the pay of a handful of top executives is window dressing, of course.  What matters is the size of broader bonus pools.  [emphasis added]  

Those will be way down anyway because of weaker revenues.

But the firms also need to show restraint on the percentage of those revenues they pay out.

One part is political. The government and regulators probably don't want to get intimately involved in setting Wall Street pay. [no, of course not, they just want to shovel money into them]  Goldman and Morgan Stanley --the two remaining independent firms and the two banks that report first --shouldn't give them a reason to do so.

Keeping the ratio of compensation to net revenues well below the usual target of about 50% is one vital element.  [so guess they'll make it 49%...]

Adopting some of the new ideas on pay pioneered by UBS to avoid excessive risk-taking would be another. For example, the Swiss bank is to keep a portion of cash bonuses in escrow -- with a provision for some to be deducted if the bank generates losses in the future.  [So, you give the bankers a bonus the year they lose lots of money, but you don't give it to them right away, just in case they lose lots of money again.]

More important than politics, however, Wall Street firms need to show their investors they will share the pain in tough times. Morgan Stanley failed last year. It raised the overall compensation ratio to 59%, after taking a big hit to net revenues from a bad mortgage-related trade. Goldman took its ratio down to 44% because it had a very strong year.

This year the pair should surprise investors, who have lost their shirts in
recent months, by being tough.

Weak revenues will ensure lower bonuses anyway. But the firms should make a point by also paying out a lower-than-usual percentage of that shrunken revenue number in compensation.

If investors are to commit new capital in the future, management needs to demonstrate a willingness to put profitability first.

This is the ideal time. With all of Wall Street under extreme pressure, the risk of losing staff is much reduced.  [So remind me, why are the banks paying bonuses at all?]

The fourth quarter is likely to be grim. But with Wall Street still fighting
to prove that its business model can get through the crisis, this is no time to
go soft on pay.

-- Thorold Barker

Bonuses : UBS Apes GS

The NYT reports that UBS will, like Goldman, not pay its executives any bonus this year.   The NYT apparently wants to say, Hurrah!  But it looks more like a concerted publicity campaign, to deflect attention from the fact that both are still planning on paying out huge sums this year to everyone else.  And make no mistake about it - executive bonuses are only a fraction of the pool;  most of the money goes to those below.  Inquiring minds want to know why any IB worker should get a bonus, when IBs are receiving taxpayer money to stay afloat.  Unhappily, it looks like the IB model of pigs-at-the-trough will be left in tact; and these same UBS and Goldman executives are undoubtedly planning to make up for this year's sacrifice with even more loot the next time around.

More on Bonuses

Bloomberg had up today a story on attempts by British regulators to rein in bank bonuses, which - unfortunately - meandered a bit.  The article started by saying that "employment contracts [may] hinder efforts to make changes this year". Why? Because some bonuses are guaranteed - when a person is hired, a certain pay-out is written into his contract (for instance) for the first two years. 

It is only at the end of the story that it is acknowledged that it's just a few lucky ducks (usually, those who recently changed jobs) who have guarantees; most do not. So at the least, most bank workers' bonuses can be reduced to zero with no problem. Perhaps those who end up with nothing will cry about the unfairness of the situation, as those with guarantees receive a huge sum for equivalent work, while their team members get nothing. But that's a bit like a model claiming she's being discriminated against because her hair is black rather than blonde. The bonuses that financial-services workers receive are patently unfair compared to the compensation of everyone else in the world; so if fairness is what they want, then the best way to achieve it is by getting no bonus at all.

Indeed the very end of the article makes it sound - and here I myself fell off my chair, because I thought the sanctity of a written and signed paper could not be challenged - that contracts could just be put aside. "The banks may have precedent and sentiment on their side if they choose to cut guaranteed payments. English courts have been reluctant to intervene in disputes over bonuses." So, apparently, it's not the law or contracts which may hinder efforts. If there's a will, there's a way. The question is, Will there be the will?

IB Compensation: The Fix is In

Goldman Sachs has announced that it won't give bonuses to its top seven executives. NY Attorney General Cuomo, one of the leading public figures involved in the bonus question, sounds satisfied:

In a statement Sunday, Mr. Cuomo said, “This gesture by Goldman Sachs is appropriate and prudent and hopefully will help bring Wall Street to its senses. We strongly encourage other banks to follow Goldman Sachs’s step.”

This is most unfortunate. The top seven get only a fraction of what is paid out in bonuses. The goal should be: no bonuses for anyone. As the NYT says in the same article,

There is a widespread belief that the way Wall Street awarded bonuses in recent years helped feed the risky behavior that eventually created big losses on exotic debt securities and helped create the current crisis.

By and large executives at financial firms don't know about the risk their firms are taking. If you want inappropriate risk to be cut, you need to cut the bonuses of the underlings as well.

The IB model needs to end. By the IB model, I mean: paying a lot of money to people in order for them to overcome their natural sense of morality and be willing to do bad things to lots of people. For instance, without the huge pay-out at the end of the year, salespeople in IBs wouldn't be willing to stuff school districts and pension funds with products they knew were toxic waste, as they have most willingly over the past couple of years. They do so, not because they like to naturally, but because they can count the dollars that it brings them; it overcomes their resistance.

So executives don't get any money this year. That's like Steve Jobs accepting, for one year, one dollar as his compensation. It's a fake. They know, as long as the model stays in tact, that they will get more than enough in the future to compensate for their seeming virtue this time.

Bloomberg had an excellent article, which I linked to a few posts ago, saying that Americans wanted the bonuses of financial workers - all financial workers - to be zero this year. Cuomo is selling them out. Let's hope that Congress, at least, is paying enough attention, and cares enough, to raise a howl.

Financial Bonuses

Bloomberg news, bless its soul, has had a couple of good articles this past week on bonuses by investment bankers.

First was an article entitled "Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say."

This was followed by a commentary by Joe Mysak, where he asks the right question,

``Have you no sense of decency, sir?''