Gaining market intelligence is one thing. Colluding with market participants in business practices is an entirely different issue. The Wall Street compensation process has always operated dangerously close to that line, and would appear to have gone over it in 2008.
This potentially collusive practice is easily disguised in the midst of excessive profitability, but is blatantly obvious when revenues disappear. The Wall Street Journal highlights this practice in writing Banks Paid Big Bonuses as Profits Slid:
Several of the banks hit hardest by the economic downturn and those that got the most U.S. government aid nonetheless handed out huge bonuses to hundreds of employees last year, according to New York Attorney General Andrew Cuomo.
Many of the banks that took money from the U.S. Treasury Department’s Troubled Asset Relief Program had been saying they wanted to pay it back as soon as possible, largely because of restrictions put on compensation that came with the funds.
Many of the banks have already paid the money back, but some, such as Bank of America Corp. and Citigroup Inc., haven’t yet done so. Mr. Cuomo said his office has been investigating compensation at many of the banks, including the original nine banks that took TARP funds, over the past nine months. The study refers to 2008 bonuses — those that would have been paid before any of the banks repaid their government bailout money.
“At many banks … compensation and benefits steadily increased during the bull-market years between 2003 and 2006,” Mr. Cuomo’s office said. “However, when the subprime crisis emerged in 2007, followed by the current recession, compensation and benefits stayed at bull-market levels even though bank performance plummeted.”
His office found that two of the first nine TARP recipients, Citigroup and Merrill Lynch, suffered huge losses of more than $27 billion apiece last year. Citigroup got $45 billion from TARP, while Merrill received $10 billion, but they paid out more than $5.3 billion and $3.6 billion in bonuses, respectively. At Citi, 124 people got bonuses of more than $3 million, while 738 got bonuses of $1 million or more. At Merrill, 101 employees got $3 million or more in bonuses, while 696 got more than $1 million.
Some of the other banks, such as Goldman Sachs Group Inc., Morgan Stanley and J.P. Morgan Chase & Co., paid out more in bonuses than their profit for the year, Mr. Cuomo’s office said. Goldman Sachs, for example, earned $2.3 billion, paid out $4.8 billion in bonuses and got $10 billion in TARP funding. Goldman had 212 people get more than $3 million, while 953 got more than $1 million. J.P. Morgan topped the list of large bonuses, with 1,626 people getting more than $1 million and more than 200 people getting at least a $3 million payment.
How and why does this gross misallocation of taxpayer funds occur? Very simply, Wall Street firms collude to keep the compensation levels elevated. How so? They talk to each other to compare and contrast compensation levels across business units and by seniority. This practice has gone on for years. In fact, my better three-quarters was involved in this surveillance back in the mid 1980s when she worked at Drexel Burnham.
Gaining market intelligence when you are paying compensation with your own money is one thing. Paying outrageous compensation packages across the Street with taxpayer funds is an entirely different issue.
Who should be taken to task? The CEOs and Boards of every firm on Wall Street. The pay for performance elevator is supposed to run both ways.