Bankers Break 2009 Bonus Record: $144 Billion
Policy + Politics

Bankers Break 2009 Bonus Record: $144 Billion

Just two years after the Treasury and Federal Reserve bailed out big banks with hundreds of billions of dollars in capital infusions, loan guarantees, emergency lending programs and some of the lowest interest rates in history, Wall Street pay is on track to hit a new record of $144 billion this year, according to a new survey by The Wall Street Journal. Meanwhile,  wages and salaries outside the financial industry remain stagnant.

Politicians and voters have already blamed Wall Street as a major culprit in the financial crisis and were infuriated by the taxpayer bailouts. But even as the huge payouts are likely to spark outrage in Congress and the public at large, it isn’t clear that federal banking regulators will put much of a dent in the largess.

Based on a survey of 35 large, publicly held financial institutions, the Journal estimated that Wall Street pay and benefits will climb 3 percent this year to $144 billion, a new pay record for the second year in a row.

The Journal didn’t come up with specifics about the distribution of those billions. Along with CEO pay in the millions, it is common for big-producing brokers and traders to receive annual bonuses that total hundreds of thousands and sometimes millions of dollars, in addition to their salaries. All in all, the Journal estimated, Wall Street firms will pay out 32.1 percent of their revenue in compensation – the same ratio as last year.

The Journal said its estimates were based on a survey of what large publicly traded Wall Street firms paid in the first half of 2010, and analysts’ predictions of their profits for the full year. The estimates are roughly consistent with the profits banks have been earning, though analysts predict that firms like Goldman Sachs and Morgan Stanley are likely to report lower profits this quarter as a result of lower trading volumes.

Non-Wall Street Wages Stagnant
Adjusted for inflation, median family incomes in America have stagnated through what amounts to a lost decade. According to the Census Bureau, real median family incomes were 5 percent lower in 2009 than they were in 1999. This year is unlikely to be much better. In September, hourly wages were up just 1.7 percent over a year earlier — barely enough to keep up with inflation.

Both Congress and the Federal Reserve have tried to clamp down on excessive pay packages, but the efforts are still in their infancy and are aimed more at the structure of compensation schemes than at the actual level of pay. In June, the Federal Reserve and other federal bank regulators jointly announced new “guidance’’ on pay at the large banks, from Citigroup and J.P. Morgan Chase to Goldman Sachs and Bank of America.

The “guidance” says nothing about how much money an executive or a broker should earn.  Instead, it orders the banks to demonstrate that their compensation systems don’t create incentives for people to take dangerous risks. The idea is to stop banks and investment firms from offering big short-term rewards to people who simply rack up short-term profits.  Those kinds of short-term payoffs, such as the lucrative commissions to brokers who sold subprime mortgages or Wall Street executives who resold them as complex securities, are widely believed to have contributed to the financial crisis.

Excessive Risk Still a Risk
Based on examinations of the executive pay plans at major banks, the regulators warned that banks still don’t know enough about the risks that particular employees or groups are running, and their pay structures don’t adequately “capture’’ that risk.

But thus far, neither the Fed nor other key regulators like the Office of the Comptroller of the Currency have announced measures to restrain or reform the pay structures at any specific institutions. The newly passed Dodd-Frank law, which overhauls vast areas of financial regulation, could have a bigger but more indirect impact.

The new law creates a slew of new rules about executive pay, starting with “say on pay’’ provisions that will require companies to allow shareholders to vote on executive pay packages and “golden parachutes.” Though the votes are nonbinding, the potential embarrassment of shareholder protests over pay could have a dampening impact on future increases.

The law also requires companies to disclose the ratio between pay for chief executives and the median pay for other employees. That provision has provoked howls of protest from business groups, but it may not rein in compensation at the top. The Securities and Exchange Commission has required companies to disclose executive pay in steadily greater detail for years now, but the gap between the earnings of CEOs and employees at the bottom still widened dramatically.

What could make a bigger impact on pay are new requirements on bank capital and new prohibitions on banks engaging in proprietary trading.

Bank regulators from the major industrialized countries recently agreed on the so-called Basel III rules that will require banks to hold substantially more capital than before as a buffer against potential losses.

Though the new requirements won’t take full effect until 2018, analysts expect that many banks will be under pressure much sooner to raise additional capital. To maintain their profit margins, banks may start cutting back on executive compensation.

The Dodd-Frank law could also dampen pay packages by forcing banks to spin off their proprietary trading operations. That trading, which banks conduct with their own capital, has been extremely lucrative at firms like Goldman Sachs and Citigroup, and the executives in charge of those units have been among some of the highest paid people on Wall Street. This year at least, they’ll have their share of $144 billion.

Related Links:
The Wall Street Pay Puzzle (Newsweek)
Goldman, Morgan Stanley Profits Seen Falling (Wall Street Journal)
Bill to Break Up Big Firms Planned (The Hill)