Softpanorama

May the source be with you, but remember the KISS principle ;-)
Contents Bulletin Scripting in shell and Perl Network troubleshooting History Humor

 Financial Sector Bonuses as Money Laundering

I think the most proper way to view financial sector bonuses is to view them in context of money laundering. In UK law the common law definition of money laundering actually captures illegal bonuses quite nicely:

"taking any action with property of any form which is either wholly or in part the proceeds of a crime that will disguise the fact that that property is the proceeds of a crime or obscure the beneficial ownership of said property."

Actually the US Office of the Comptroller of the Currency also uses the definition in which any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting constitutes money laundering.

In view of the level of corruption and "capture" of regulators it is naive to think that the US could pass legislation limiting bonuses, but there is there is much more social value in a windfall tax for bonuses that exceed certain threshold, than a short-sighted public act of revenge against "banksters".  Public will definitely applaud when a dozen of rascal would be hanging from lamp posts, but that does not solve the problem. 

Windfall tax can be viewed as a measure that helps to suppress illegal or semi-illegal (HFT, gambling using taxpayer money) activity without excessive litigation. I think that's why the measure has and will have broad international support: none of the countries, including Switzerland, wants to became a pariah in a new international financial framework.

But there are serious problems in imposing windfall  tax too. One widely understood problem is that  the utility banking is now inextricably linked with the "casino banking."  The other problem is that large banks play crucial role in Fed bonds auctions. In a way, US government is afraid to disturb this delicate balance. 

But structurally high unemployment might generate some political will despite those problems. Balance of power is now shifting as credibility of banking elite  is now openly challenged and era of "Big Swinging Dicks" of trading might be over.   Also the  litigation against large bank brass is the "Sword of Damocles" that hands over the "bonus culture". Banks position in structured products litigation is weak and courts now tend to scrutinize related activity much harsher then before; it may eventually play a role as the implicit windfall tax on bonuses because of fines and/or sentences imposed. So 2009 bank bonuses might the last Hurrah.  In this context GS move to award bonuses to top brass totally in stock can be viewed as a preemptive measure to lessen the threat.

I think the issue here is not about "a short-sighted public act of revenge against bankers" as many try to represent it.  It's about basic fairness. The real issue is the special relationship and revolving door between current and former government officials (judicial, legislative, and executive) and current and former brass of the major investment firms.  The distinction between the public and private sector has become blurred and the only the commonality between both is that neither is looking out for the taxpayers.

I would understand if bailout money were used to innovate in an important areas like energy but not to bail out inventors of a new casino games like CDS. I would prefer them to be nationalized and all brass top brass removed. Basically this was a gambling: people made bets that made short term money, got paid bonuses for that, those bets went south, the government stepped in and replenished their coffers, they made more bets, which are now profitable in the short term and they, again, collect bonuses for those bets.

And I would distinguish between sports/music celebrities and traders. I know that whatever I try  I will never be Paul McCartney or  Michael Jordan. But if somebody give me a hundred of million at 0% and let me trade any market, I think I would earn at least 8% this year without too much risk. Does this mean that I deserve a million in bonus?  Therefore, those who get money due to special relationships with the government should generally be taxed accordingly on all income above, say $250K.


Top Visited
Switchboard
Latest
Past week
Past month

NEWS CONTENTS

Old News ;-)

Banking executives bonuses as institutionalized money laundering

I am so tired of the absolute nonsensical and foolish approach in regards to Banker Bonuses taken by both the Obama administration as well as the bankers themselves. Here's what is really going on and what should should be going on if we lived in a world that was dependent on telling the truth, prudent financial management, reduction of systemic risk, and if a cure to our banking system malady is genuinely being sought.

If one accepts the postulation that the primary core of our banking system problem is the fact that many our our banks, including the group of 19 tagged as "Too Big to Fail", have severe capital shortfalls, then one is forced to accept the fact that the solution to the problem requires a rebuilding of capital on the balance sheet. Gee, that's fairly complex, isn't it?

Here's the deal in a nutshell:

1. Banks have significant capital shortfalls that are being masked by FASB FAS 157 modifications that allow marking of assets to bank "models" versus a mark to market. Got a pile of CDOs or RMBS paper worth 30 cents on the dollar? No problem, mark it at 90 cents and watch the profits roll in. The egregious matter here is that both banks and U.S. Regulators continue to tout the high capital ratios of the group of 19 yet conveniently fail to mention that FASB 157 is the primary reason for this illusion. Do you guys think that these assets are going to magically run back up to par in the future? Do you guys think that a lot of this garbage is going to cash flow?

2. While on the subject of capital shortfalls, FASB FAS 166/167 provisions became effective November 2009 (after being postponed from November 2008, interestingly) for Q1 2010. ZH readers are aware that this requires that banks bring off balance sheet assets back on to the balance sheet and it is unlikely that this tsunami of garbage paper is worth anywhere near 100 cents on the dollar. With bank profits quite handsome for Q4, and capital accounts woefully inadequate, it would be prudent to allocate this profit to capital accounts to reserve for losses on this incoming pile of fecal matter, but, no, let's just kick the can down the road further. The FDIC has decided to give a pass to the banks for one and one half years to begin the process of allocating capital in regards these assets. Read it yourself: http://www.fdic.gov/news/news/press/2009/pr09230.html

3. With multiple billions of profit earned (engineered?) in Q4 2009, the bankers have decided to abandon prudent balance sheet management and put the vast majority of these profits in their pockets. This is the ultimate in piggishness as well as a dereliction of fiduciary responsibility to properly manage a balance sheet on the behalf of the bank's owners and bondholders. Then again, I'm not so sure that bank equity owners and bondholders are the smartest group in the world, as their investment rests on the good "graces" of the Obama administration regulatory ineptness and the Federal Reserve Bank, an organization with a track record that leaves much to be desired. Caveat Emptor.

4. U.S. Regulators have decided that they simply are not going to require the profits to be allocated to capital accounts for loan loss provisioning either. The citizenry of the USA have loaned and given (via Fed balance sheet purchases and who else knows what) the banks trillions of assistance because of these capital shortfalls and now that some money from profits is available for balance sheet reconstruction, our regulators have simply put their fingers in their ears and started yelling "La, La, La, La, I can't hear you". This is a total and epic failure of the banking regulatory authorities in the U.S.

5. The Obama administration, now that the bankers are going to pocket the money, has decided to tax some of this money to fund stimulus version X.0, "X" being a number somewhere between the current number of stimulus items and the eventual Minsky moment. The point of the matter is that Obama's wall street endeared team (it's not political kids, it's the same group that ran the show under Bush, Clinton and many other Presidents) has, once again, failed in its responsibility to ensure proper bank capital standards and, once again, has left the door open for systemic risk. Helluva job, guys and gals!

Here's the simple answer folks.

The bankers should have taken every nickel of profit and allocated it to capital accounts to provision for loan losses: past, present, and future. The regulators should force every nickel on to the balance sheet irrespective of the menagerie of FASB FAS 157. The government should not be taking this needed capital from the banking system. If we follow this path for a few years, maybe we'll have a chance to avoid a complete zombification of our banking system.

I cannot believe after what we have been through since the lessons of Bear Stearns and Lehman that we are simply not fixing a not so complex matter.

Much Ado About Nothing $23B: Goldman Sachs Bonus

  1. Bruce in Tn Says:

    In the Carter days, Barry, the top tier was taxed at 70%…even though the deductions of that era are gone, Harry and I think this marginal tax rate reinstituted today would be only fair.

    B in T

  2. SINGER Says:

    To the extent that these GS bonuses are directly related to the items you listed as things to get upset about, I disagree.

    This is the question: Would theses $23B in GS bonuses exist to be paid if:

    1) No TARP;

    2) No bailout of AIG counterparties;

    3) No influential GS lobby in Congress;

    4) No gifting of hundreds of billions by governments to TBTF's;

    5) No obscene influence and conflict ridden relationships b/w GS and the Executive branch (Treasury);

    6) Future risks of the bonus worthy performance had to be taken into account????

    If the answer is that these $23 B in GS bonuses would exist even without the above, then I agree we shouldn't be mad at the bonuses.

  3. Bruce in Tn Says:

    By the way, Harry and I went out last night to see a magic act. It was pretty good. The final act though was the best by far. They put a guy flat on his back, and then the magician came out and waved his wand, and the man floated in the air for several minutes. Harry and I talked about that after we left the performance.

    "Did you see how that magician levitated that guy! Wow, that was some magic!" Harry said.

    I replied," Harry, that was just a trick, he had a forklift behind the stage that fits under the fellow that is being levitated, there is no real magic there…"

    "No, I saw it with my own eyes. The guy was flat on the ground, and then he was floating in the air. I would have known if there was something unreal about it all." Harry was adamant.

    "Well, ok, I guess we'll just have to disagree. But I did enjoy the performance. Say, what are you going to do with that raise you got with your stimulus money?"

    "They've been advertising those Chia Obamas on TV. I've got to have one…."

    …..OH, well..

  4. HCF Says:

    I have NO problem with bank bonuses whatsoever….

    However, I do have a problem that the very survival and profitability of the banks has been primarily driven by the largess of the government, and by proxy, the American taxpayer. Rather than lend freely at a PENALTY rate, the central bankers have chosen to lend freely to banks a ZERO rate. Give me trillions at 0% and even I could find something to do with it that would earn a $23B bonus!

    HCF

  5. wunsacon Says:

    Barry, after all you've written about and know about the crisis, what have you to say in response to Singer?

    I'm surprised by your post.

  6. Barry Ritholtz Says:

    Note that AIG is a different situation than GS, JPM, etc.

  7. Barry Ritholtz Says:

    Yet another thing to think about: the terrible deals cut by Paulson/Bernanke/Bush in lieu of bankruptcy…

  8. Mike in Nola Says:

    Agree with Singer. To the extent that the bonuses were generated with direct or indirect government support, we should be upset.

  9. spoonman Says:

    Good post, Barry. Also, aren't much of the bonuses paid out as stock that vests sometime in the future? If that's the case(I'm not sure) then traders have a huge incentive not to blow up their company(at least until they can access their stock). What kills me is not that they get paid so much, but that they are government "supported"(or whatever their relationship is – bailed out, sponsored, etc). The capitalism for gains, socialism for losses is what is so aggravating…

  10. CuriousCreature Says:

    @BR

    SINGER is dead on. The inquiry that I would like to see is how much GS contributed to the downfall of Lehman and Bear.

    This kind of rock star pay leads the best and brightest to believe that they are the masters of the universe. Their clever financial products nearly caused the collapse of our entire financial system. You may want their autograph. I want them to find another line of work.

    Curious

  11. David Yaseen Says:

    Barry, is there a reason the traders need to make exactly this much money? Was there an open auction of their talents (that somehow escaped my attention) where their compensation levels were set? If so, did the other bidders have all the relevant information regarding their performance, as they have in the NBA/NFL/NHL? Would $1m either way have any effect on performance? $10m? Any idea how GS (and others) decide how to compensate back-office and other employees who don't directly produce the returns? Is there some formula that dictates exactly how much the employees should get relative to the account holders and share owners whose money they used to generate these returns? Does anyone have any idea what proportion of the bonuses are paid for employees' loyalty rather than performance?

    I'm not against bonuses in principle, but absent transparency, IB compensation looks an awful lot like pure self-dealing with other people's money.

  12. austincompany Says:

    I don't have a problem with bonuses per se, only with the extreme amounts. One has to ask, at what point does a bonus become "obscene"? Especially in a very, very weak economy. A better suggestion might be deferred bonuses, and/or stock grants/options.

    It is foolish of any company to think that they are an "island" in the capitalist sea and while all of those around them are drowning, they have wine and cheese. It's just bad business to give such large bonuses now while the economy is in the tank. Looks bad. And I think most "common people" would agree.

  13. Boo-urns Says:

    Barry,

    what about the argument that the bonus culture, as currently constructed, leads bankers/traders/etc. to take outsized risks, with the incentives all aligned towards the immediate profits that can be posted, and with no regard whatsoever for the long-term consequences of these actions? Can you really claim that the bonus structure had no bearing whatsoever on bank managers loading up on crap MBS and CDO during this last cycle?

    and in this era of TBTF, the bonus issue isn't simply a shareholder issue (although that might be enough justification, given that corporate governance is essentially defined by legal standards), it's also a taxpayer issue.

    to posit a highly imaginative hypothetical, supposed that these Goldman profits were entirely the result of short-term profits booked on longer-term, high variance risk. if Goldman were to go under as a result of this risk, it seems pretty well established that we the taxpayers would step in and bail them out. so why aren't their bonuses, which as the major portion of salary for most Wall Street bankers are the largest driver of behavior, of concern to us again? particularly when we are the ones who will bear the costs?

  14. Barry Ritholtz Says:

    Look at Citi dumping Phibro - that's $600M in revs lost, becuase people were upset the person who generated those revs was paid $100M bonus as per K.

    We as taxpayers own a huge chunk of C …

  15. danm Says:

    There are plenty of things to be upset about these days. Top performers earning huge paydays at the biggest firms is not one of them
    ---–
    Springstein is filling the arenas because people want to see him. The bankers are getting their friggin' bonuses because of ALL the reasons you mention and not because people want to see them.

    It's interesting how you can rationalize some stuff. Why bother blaming people for the credit bubble then? Isn't life just unfair and what we got the natural evolution of laissez-faire?

    Bankers have 2 jobs: create leverage which is dictated by regulatory ratios and allocate capital efficiently. The first one is a commodity. The second one is a skill. But they've shown us that they have no skill whatsoever in allocating captial properly. So why should they get their bonuses?

  16. HEHEHE Says:

    Capitalism? Are you kidding me? Crony capitalism perhaps but definately not capitalism!!!

    Barry they can pay out these bonuses when they take all the cr*p they dumped on the FED back onto their balance sheets. If they did that there'd be no bonuses because there's be no profit from which to pay any bonuses; half of the banks wouldn't even exist.

  17. cvienne Says:

    @BR

    I was getting prepared to type almost exactly what SINGER wrote…

    I'll add to that that it is disingenuous to group athletes, or pop artists in the same category…

    Sure, Peyton Manning & LeBron James earn their teams (and leagues) millions, but the last I checked the NFL, the NBA, the Indianapolis Colts, or the Cleveland Cavaliers weren't coming to the US taxpayer and asking for a bailout…

    When the banks can stand on their own and produce profits to pay bonuses, then they're entitled to do what they wish…

    I know this is an oversimplification, but I resent the idea of being taxed into future generations, so that capital can flow to the banks, allowing some "trader" to bid up the price of oil from $35 to $75 dollars a barrel, and collect a $100 million dollar bonus doing it…

    I'd prefer, even at the cost of enduring PAIN along the way, to let deflationary forces set in. From the ashes of that, what REAL capital that remains will find a way towards more productive ends.

  18. danm Says:

    Look at Citi dumping Phibro - that's $600M in revs lost, becuase people were upset the person who generated those revs was paid $100M bonus as per K.

    We as taxpayers own a huge chunk of C …
    ------
    Yes. And all this fast money is what got us in the bloody mess we're in­. A lot of these dealings are integral to the credit bubble. No credit bubble no hundreds of millions per individual.

    Barry, you complain about the creators of the credit bubble but you have no qualms about those using the money supply created to line their pockets.

    We've created a layer on top of the real economy that does not produce anything and just skims the profits. This layer works fine as long as credit is being created at a fast rate. We know that debt creation forces us to create even more debt just to cover interest payments. A lot of this debt has not been created to generate productive businesses, it's financial manipulation.

  19. ItalicBold Says:

    "Its not fair, but it is how it is." – If they ever start clawing back/intervening in this area, remember these words.

    People wouldn't be so up in arms about this if there was performance to back it up. At the moment it feels like these people are not only being rewarded excessively but they are being done so for raping America.

    I fully agree it is used as a distraction and there are bigger issues, but I will be no more surprised by the govt intervening than I am about the bonuses themselves. The bottom line is we live in a rather broken and unfair system and the system as a whole needs to be fixed.

  20. b_thunder Says:

    Do we really "live in a capitalist system, where there are going to be winners and losers"? We supposed to be, but where are those losers? Fuld and Cayne? Puh-leeezeeee, they're multimillionaires! I guess life's a b***ch when you have to get rid og G5 and fly on a 2nd hand G4?

    The problem with $23B (B as in Billion) bonus pool is $23T (T as in Trillion) that The Fed, FDIC and the Treasury reportedly pledged to "support the system." Not to mention that the "backstopping" also created those mega-winners – GS, JPM, and the PPIP partners. All at the public's (and smaller banks') expense.

  21. cvienne Says:

    @BR

    But I do understand your defense of the "bonus babies". After all, I wouldn't want to be "odd man out" at the cocktail parties at the East Egg Marina Club…

  22. DM RTA Says:

    The system is built to reward success but what kind? This discussion, ultimately, is about how to regulate the assumption of long term risks. I am no fan of regulation but if "Too big to fail" must exist(right now), then better regulation must too. Why not just go there since we expect Congress to do it and, obviously, they are not. They need to be led to the idea.
    There's got to be a good example from the past that modeled proper balancing of now and later incentives, no? And if not then that only makes the construction of new ideas to delay risk based reward more pressing.

  23. Rikky Says:

    Lebron earning his money is one thing. GS getting paid by being not only saved when they would've surely went under but also given an unfair advantage by borrowing for free from their friends in the government is a completely different story. The game is rigged and you question why there's anger over these payouts? The bonuses should be determined at the corporate level then some very large % should be given to the taxpayer for his 'investment' in this firm. Remember the investors always get paid first and with much of the pile before the workers.

  24. aupanner Says:

    how are these bonuses unlike the first point you suggest we fret over: "Paying people in year one for risks that last years or decades" ?

  25. wally Says:

    "Top performers earning huge paydays at the biggest firms is not one of them . . ."

    I know you're just trolling here, but perhaps you should look up the meaning of the word "earning" as applied to somebody who was given a truck full of free money. My money, your money… everybody's money.

  26. robertso2020 Says:

    Please don't compare a trader or banker from a bailed out bank to The Boss, a Pro Athlete or Movie Star. Yes, many think they too are overpaid but at least you have an option of paying with your feet. At least stadium funding comes down to a public vote. You discredit yourself when you defend record bonuses at bailed out financial institutions year one after a mini depression. At the minimum banks should have to give back the free carry trade money (ok…left field I know…but I didn't get to borrow at zero this year).

    With that said Americans typically do not condemn the likes of a Bill Gates or Sergey Brin for making boatloads of money. They are what the general populous consider true risk takers.

  27. How the Common Man Sees It Says:

    In case you were all wondering where fall went GS took that over too

  28. m111ark Says:

    You've muffed this one Barry. But I'm not surprised, one wall st. prowler NOT upset by the ill-gotten gains of other wall st. rapist – but you should be. The fine line dividing civilized behavior from mob reaction is too, too thin. This is the kind of thing that stretches it even more. The black swans are circling attracted more black swans, don't be anywhere near wall st. when the next one lands.

  29. KidDynamite Says:

    dead on Barry. I am well aware that SINGER"S points above are very common concerns, mainly "but if we, the people, hadn't given AIG money to funnel through to Goldman, they wouldn't be able to pay those bonuses"

    yeah – and??? BE MAD AT THE PEOPLE WHO CONSTRUCTED THAT ILL CONCEIVED BAILOUT!!!! that is the whole point… don't hate the player – hate the game. GS's job is to make money and get paid. they are good at it. They had contracts with AIG. the government gave AIG money so that it could make good on its liabilities – and that makes you hate GS?!?!?! hate Paulson… Bernanke… Geithner… Barney Franks…Bush… OBama… the guys who GAVE the money out without any foresight as to potential problems and consequences.

  30. KidDynamite Says:

    oh – and another thing that I just realized i'm very very mad about – the BofA forced purchase of MER… someone should go to jail – i'm not quite sure who – I keep thinking it's Ken Lewis for his complete screwing of his own shareholders. The quote from this morning's NYT article between boardmember emails was ""Unfortunately it's screw the shareholders!!" " (http://www.nytimes.com/2009/10/14/business/14bank.html?_r=1&ref=business)... and in light of last week's Vanity Fair excerpt from Sorkin's book where he illustrates the negotiations to save MS and GS, we saw that real CEO's actually said "NO" when Geithner called Dimon and said "you have to buy MS"… "NO" said Dimon – I can't….

  31. bsneath Says:

    Barry – Aren't we overlooking what is perhaps the greatest risk of concentrated accumulation of wealth? That is the corresponding decline in incomes and wealth in the middle/working classes and their inability to sustain consumption and growth of our economy. (Declining incomes now coupled with contracting debt levels.)

    This was taught to me as one of the causes of the great depression. It seems to be overlooked in the present day circumstances. My suspicion as to why is because it is the same liberal class that should be raising this issue that instead is benefiting economically from the current status quo. Less a statement of hypocrisy than an observation on human nature.

    The consequences may very well be that the greed of the wealthy class will ultimately result in the demise of the very systems that has perpetuated their wealth. However, even if they were to recognize this, they are incapable of pursuing any path other than the continuation of their greedy behavior.

    Just some thoughts to ponder.

  32. bsneath Says:

    Really bad grammar above. Note to self: need more coffee before I write.

  33. jayblonde Says:

    "Top performers earning huge paydays at the biggest firms is not one of [the things to be upset about]…"

    Top performers generating millions for their firms do deserve their share of profits.

    But what is an appropriate share? 1 million? 10 millions? 50 millions? 1%? 10%? 50%?

    You could say: Nobody knows, so let the market decide.

    Unfortunately, the market rather resembles an oligarchy with its own standard of relative wealth (when you talk about millions, only relative wealth counts).

    As an example, the ratio of CEO to worker pay has increased from 24:1 in 1965 to around 300:1 in recent years. Have CEOs increased their skills 12 times compared to average workers? Didn't workers also have to adapt to computerization and internationalization?

    Or is it rather a race upwards between a small (admittedly highly skilled) group of people that has lost touch with the life and incomes of society in general?

  34. Mannwich Says:

    The mere fact this this firm wouldn't even exist without the generous support of we the taxpayer is enough to make me upset about anything Goldman does. I realize that you work in the biz, Barry, and can't hammer everyone and everything in it, but please, we all know this firm would be done for without gov't support. The mere fact that we have to listen to just how brilliant these fuckers were/are when all along they only exist because of gov't support is enough to get any thinking person a bit irritated.

  35. dawase Says:

    I think Singer has it right. Normally, I wouldn't join the chorus of "I agree"s, but this is too big an issue.

    And frankly, BR, you're too smart for this completely bullshit post. At the end of the day, GS is paying out a taxpayer-sponsored bonus pool.

    One thing you left out – The complete abrogation of liquidation preferences. Why have bankruptcy laws if the government can rewrite them at will?

  36. Mannwich Says:

    I agree with danm. Barry – why bother hammering this culture when you rationalize some things in it and not others? I realize that you're trying to be a pragmatist but part of me thinks you do this just to fire up the minions here at TBP a bit so you can look like the "good guy" in the process, when in reality you're just part of the machine on Wall Street that is killing this country .

  37. Mannwich Says:

    @cvienne: Not to be picky, but there are PLENTY of taxpayer subsidies and their implicit monopolies in professional and big-time college sports. Tax paying suckers get duped into funding stadiums for all these wealthy entities and that subisides indirectly affects (pushes up prices) for everything else related to those entities, including players' salaries. Without taxpayer subsidies for stadiums, the owners would have to find a way to pay for these money-losing boondoggles themselves and most wouldn't do it. This would result in lower salaries for everyone else.

  38. HarryWanger Says:

    I have no problem with the best in the game getting bonuses they deserve. I think what we see is a lot of jealousy from those who try to defend capitalism but then hate to see it in action. They cry that Obama is making a socialist state yet when true capitalism is on display they balk.

    I've been indicating to people for quite some time to share in the wealth by buying into the market. We are undoubtedly and inarguably in a mini economic boom. Look at the incredible results being posted by INTC, JPM. If these guys can navigate such rough waters and come out big winners, there employees deserve whatever bonuses they deem necessary.

  39. Mannwich Says:

    I don't know why, but after reading this post (and several others here at TBP before in recent days/month), the term "jump the shark" just keeps popping into my head. Won't go away.

  40. cvienne Says:

    @Mannwich

    At least the local citizens get a VOTE on whether or not to subsidize a stadium…

  41. contrabandista13 Says:

    It's kind of like back in the late seventies and early eighties, the kids would jump into bed with me on Saturday morning and we would tune the TV to championship wrestling and watch the choreographed matches of Good vs. Evil. That's all business, politics and the media are in this country today, just one big championship wrestling pulling on your emotional strings…

    GS is what…. The Iron Sheik….? and….. Tim Geithner is who…. "FROM FLATBUSH AVENUE IN BROOKLYN NEW YORK…! THE PRETTY BOY….! GINO DE PASQUALE…!" Who jumps into the ring with the enthusiastic applause of the spectators, and immediately, to the shock and astonishment of the crowd and my daughters sitting in bed next to me, gets his ass stomped into the ground by the Iron Sheik.

    Now, that's entertainment…

    Best regards,

    Econolicious

  42. Rikky Says:

    >>At least the local citizens get a VOTE on whether or not to subsidize a stadium…

    not necessarily true. look at yankees stadium. bloomberg came up with the plan and did what he wanted. there are some very nice subsidies in the package for the yankees. but hey it's good for NY and good for baseball!

  43. Mannwich Says:

    @cvienne: Most folks do (and are too emotional and stupid about it when they do vote, not realizing they're rooting for laundry anyway nowadays), but here in Minny, they find a loophile to ram through the Twins new ballpark WITHOUT our vote even though we denizens of Hennepin County are paying for it. Me-thinks that's "taxation without representation", no? Don't get me wrong, I'm glad the Twins will play in a real baseball park outside (during the summer months), but I didn't even get to vote. The owner here is a billionaire and could have paid for the whole thing. Instead, they're paying almost half. To add insult to injury, they were too cheap to pay for a retractable roof, so games in April and October are going to be a joke, if they even play them at all.

  44. atswimtwobirds Says:

    We need a financial transaction tax (tobin tax) to redirect to redirect the energies of creative smart people like our host(and GS traders) away from financial speculation to more productive parts of the economy.

  45. LeeX Says:

    I don't know exactly how they "earned" (or scammed) that much money, and I don't care. These people are a cancer on society. Here in the boonies where the peasants live, you know, the folks who make real stuff like food and machinery – we are struggling to get by on a few crumbs. What in the world is happening to this country? The predators on Wall Street make ginormous money while ordinary people are trying to avoid financial calamity every day, and too often losing that fight.

  46. Marcus Aurelius Says:

    Nothing is immoral, unethical, or obscene to a person with no conscience or compunction. That's why we have laws.

    We all understand that criminality, in the form of fraud, committed specifically by "the banks" in league with "our government" (by both commission and omission, and at all levels) was what led to our current dire situation. That the money has been laundered and blessed by having passed through the corporate non-entity before being distributed among the participants in the underlying crimes is little consolation to those who have been robbed.

    The most telling and basic analysis of why such large bonuses are wrong, dangerous, and repugnant in the extreme is to observe that there are enriched "financial services" insiders on one side of the equation and defrauded (and increasingly destitute) investors and taxpayers on the other - with no net benefit or improvement in production levels or capacities, incomes, or balance sheets to be found.

    We have witnessed (as one would witness a crime) the largest illegitimate transfer of wealth in history. That wealth went from the many to the few in a very complex and entangled scheme involving new "financial products," dishonest ratings, and tortured accounting principles. All guarded by the corporate veil and supported by the corporatist government structure (a silent coup, indeed).

    The sad thing is that we know what happened and we are watching it continue. No SEC or FBI investigations? No indictments under the RICO act?

    Under legitimate government, we would let the bonuses be passed out and begin the RICO investigations starting with the recipients and following the money backwards. I don't think you'd have to dig very deep before you hit your first crime.

  47. Andy T Says:

    Ridiculous post BR. Singer absolutely nailed it.

    Additionally, the banksters are the very first people to receive the Dollars from the FedRes. They are given the cheap access to unlimited funding now. So, it's not like these hot shit traders are operating on a level playing field of any kind.

    That said, GS does have some excellent prop traders who can make money from nothing. They deserve some bucks. But, how much money should the Phibro guy get? He was using money from the taxpayers to lock in huge "cash and carry" trades when the oil market was severely contangoed. Any monkey could have made the $$s with those assets and, more importantly, the cheap cash!

  48. Mannwich Says:

    And on cue over at Naked Capitalism…….I read the William Black article yesterday as well. A very thoughtful piece.

    http://www.nakedcapitalism.com/2009/10/does-banking-contribute-to-the-good-of-society.html

  49. jdmckay Says:

    The focus on the bonuses of top performing traders and investment bankers is misplaced. There are many, many things to be upset about regarding the financial sector - but bonuses are not one of them.

    Couldn't disagree more.

    Especially at GS… there is very little real value added by these crooks: trading gains based on opportunistic electronic sophistication is one thing in a healthy economy. But these guys were at the core of everything that crippled US economy, and the same methods/practices continue in spades.

    I would go back to your articles around election time citing ideas like a Manhattan Project for economics and such, and compare that to the rolling-the-dice strategy Obama has carried over from Bush.

    GS is at the heart of that… a cancer AFAIC.

    We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is.

    Sheesh… it's a corporate welfare system w/a CAPITALISM sign hanging out front. This thing has degenerated into reap the spoils, take what you can get, and the hell w/identifying real underlying value, much less badly needed economic initiatives which CAPITALISM has entirely ignored and demonized.

    Love your blog, get a lot of great info here. But you sure miss the boat on this one Barry… seemingly ignoring everything you wrote on circumstances and practices that got us here.

  50. Mannwich Says:

    If one ultimately connects ONE too many dots, one may not ultimately like where those dots lead………

  51. Marcus Aurelius Says:

    "Sheesh… it's a corporate welfare system w/a CAPITALISM sign hanging out front."
    ______

    Ha!

  52. SINGER Says:

    As a general proposition, I am all for bonuses. I think the issue here is not so much the bonuses, in and of themselves.

    If I worked at GS I probably would take the bonus money offered to me as an aspect of my contractually agreed upon compensation package, even in the current circumstances.

    I think the real issue is the disdain that has built up, and rightly so, over the cozy relationship between: current government officials (judicial, legislative, and executive), former government officials, and current and former employees/partners/etc. of the major investment firms. This is what rubs people the wrong way.

    The distinction between the public and private sector has become blurred and the common factor between both is that neither is looking out for the taxpayers, (why we pay taxes like we do is another issue), and/or the common man/society.

    Not only that, but all this bailout money, etc. might be justifiable if it were really being used to innovate in an entrepreneurial and productive way, but alas, it appears not to be.

    Basically, people made bets that made short term money, got paid bonuses for that, those bets went south, the government/taxpayer stepped in and replenished their funds, they made more bets, which are now profitable in the short term and they, again, collect bonuses for those bets.

    Another part of the disdain is an inevitable jealousy, which although common among normal people toward those with high levels of success and wealth, is distinguishable with regards to sports/music figures and the likes of GS.

    I know that whatever I do, at this point, I will never be Peyton Manning, Lebron or Springsteen, so I can respect their individual success without being too jealous.

    On the other hand, if the government handed me $10 million at 0% and let me trade any market, I believe I could make a nice profit, after paying back my interest free loan. Therefore, because they, the ones with the cozy relationships to the government, get this boatload of cheap money to trade the markets with, and make sick money on a bounce that was pretty callable, and make huge bonuses because of that access to government money, that understandably engenders jealousy and ill will.

  53. rootless_cosmopolitan Says:

    Harry Wanger,

    "I've been indicating to people for quite some time to share in the wealth by buying into the market. We are undoubtedly and inarguably in a mini economic boom."

    This must be based on a new definition of "economic boom". Latest data for retail sales: down. Latest data for business inventories: down. But the "economic boom" is "undoubtedly" and "inarguably" here. Bullying posture of Harry "knows it all" Wanger instead of arguments, analysis, and substance.

    "Look at the incredible results being posted by INTC, JPM."

    Go ahead and buy Intel shares then, Harry. They have been doing really great for the last 10 years.

    rc

  54. carol7 Says:

    Barry, I could not believe my eyes reading your post…, I was relieved by all but 1 commentator.

    like dawase says: I think Singer has it right. Normally, I wouldn't join the chorus of "I agree"s, but this is too big an issue.

    The City example doesn´t cut it; it might have been + $ 600 million (well, $ 500 million after his $ 100 million bonus; why can he claim a hedge fund type salary, when on his own he could never get his hand on the money amounts to play with, like he did at City?), but how would it work out when he had hedged his bets for $200/bbl oil, like GS projected? The Phibro thing is a prime example of heads I win, tail you stupid taxpayer lose.

    KidDynamite: ¨that is the whole point… don't hate the player – hate the game. GS's job is to make money and get paid. they are good at it. They had contracts with AIG. the government gave AIG money so that it could make good on its liabilities – and that makes you hate GS¨

    ?????
    Without players no game, sorry Kid, but after you´ve grown up, you´ll realize that players and game go together. And if players are gaming the game, then we have all the right reasons to be very upset!
    You're reasoning like that bullying schoolkid: ¨If that other kid had not let himself be bullied, I would not have done it¨, or that thief: ¨If they had locked the door, I would not have stolen¨.

    ¨GS's job is to make money and get paid. they are good at it¨
    UTTER NONSENSE
    GS job is to EARN their living IN SOCIETY. They do not operate in a vacuum you know. There is ´collateral dammage´. Plus.., GS was so good at it, that their derivatives portfolio and other gambles were imploding in their faces September ´08.
    By the way, how much money would you have made, borrowing at 0%, riding the liquidity induced stock market rally, getting fees for selling loads of Treasuries (to pay for your bail-out), etc.?

    Barry, after having read the comments above and given this outrageous, paid-for-by-the-unwilling-taxpayers bonus issue some more thoughts, what´s your take now?

  55. Mannwich Says:

    @carol7: I don't think Barry cares. He's "getting paid". He's "good at it".

  56. SteveC Says:

    Barry, the people you list like Lebron James, Bruce Springsteen, or Tiger Woods are essentially sole proprietors. They are main attractions and true rainmakers. For the majority of bankers at GS, their success has more to do with the name GS on the top of their cards (along with their access to the US treasury), than actual skill. Doug Kass says there are very few real rainmakers in the business world, and I agree.

  57. Init4good Says:

    Whatever percentage of those firms that are "owned" by "the government" (via TARP, TARP+, or bailout) – the same ratio should be used to determine the percentage of trading profits that should be "clawed back" to the taxpayer.

    If a firm is 75% owned by the gov't then 75% of the trading profits should go back to the government.

    If an entity is totally 100% owned by equity or private debt – then they can keep 100% of their trading progfits.

    How's that for an incentive to "get off the dole?"

  58. Init4good Says:

    <>

    True

  59. Marcus Aurelius Says:

    Singer:

    The whole sports figures/entertainers vs. the bankers analogy is bullshit. It's like comparing Al Capone to Charlie Chaplain.

    Your comments on jealousy, especially your last paragraph, seem misplaced and a little logically twisted. True, you'll never be a rock star, and you aren't jealous of rock stars - yet you say that jealousy exists against the banking class because of their "success and wealth." You then tie this "success and wealth" to insider connections and access to free money. So, it's not the wealth, it's how the wealth was obtained that irks people. By extension, it's not jealousy you see, it's anger. Bill Gates is a wealthy man, but no one is pointing a finger at him, 'cause he's legit.

  60. Mannwich Says:

    I have FAR more respect for the likes of Lebron James than I do Lord Blankfiend. One has real talent. I honestly don't think most of our culture cares about what elite athletest or movie starts make. I hardly EVER hear that being discussed anymore by sports fans, whereas in prior years it was discussed all the time. I think most have accepted the fact that these folks have special talents that very people in the world have, so they're OK with it for the most part.

    @MA: Great comparison. Spot on.

  61. blueoysterjoe Says:

    What Singer said:

    "To the extent that these GS bonuses are directly related to the items you listed as things to get upset about, I disagree."

    Yup. Let's give them bonuses after we subtract all the largess they have extracted from the taxpayer due to their buddy buddy status with the White House.

  62. Daffyorbugs Says:

    I want to be in the investment bankers union.

    Strongest union ever.

  63. Mannwich Says:

    Try rationalizing Goldman's bonuses to these people. It's going to be a fun holiday season when all the garish numbers start trickling out.

    http://www.nytimes.com/2009/10/14/business/economy/14income.html?adxnnl=1&adxnnlx=1255533107-eY56BJ/z50yCGNpFfKsuGg

  64. KidDynamite Says:

    wow BR – i'm surprised i'm the only one who agreed with your post!

    Carol – my point is that your anger is misplaced. The bailouts were a massive clusterf*ck initiated by Paulson, Bernanke, Bush, Frank etc etc… You cannot blame the recipients of the money for the lack of foresight of the idiots handing out the money. I completely agree that when money was given to the banks (and newly chartered banks, like GS) there should have been severe restrictions. but guess what – THERE WERE NOT! That's the fault of the lawmakers – BLAME THEM. The whole process was sick from top to bottom, and was evidenced from the beginning that the government got significantly inferior terms for their investment when compared to private investors like Warren Buffet. but again – that's not the fault of the recipients. It's the fault of the lawmakers. Vote them out of office.

    ps – yes, i know GS has tremendous influence and connections within the government – so what – total strawman argument – VOTE THEM OUT if you don't like it! That's how America works.

Guest Post: Still The Masters of the Universe

By Satyajit Das, derivatives expert and author of Traders, Guns, and Money.

Tom Wolfe writing in Bonfire of the Vanities created the term – 'Masters of the Universe': "He considered himself part of the new era and the new breed, a Wall Street egalitarian, a Master of the Universe, who was only a respecter of performance." Wall Street bond trader Sherman McCoy, the original Master of the Universe, came to personify the avariciousness and self-aggrandisement of financiers.

Human history is a sequence of "ations" – civilisation, industrialisation, urbanisation, globalisation interspersed with actual or threatened "annihilation". The most recent "ation" is "financialisation" – the conversion of everything into monetary form (also known as another "ation" – "monetisation").

New paper economies emerged directly from the demise of the gold standard that removed restrictions on the ability to create money, especially debt. Finance inexorably displaced industry with trading and speculation becoming major activities as financial engineering replaced real engineering. In an earlier age, Heinrich Heine, the German poet, too had identified the change: "Money is the God of our time…." The rise of financiers is intimately linked to this financialisation of the global economy.

Financial innovations such as securitisation (the packaging up and sale of loans) and derivatives (effectively risk insurance) enabled banks to extend more credit. Banks could literally by increasing throughput, making more loans and selling them off to eager investors, magically increase returns to their investors. Bankers had invented a 'money machine'.

Bank also began to trade more actively with their shareholders money, following the advice of Fear of Flying author Erica Jong: "If you don't risk anything then you risk even more".

All of this, of course, meant increased earnings for the bank and its star performers. As people who work in financial institutions know, it is primarily an enterprise that is run for the employees with an afterthought for shareholders.

Sherman McCoy could with a single phone call make $50,000 and, even better, a share of that was his and his alone. At the height of the boom, top hedge fund and private managers could make more in 10 minutes than the average worker earned in an entire year. In 2007, James Simons of Renaissance Technologies earned $1.5 billion and David Rubinstein of The Carlyle Group earned $260 million in the ethereal "economic stratosphere." In Australia, Macquarie Bank employees rejoiced in the sobriquet – the 'Millionaires factory".

The ability to earn high rewards only becomes a problem where the promise of a share of profits encourages excessive risk taking and a focus on short-term earnings. It also becomes a problem where the basic measure of performance is ambiguous and can be systematically manipulated. Unfortunately, 'earnings' proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured.

Finance is also problematic when it comes to dominate the economy. In the U.S.A., financial services' share of total corporate profits increased from 10% in the early 1980s to 40% in 2007. The combined stock market value of these firms grew from 6% to 23% over the same period.

It is now conventional wisdom to accept the central role of financial services. Gordon Brown, the Chancellor of the Exchequer under Tony Blair and then Prime Minister, harboured secret dreams of a Scandinavian-style social welfare state with low taxes funded by the growth of the City. In 2007, he told bankers: "What you have achieved for the financial services we … now aspire to achieve for the whole of the British economy." Alistair Darling, Gordon Brown successor as Chancellor, was no less loquacious describing financial services as "absolutely critical" to the economy.

The golden age seemed to come to an end with the GFC. Initially, the world viewed the destruction of storied financial institutions in Global Financial Crisis as an entertaining blood sport.

Some bankers lost their jobs by the thousands. Others lived with the psychological fear of firing by text message.

In New York, bankers confessed it was hard to live on less than $500,000 – after all, the children's private school fees, the maid, the Pilates lessons etc all cost money. They economised by buying cheaper cuts of meat. In London, families deferred moves to more expensive suburbs. The latest Gordon Ramsay restaurant was no longer a must have.

The effects of belt-tightening were seen in a fall in bookings at luxury hotels, holiday resorts and sales of super yachts – some of the plutocrats were down to their last billion. Once rich hedge fund managers were back in court trying to renegotiate the terms of their divorce pleading 'poverty'.

For some women, the aphrodisiac quality of a young unattached male purring "I'm an investment banker" in a certain type of bar lost its allure. Some professions – personal trainers, dog walkers, personal dressers, children's party organisers – were in danger of extinction.

There was a sense of Schadenfreude as the Masters of the Universe received their comeuppance. Unfortunately, the "financial" crisis quickly spread to the "real" economy – jobs, consumption, and investment- becoming everybody's problem. "Too large to fail" financial institutions had to be bailed out by governments, that is the ordinary taxpayer. In a perverse piece of income redistribution, the less fortunate now were subsidising the masters of universe because it was in their best interest.

Commentators briefly dared hope that the power and influences of finance and financiers would be reduced. Finance would revert to being a facilitator rather than the central driver of the economy.

The Economist wrote: "Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dot.com. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America's retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started."

Unfortunately, those hopes are misplaced. Low or zero interest rates, heavily managed markets, reduced competition and state underwriting of solvency has helped surviving banks prosper.

Bank risk levels have increased to and in some cases beyond pre-crisis levels. The higher levels of risk taking reflect increasing comfort in central bank support of financial institution's liquidity and their ability and willingness to intervene to limit price risks.

In 2008 in Canary Wharf, the financial district in London's docklands, I meet two affable recruiters from the English Teachers Union who explained that there was "a bit of financial crisis". Well-educated and highly motivated bankers who were losing their jobs by the thousands might like to consider a new career teaching. I questioned the adjustment in salaries that the change in careers would necessitate. One recruiter's responded: "If you haven't got a job then it's not relevant is it? It was never real money and it wasn't going to ever last was it?"

Over the last 30 years, talent has increasingly been lured from productive profession into finance and the speculative economy. The rewards available mean that the brain drain into these professions is unlikely to stop. The excesses of the financial economy are also unlikely to be easily tamed.

The Masters of the Universe that survived the carnage are back to their old tricks. The 'fight for talent' means that bonuses and remuneration guarantees for new employees are all back in vogue.

Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, illustrate Mancur Olson's thesis – small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The resulting policies benefit the coalitions and its members but large costs borne by the rest of population.

The "finance government complex" (dubbed "Government Sachs" by its critics) and financiers have proved exquisite masters of the game of privatisation of profits and socialisation of losses. Many countries now practice Chinese socialism with Western characteristics.

A year after the collapse of Lehman, the near collapse of AIG and the grande mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard knew: "everything must change so that everything can stay the same."


Comments:
• DownSouth says:
October 4, 2009 at 6:47 am
Masters of the Universe they may still be, but they should relish the moment, for their days are surely numbered.

When one assesses what the Masters of the Universe have wrought, one cannot help but be reminded of this passage from A Tale of Two Cities:

Far and wide, lay a ruined country, yielding nothing but desolation. Every green leaf, every blade of grass and blade of grain, was as shriveled and poor as the miserable people. Everything was bowed down, dejected, oppressed, and broken. Habitations, fences, domesticated animals, men, women, children, and the soil that bore them-all worn out.

Monseigneur (often a most worth individual gentleman) was a national blessing, gave a chivalrous tone to things, was a polite example of luxurious and shining life, and a great deal more to equal purpose; nevertheless, Monseigneur as a class had, somehow or other, brought things to this.

And, writing of the French Revolution, Dickens warned: "Crush humanity out of shape once more, under similar hammers, and it will twist itself into the same tortured forms."

It boggles the mind how these people who hold themselves out as being so intelligent, so brilliant and so ingenious can be so blind as to where all their cleverness leads. Perhaps it was Shaw who summed the lot of them up best:

Your friends are not religious: they are only pew-renters. They are not moral: they are only conventional. They are not virtuous: they are only cowardly. They are not even vicious: they are only 'frail.' They are not artistic: they are only lascivious. They are not prosperous: they are only rich; not courageous: only quarrelsome; not masterful, only domineering…

Even as they are being led off to the guillotine, they will surely still be in denial that it was their greed, their corruption and their complete and utter incompetence that brought them to this point. No one said it better than Dickens:

It was too much the way…to talk of this terrible Revolution as if it were the one only harvest ever known under the skies that had not be sown-as if nothing had ever been done, or omitted to be done, that had led to it-as if observers of the wretched millions in France, and of the misused and perverted resources that should have made them prosperous, had not seen it inevitable coming, years before, and had not in plain words recorded what they saw.

Reply
• craazyman says:
October 4, 2009 at 7:48 am
"Talent?"

That word crawls miserably around discourse of this topic like a cockroach around a kitchen.

Talent is not a narrow, shallow and morally bankrupt intelligence that performs calculations and reads a computer screen while financially raping the world.

A "skill" maybe. Like the skill required to evaluate and trade slaves or to compose chemical formulas that make cigarettes more and more addictive or to lobby politicians so they'll approve public funds to bail out your industry's mistakes.

Skills that should be personally embarrasing to put on public display. Skills that should trigger profound personal moral crises. Let us call this stuff what it is. It will clarify the foundations of the dialogue.

Reply
• DownSouth says:
October 4, 2009 at 8:57 am
"The beginning of wisdom is calling things by their right names."–Confucius

By the way, your comment on this thread yesterday was absolutely superb:
http://www.nakedcapitalism.com/2009/10/quelle-surprise-bankers-claim-regulating-them-will-be-bad-for-us.html

Reply
•Shower time " Front to Back Books says:
October 4, 2009 at 8:43 am
[...] Das hits a line shot up the middle. here.As Giuseppe di Lampedusa, author of The Leopard knew: "everything must change so that everything [...]

> Risk, reward and responsibility the financial sector and society - HM Treasury
10 December 2009

On 10 December 2009 the Treasury published a discussion document on possible international options to reduce the cost to taxpayers of financial sector failures. Risk, reward and responsibility: the financial sector and society is a contribution to the international debate on the future of the global financial sector.

The document highlights the importance of the financial sector to the UK economy alongside the risks it poses to society. Whilst some risk-taking is inherent in financial sector operations, the recent financial crisis has shown the high cost to taxpayers when risk-taking becomes excessive. The document considers ways in which the financial sector might contribute to the potential costs of any residual risks it poses to taxpayers and to broader social objectives.

>[Dec 11, 2009] Money Supply A windfall tax in the US by Krishna Guha
December 11, 2009 | FT.com

Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers' bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.

1. People on Main Street are furious about Wall Street bonuses.

2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a recovery in financial markets and collapse of risk spreads.

3. All banks benefited from this bailout - not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).

4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.

5. This is understandable given the pressures on decision makers mid-crisis. However, this means we have to consider the cost/benefits of acting retrospectively.

6. If policymakers do not act to address justified public anger, there will be long term costs.

7. People have lost faith in economic institutions such as the Fed and Treasury because they believe these institutions are working in the interest of Wall Street rather than the general public.

8. This is likely to lead to bad policies, including reforms that undermine the powers and independence of the Fed, high rates of tax on high incomes earned in normal competitive markets and the wrong type of financial regulatory reform.

9. It is also the worst possible starting point for a serious debate about fiscal consolidation, which at its heart is a debate about national burden-sharing.

10. The best way to lance the boil is to recoup the value created by taxpayer-backed interventions through a windfall tax.

11. Having imposed a windfall tax the Treasury and the Fed would be in a better position to resist bad policies, e.g. punitively high rates of tax on high earners on an ongoing basis.

12. A well-designed windfall tax with measures to limit avoidance might raise roughly $30bn. (Math follows: with $140bn in planned bonuses and one third successfully diverted to avoid the tax, a UK style 50 per cent surcharge on bonuses net of 35 per cent income tax would yield $30bn.)

13. This sum is small relative to the deficit but it is not trivial. For instance, it could finance a one-time $5,000 per job hiring tax credit for up to 6m jobs. Suppose nine out of ten of these jobs would have been created anyway. That is still 600,000 extra jobs.

14. Any resulting increase in banks cost of capital due to a political risk premium is likely to be small because: a) the tax relates to a truly one-time event; b) it falls on employees not shareholders; and c) past windfall taxes e.g. on the UK privatised utilities did not result in large increases in the cost of capital.

Well… what do you think?

Tags: bank taxes, fed, tax on banks, windfall tax

Comments

  1. It is definitely not obvious how Congress, which has limited power, can apply a windfall profits tax easily, especially on an ex-post factor basis like in the UK or France. Besides, the banks doing well now, having repaid TARP, did pay dividends that were not insignificant. So, with a relatively "guaranteed" upside already for the banks that did not default, if they wanted equity upside too then they should have gotten equity in the first place but they didn't.

    This is not to say that business as usual in Wall Street is a good thing - it's a disgrace.

    Posted by: constantine gonatas | December 11 12:55am | Report this comment | Options

    ===

  2. Isn't it much simpler than 1-14? (1) In large part, the bonuses are driven (claimedly) by the banks' need to retain employees who generate large trading profits. (2) Since every trading gain equals a counter-party's loss, overall they produce no economic benefit. (3) Moreover, the bonuses incentivize pernicious side-effects. (4) They also distort societal values. A trader is many times more valuable to society than a teacher? (5) Whatever action can be taken, promptly, should therefore be taken by Washington to match the British and French actions.

    Posted by: 10024 | December 11 3:32am | Report this comment | Options

    ===

  3. Sounds sensible to me. I'd keep it in place until a full financial reform package is in place. Will never happen though, Obama works for the street.

    Posted by: JDA Boston | December 11 3:52am | Report this comment | Options

    ===

  4. Can't these Wall Street companies give "bonuses" in forms other than cash or stock options? Call it "retroactive contributive hiring re-gifting credit" or some such nonsense?

    And a "non-binding" board decision? Guess I'm a "populist," the word now used to label an indignant American public as a pitch-fork wielding, stupid, crowd of creeps.

    Posted by: N. Can | December 11 7:39am | Report this comment | Options

    ===

  5. Whether it is an accurate representation or not, most people seem to believe there is an element of regulatory capture in the US (and the UK).

    For instance, it can't be good for democracy or the banks to have so many ex Goldman employees working in the government. They might be intelligent and hardworking but I'm sure you can find similar talents in other organizations. That reinforces your point 7.

    Moreover, the banks aren't just beneficiaries of the Treasury's largesse; they also benefit from the Fed's policy of zero interest rates. It's easy to make money when yield curves are steep. Rightly or wrongly, many people find it hard to understand why you should bail out the banks when many other companies have gone bust.

    I would have thought that any banker with some self-awareness would have recognized the dangers of paying bonuses this year. The risk, as you say, is that by not accepting the pain this year (after all, the banks told us it was the worst crisis in living memory), politicians come after them with a bigger regulatory stick. And their apparent 'supporters' in policymaking circles are defenestrated at the same time.

    Posted by: Econoclast | December 11 8:28am | Report this comment | Options

    ===

  6. 1. Why just bank ? Why not insurance companies, Asset managers, in fact all financial institutions.

    2. No one seems to be talking about the ROI on TARP funds that the gov made when banks paid back the money.

    Posted by: Anshuman Mukherjee | December 11 10:32am | Report this comment | Options

    ===

  7. 9. If highly paid employees in subsidised industries are subject to extra taxes, this should not be restricted to banking. It should also apply to farming, for example - owners of large farms have been enjoying huge, taxpayer-subsidised incomes for decades.

    Posted by: M | December 11 10:47am | Report this comment | Options

    ===

  8. 10. @M Some might suggest that it is right to keep an excess of farming capacity for emergencies. I'm not sure the same is true for investment banking, I also doubt many farmers get million pound bonuses in any year.

    Posted by: Richard Crozier | December 11 11:02am | Report this comment | Options

    ===

  9. 1 - Only a minority of bankers are traders
    2 - Only very small minority of bankers ever got a million pound bonus
    3 - Most of investment bank's bankers are highly skilled people, a lot of them with PhDs
    4 - Given the above, why should most bankers start earning much less than most lawyers, doctors (a lot of them incompetent) etc?
    4 - Why should all bankers pay for the mistakes of a minority of them
    5 - Most of bankers are just like you and me trying to pay a mortgage
    6 - If taxes apply for bankers they should apply to everyone

    Posted by: Anonymous | December 11 11:13am | Report this comment | Options

    ===

  10. Well though the logic of applying a windfall tax has its merits, why should the entire banking community be penalized for the transgression of few. Those few are primarily the investment bankers who came out with so called "credit derivatives" that created havoc with the financial world. Taxing them and only them would make sense but then the few of them are probably 2 big to be annoyed.

    Posted by: SK | December 11 11:23am | Report this comment | Options

    ===

  11. The Windfall tax in the US will have to be approved by congress.

    Who benefits from the windfall tax? the "taxpayer" , but this term is way too large it doesn t really defines the constituencies of the congressmen, these constituencies are by large the ones suffering the least from the current economic environment as most of the US voters -35% or so of the total electorate- are high earners. upsetting as bonuses are, these populist measures are a no go in US politics.

    The last time it was tried -Big Oil profits- it didn t go much further than a couple of congressional hearings. US congress is skewed towards the rich, the ones who most regularly vote in the US.

    Posted by: pascual dejuan | December 11 11:51am | Report this comment | Options

    ===

  12. Clearly a windfall tax such as discussed would not sail easily through Congress. And I suspect the Administration will more urgently focus on more, urgent issues - health care reform, Aghanistan, an more.

    So even if popular with a large share of Americans I doubt if we shall see anything like a UK-like initiative, unless something happens to further support the factual/logical case made by Krishna Guha.

    Posted by: GB | December 11 12:38pm | Report this comment | Options

    ===

  13. While the windfall tax is an unfortunate way of doing it, something needs to be done. The problem is that the utility of banking, which TARP and fed policy was meant to save, is inextricably linked with the "casino" of banking. The bank recapitalization as engineered by the fed pumping cash at 0% was meant to bolster the utility of banking. Borrow at 0% from the fed and lend it at something higher, maybe even buy US treasuries and improve the capital situation of the institution.

    But free money became the bankroll for the casino and generated large profits. Very little of that profit had anything to do with the skill of the traders involved. If the banks were to honestly separate the "alpha" of value-added by an individual trader from the "beta" of the banking activity itself making money and paid bonuses based on alpha and not beta then there would be precious little to pay since there was no alpha generated this year. But that is not what is being done and the public is understandably incensed.

    Posted by: SNY | December 11 1:36pm | Report this comment | Options

    ===

  14. Evidence of surprisingly short term memory or the super infuence of bankers ... in US politics?!

    Instead of using the crisis to make important structural changes (including compensation), things are conveniently reverting back to pre-crisis days!

    Posted by: Neo | December 11 2:58pm | Report this comment | Options

    ===

  15. Very good idea....I don't know if this will change the way the public feels about Banks. What happened was the biggest crime foisted upon the American people ever. I think that the trust has been lost. Most of middle America see the big corporations and bankers working together to suck them dry.

    Then, they move their headquarters out of the US....like Haliburton to Dubai.

    The young adults are in the midst of this and hopefully they won't forget. They need to be the next guardians.

    Tax the Banks, their bonuses, their houses. Tax them back to the stone age.

    Posted by: Charles Seifried | December 11 3:17pm | Report this comment | Options

    ===

  16. 19. Great, thought-provoking comments. Keep them coming! Meanwhile, a few thoughts in response...

    @Constantine @ Anshuman the argument is that even a reasonable ROI on Tarp capital injections represents only a few cents on the dollar in terms of the true value of the wider insurance the authorities provided for the system as a whole at the taxpayers risk.

    @JDA @Pascual I hope you are wrong about the admin and Congress working for the rich. I'm not sure this is true, but it is the belief advocates of a windfall tax say the tax would correct.

    @Econoclast I like you wish bankers had themselves acted to forestall public rage by showing real restraint on bonuses this year. But there are serious collective action problems.

    @10024 @Anonymous @SK @SNY Windfall profits are concentrated in trading (though eg those involved in capital raising also benefited from interventions that reopened markets). The big bonuses are also concentrated in trading, so you could exempt eg the first $200,000 from a bonus surcharge and shield the less rich from some of the pain.

    But bankers are not sole traders: everyone exploits the brand and balance sheet of the firm and benefited from interventions that insured it against failure. So if there is a windfall tax it strikes me that non-traders should not be exempt from it.

    As to the value created by trading - I think there is some, but it is not as large as the bonuses associated with it suggest, and there is @SNY a lot of beta masquerading as alpha.

    @Anshuman there is a good case for extending the scope of any windfall tax beyond banks to financial institutions more broadly.

    @M @Richard subsidised farmers should lose their subsidies or be subject to ongoing higher taxation. The case for a windfall tax is that bankers benefited from a one-time subsidy and so should be hit with a one-time tax - not an ongoing surcharge.

    @Anonymous Why only bankers (or @Anshuman financiers more broadly)? Because the windfall gains from specific taxpayer-backed interventions accrued overwhelmingly to this group.

    The strongest argument against a windfall tax in my view is the claim that Congress would not stop with a one-time levy but would keep coming back for more.

    Still, it is not obvious to me that it is easier to resist a soak-the-rich strategy from a position that denies any recovery of windfall gains. Taxing the windfall but not punitively taxing future success might be a more defensible position.

    Posted by: Krishna Guha | December 11 3:19pm | Report this comment | Options

    ===

  17. Some of my thoughts:

    1. What stops banks to give out bonuses as simply as an increase in base pay? Most traders start off with a low base salary and are compensated through bonuses. They can simply increase the base to a significant amount and reduce the bonus amounts, thus avoiding a some of the taxes.

    2. I am still unsure what the taxing of bonuses is meant for. The changes that the system needs and that should come out as a result of the crises should lead to stopping excessive risk taking. Taxing bonuses does not curb it in any way. I think far too much effort and discussion has gone into this topic when other more pressing matters should be dealt with.

    If people on Main Street are angry and the taxes are meant to punish bankers for making money, then be it, but then it should be accepted that this would be a populist policy.

    3. I will agree that without taxpayer funded money, the bonuses would likely not be possible. Would it be wrong to say, however, that the American taxpayers needed to provide TARP as much as the banks needed it? Banks were able to quickly use that money, generate profits and repay the taxpayers. This wouldn't have been possible without the traders and other bankers so why shouldn't they be reimbursed for it? This is where the discussion turns to excessive pays, but in what other business do a few groups of people create billions worth of profits?

    Posted by: VK | December 11 4:06pm | Report this comment | Options

    ===

  18. The case for a windfall tax in the US is really quite simple and can be explained by a single bullet: It is politically popular for politicians to rail against successful people when the biggest number of constituents are made up of envious, undeserving, contemptible little people with skill sets of low value, who feel they're entitled to something even though they've done reward-worthy.

    But because the people who matter are those who receive rewards, as they should, for their higher-level skill sets, I suspect there will be a lot of talk and little real action. The US is still a bastion of free markets where athletes make $10 million / year, and all the inconsequential people can be placated by tough talk and no action because time passes and the second-handers think something must have happened for all the talk, even though life for those with high-level skill sets (i.e. "bankers") carries on as usual. Sound and fury.

    Posted by: H Roark | December 11 4:44pm | Report this comment | Options

    ===

  19. You make a compelling argument, however, you do not address the potential consequences of such a tax.

    Ultimately, this could lead to regulatory arbitrage, in turn decreasing New York´s competitiveness in international financial markets.

    Although this will not occur instantaneously a windfall tax will have long-term and unforeseen implications. Instead of following in the footsteps of London and Paris, Washington needs to author legislation that balances investment bankers´ appetite for risk and financial prudence.

    Easier said than done, but, in my view, a better option than slapping on a windfall tax on bonuses.

    Posted by: Árni Tómasson | December 11 6:28pm | Report this comment | Options

    ===

  20. There is a need to change the incentive system. I'm not sure a windfall tax is the answer. Even if a windfall tax is enacted, bankers will figure out a fancier way to compensate themselves. This is somewhat similar to the debate in the US regarding whether doctors should be paid a salary or a fee for service. Once you have fed these bankers on a diet, it is difficult to wean them away from it.

    Posted by: ganesan.srinivasan | December 11 7:36pm | Report this comment | Options

    ===

  21. Let's suspend conventional disbelief for a minute and connect the proverbial dots.

    The banks in question here are public companies, no? As public companies they are, by definition, owned by a combination of their shareholders and bondholders.

    Topping the list of shareholders for Goldman Sachs are names like Alliance Bernstein, BlackRock, and Fidelity - asset managers, some owned by banks, some independent but equally as embattled in this whole debate as the banks.

    But who do they serve? Who's money is the reported $3.8B worth of Goldman Sachs stock that Alliance Bernstein "owns" because a quick look at their balance sheet would suggest that, unless they're very good at hiding assets, it's most certainly not their own.

    These companies are retained to manage money for the numerous large pools of money floating our the global economy, no? Pools owned by defined contribution and defined benefit plans held by the employees or by companies on behalf of their employees or governments like the behemoth CalPERS, or by charitable organizations and educational endowments who derive their livelihoods from returns generated in financial markets, or by plain old main street investors, you and I, who investor through some intermediary who custodies our assets for us. On this thinking, who is a windfall tax similar to the UK or French iteration really penalizing?

    Ultimately, the management and employees of a company are stewards of a business, those chosen by a board which is elected by shareholders as those best to maximize value created by leveraging a firm's competitive strengths. By levying a tax to be paid by these businesses, which is in effect a siphon of money from company/shareholder pockets to government coffers in the pursuit of the ephemeral, subjective greater goods of job creation (ephemeral) or debt reduction (the assumption of debt being subject to government determination), you're not penalizing the employees of an institution or its management nearly to the extent that you penalize shareholders in so much as you would penalize someone renting a car by totaling it. The same could be said for having employees bear the brunt of the tax who for a short while will be compensated less, but in the longer run are free to seek other opportunities, depriving the shareholders of the company of their value-adding abilities. On that front, for those who claim the value add in financial services is net 0 or that banking is a utility, let's see you underwrite an equity or debt offering successfully or simply model a stock and defend it. Recent demonization of instruments such as credit default swaps aside, these and other innovations do add value and I'm implore you to use a broader scope than the past 18 months when passing judgment.

    The point I'm trying to illustrate is that, much to many a persons chagrin, this distinction that's developed between Wall Street and Main Street is by and large, non-existent. Wall Street is Main Street and Main Street is Wall Street, ad infinitum. Both are each others biggest client and as such, any move to punitively tax one will undoubtedly benefit neither.

    Posted by: smith | December 11 7:46pm | Report this comment | Options

    ===

  22. 1) Basing taxation decisions purely on public sentiment makes a terrible public policy precident

    2) There is no such thing as a "purely one-time" windfall tax. Markets would never believe that this event will never re-occur or will not be transposed on another industry

    3) If you think public is angry about the bonuses, just wait and see what the public will say if the unemployment rate this summer is above 8.5%. A windfall tax based solely on public sentiment will create uncertainty which would likely prolong high unemployment numbers

    4) A retroactive windfall tax is basically a form of thievery disguised with populist rhetoric. Such tricks might work in Europe but Americans usually have a healthy dose of skepticism about populist political crusades

    5) Americans are not angry about lavish bonuses but are VERY ANGRY at an environment in which taxpayers are held hostage to banks involved in extensive risk taking. Taxing bonuses will not solve this problem. It is a very misguided form of populism which totally misses that point and public will totally see through it

    6) Bonuses had very little to do with the nature of the crisis. The biggest financial offenders other than AIG, were relatively low-paying firms FNMA and FreddyMac. These firms are still insolvent and are biggest "black holes" for the taxpayer dollars. Both of these Government-Sponsored Enterprises were presumed to be tightly regulated and supervised by their sponsors in Washington, hence excessive populism and righteousness by the Feds will only renew discussions about the Government's massive failures in regulating GSEs

    Posted by: Yevgeny Frenkel | December 11 9:24pm | Report this comment | Options

    ===

  23. A good argument making the rounds on the blogs is less macro and more micro.

    WHY PAY ANYONE AT GOLDMAN?

    Goldman has lost its top perch in M&A (which would be the fault of John Weinberg and Michael Evans), it has collapsed in Leveraged Finance (which happened under Ed Forst), it lost $3 billion in leveraged loans (which was the group Ed Forst built), its Alpha Fund and Asset Management in general has returned the worst percentages of any major bank (where everyone is to blame), its lost its top spot in equities (which is Kevin Kennedy's fault, and who ofcourse approved all the deals during the Internet mania that cost Goldman $100 million in penalties) and then there is Lloyd Blankfein and the majority of the committee (which personify how the trading side of the business took over the firm and drove it to the precipice of bankruptcy last year).

    Of course Ed Forst has worked at the firm only one month this year having abruptly departed last year for Harvard, and having done nothing to save it during the financial crisis, has abruptly left Harvard to rejoin Goldman.

    Posted by: Sandy London | December 11 10:57pm | Report this comment | Options

    ===

  24. 30. It's interesting that you raise this issue ahead of the meeting of President Obama and the large bank heads next week. Any chance that this is a trial balloon?

    I think retrospectively taxing bonuses might placate some Americans... but the $30 billion number proposed is insignificant compared to what the taxpayers have transferred to the banking industry in direct cash subsidies and implicit guarantees.

    I think the more useful tax which will be adopted is the Tobin tax on financial transactions. The EU just "urged" the IMF to "pursue" this tax. There is near global unanimity for such a tax.

    It's most valuable contribution will be to lower the volume of interest rate and credit derivatives. This will improve global financial stability.

    The global money center banks trading books are laden with an excess of these products. This excess of cross insuring each others risks (and end users) was profitable but makes the system too interconnected (AIG anyone?).

    The only thing standing in the way of the implementation of the Tobin tax in the US is Treasury Secretary Geithner. After watching his performance in the US Senate with the Congressional Oversight Panel yesterday I don't think he will remain in the Administration for long. (start at 100 minutes) http://cop.senate....21009-geithner.cfm

    Americans sorely need confidence in their financial system restored. The best way to do this is forward looking and is the Tobin tax.

    http://freerisk.or...ndex.php/Tobin_tax

    Posted by: Cate Long | December 11 11:42pm | Report this comment | Options

    ===

  25. 31. I thought the purpose of bankers and wall street was to make effiecent use of money, where they brought people who had money to lend to people who had a use for it. Now what wall street has become is a place where people wanna get rich fast buy speculating, taking excessive risk, etc. When they screw up the tax payers have to come in bail them out while they keep all the earning upto this year. It may be a zero sum game but the mutual fund and pension funds are the losers.
    We should tax not only bonuses of this year but bonuses of the past 10 years.

    Posted by: AHMED AMINI | December 12 1:29am | Report this comment | Options

    ===

  26. 32. @Frenkel: "Taxing bonuses will not solve this problem. It is a very misguided form of populism which totally misses that point and public will totally see through it"

    Obscene bonuses are just tip of the iceberg of casino capitalism with its redistribution of wealth to banking elite. And it is casino capitalism that people are protesting. I think it is very dangerous to underestimate the level of resentment GS and other banksters generated. This lead to the situation when elite cannot govern as usual and the rise of anti-semitism might be one of the side effects.

    In no way we should underestimate the possibility of dramatic societal shifts. You need to remember Germany 1935 election.

    Posted by: bezroun | December 12 1:59am | Report this comment | Options

    ===

  27. @Cate Long It's most valuable contribution will be to lower the volume of interest rate and credit derivatives. This will improve global financial stability.

    I am not sure what your experience with markets is but if you have been watching what has transpired over the past 2 years, it would be clear to you that absence of liquidity in the markets increases volatility and increases risks. A Tobin tax will DECREASE liquidity in financial markets and will INCREASE volatility. While you are right that Geitner is not very popular with his own constituancy, he is not the main impediment to a Tobin tax. The problem for Mr. Obama is that US is among the World largest borrowers and our government borrows money by issuing bonds (traded securities). Presence of a Tobin tax will decrease trading volumes due to higher cost of inventory management and hence will increase yields. US government will loose more on debt service than any possible tax procedes it might hope for.

    Additional points to note that IMF (thankfully) has no juristiction over any country unless this country needs an emergency loan. We might be on our way to an IMF bailout but not yet....
    Also, when you mention a unanimous agreement on the Tobin tax, do you include Singapore, Dubai, Moscow, Zurich, Honk Kong in your assertions? We in the US already import most of our consumer goods from China, we dont want to end up in a situation where we will be importing our financial services as well.

    Posted by: Yevgeny Frenkel | December 12 2:53am | Report this comment | Options

    ===

  28. It is virtually astonishing that the leadership that was part of the problem now wants to be part of the s solution. The first step toward credible solutions is credible leadership. Leadership untainted and with a clean slate.

    I believe that a compelling case was made by Institutional risk analytics

    Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
    December 7, 2009

    http://us1.institu...om/pub/IRAMain.asp

    "

    Coming together with the friends of Mark Pittman ended a grim week.
    Many of us in the financial community were wading hip-deep through
    barnyard debris as we watched Federal Reserve Chairman Bernanke dodge
    and weave in front of the television cameras during his Senate
    confirmation hearing. We have to believe that Mark would have been
    pleased as Senators on both sides of the aisle asked questions that
    came directly from some of his reporting -- and a few of our own
    suggestions.

    To us, the confirmation hearings last week before the Senate Banking
    Committee only reaffirm in our minds that Benjamin Shalom Bernanke
    does not deserve a second term as Chairman of the Board of Governors
    of the Federal Reserve System. Including our comments on Bank of
    America (BAC) featured by Alan Abelson this week in Barron's, we have
    three reasons for this view:

    First is the law. The bailout of American International Group (AIG)
    was clearly a violation of the Federal Reserve Act, both in terms of
    the "loans" made to the insolvent insurer and the hideous process
    whereby the loans were approved, after the fact, by Chairman Bernanke
    and the Fed Board. The loans were not adequately collateralized. This
    is publicly evidenced by the fact that the Fed of New York (FRBNY)
    exchanged debt claims on AIG itself for equity stakes in two insolvent
    insurance underwriting units. What more need be said?

    As we've noted in The IRA previously, we think the AIG insurance
    operations are more problematic than the infamous financial products
    unit where the credit default swaps pyramid scheme resided. And we
    doubt that any diligence was performed by Geither and/or the FRBNY
    staff on AIG prior to the decision taken by Tim Geithner to make the
    loan. We'll be talking further about AIG in a future comment.

    Last week the Senate Banking Committee spent a lot of time talking
    with Chairman Bernanke about why payouts were made to AIG
    counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the
    real issue is why Tim Geithner and the GS-controlled board of
    directors of the FRBNY were permitted to make the supposed "loans" to
    AIG in the first place. The primary legal duty of the Fed Board is to
    supervise the activities of the Reserve Banks. In this case, Chairman
    Bernanke and the rest of the Board seemingly got rolled by Tim
    Geithner and GS, to the detriment of the Fed's reputation, the
    financial interests of all taxpayers and due process of law.

    Martin Mayer reminded us last week that the Fed is meant to be
    "independent" from the White House, not the Congress from which its
    legal authority comes by way of the Constitution. Nor does Fed
    independence mean that the officers of the Federal Reserve Banks or
    the Board are allowed to make laws. None of the officials of the Fed
    are officers of the United States. No Fed official has any power to
    make commitments on behalf of the Treasury, unless and except when
    directed by the Secretary. Given the losses to the Treasury due to the
    Fed's own losses, this is an important point that members of the
    Senate need to investigate further.

    The FRBNY not only used but abused the Fed's power's under Section
    13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner
    invoked the "unusual and exigent" clause again and again, but there is
    a serious legal question whether the then-FRBNY President and the
    FRBNY's board had the right to commit trillions without any due
    diligence process or deliberate, prior approval of the Fed Board in
    Washington, as required by law. The financial commitments to GS and
    other dealers regarding AIG were made always on a weekend with
    Geithner "negotiating" alone in New York, while Chairman Bernanke,
    Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC
    without any real financial understanding of the substance of the
    transactions or the relationships between the people involved in the
    negotiations.

    Was Tim Geithner technically qualified or legally empowered to "make
    deals' without the prior consent of the Fed Board? We don't think so.
    Shouldn't there have been financial fairness opinions re: the
    transactions? Yes.

    We understand that the first order of business in any Fed audit sought
    by members of the Senate opposed to Chairman Bernanke's re-appointment
    is to review the internal Fed legal memoranda and FRBNY board minutes
    supporting the AIG bailout. These documents, if they exist at all,
    should be provided to the Senate before a vote on the Bernanke
    nomination. Indeed, if the panel established to review the AIG bailout
    and related events investigates the issue of how and when certain
    commitments were made by the FRBNY, we wouldn't be surprised if they
    find that Geithner acted illegally and that Bernanke and the Fed Board
    were negligent in not stopping this looting of the national patrimony
    by Geithjner, acting as de facto agent for the largest dealer banks in
    New York and London.

    The second strike against Chairman Bernanke is leadership. In an
    exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that
    he could not force the counterparties of AIG to take a haircuts on
    their CDS positions because he had "no leverage." Again, this goes
    back to the issue of why the loan to AIG was made at all.

    Having made the first error,Bernanke and other Fed officials seek to
    use it as justification for further acts of idiocy. Chairman Dodd look
    incredulous and replied "you are the Chairman of the Federal Reserve,"
    to which Bernanke replied that he did not want to abuse his
    "supervisory powers." Dodd replied "apparently not" in seeming
    disgust.

    We have been privileged to know Fed chairmen going back to Arthur
    Burns. Regardless of their politics or views on economic policies, Fed
    Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew
    that the Fed's power is as much about moral suasion as explicit legal
    authority. After all, the Chairman of the Fed is essentially the
    Treasury's investment banker. In the financial markets, there are
    times when Fed Chairmen have to exercise leadership and, yes,
    occasionally raise their voices and intimidate bank executives in the
    name of the greater public good. AIG was such as test and Chairman
    Bernanke failed, in our view.

    Posted by: Michael Pomerleano | December 12 3:14am | Report this comment | Options

    ===

  29. @ Yevgeny Frenkel >> >> "A Tobin tax will DECREASE liquidity in financial markets and will INCREASE volatility. "

    Interesting supposition... any feedback on this oldish study appreciated...

    "Tobin tax and market depth", G. Ehrensteina, F. Westerhoffb and D. Stauffera, Institute for Theoretical Physics, Cologne University and the Department of Economics, University of Osnabruck, November, 2003

    Since the mid 1980s, the daily turnover in financial markets has increased sharply. Moreover, the trading volume increasingly reflects very short-term and speculative transactions.

    In foreign exchange markets, for example, operations of intraday traders account for 75 percent of the market volume (Bank for International Settlements 2002).

    In comparison, only 15 percent of the trading volume is on account of non-financial customers, with international trade transactions representing merely 1 percent of the total. The fast and hectic trading leads to complex financial market dynamics.

    According to Cont (2001) and Lux and Ausloos (2002), the behavior of financial prices may be characterized by five universal features:

    1. the evolution of the prices shows little pair correlations between successive daily changes,
    2. severe bubbles and crashes occasionally emerge,
    3. the prices fluctuate strongly,
    4, the distribution of log price changes possesses fat tails, and
    5. periods of low volatility alternate with periods of high volatility.

    Any other academic work you can point to on the topic greatly appreciated.

    I found the comments of Hal Scott, Harvard Law School professor about the legal framework for derivatives contracts particularly interesting when he was queried about swaps trading exiting the US... He implies that the Euro legal and regulatory framework doesn't have the same certainty as the US which creates a disincentive to transfer trading and settlement to the EU. http://www.clipsyn...ideo/playlist/1778

    Do you think the big banks would move their trading desks to Dubai, Moscow or Zurich?

    Singapore and Honk Kong already have reasonable trading activity but could you centralize trading away from NY or London? Which bank would make the first move? ...

    I wonder what they Chinese think of a Tobin tax?

    As to the decreased liquidity in the last two years is there any correlation to the constrained balance sheets of the major dealers? (ABCP conduits, SIVs, ARS, swaps collateral) Did this lead to reduced capital to commit to market making?

    Many thanks.

    Posted by: Cate Long | December 12 3:50am | Report this comment | Options

    ===

  30. @Cate Long : mine is a humble observation of a practitioner

    i dont know which banks will move but i can give you a list of customers who have moved to zurich and most of these customers are larger volume generators than many global banks. And banks tend to follow customers. Also, can you tell me which bank doesn't have a fully functioning trading desk in Honk Kong? Gillian Tett has a very insightfull article on this issue in today's paper.

    But in any case, you totally miss my point. The US Government is the biggest customer of banks because they use banks to underwrite and distribute their debt. Taxes have a tendency to be passed onto customers and the US government will not be an exception. Geitner opposes a Tobin tax not because his ideology has anything to do with it but because he realizes what it would cost in terms of servicing the debt. 50 basis point of a yield differential is not a lot for a physicist or a law professor, but as far as the US Treasury is concerned it is an addition of $60bn/year given the size of our outstanding debt.

    Posted by: Yevgeny Frenkel | December 12 5:33am | Report this comment | Options

    ===

  31. @Cate Long: Singapore and Honk Kong already have reasonable trading activity but could you centralize trading away from NY or London? Which bank would make the first move? ...

    As per letter on page 10 of today's FT from Mr. Lybeck the 1st major UK bank to move its chairman to Honk Kong is HSBC..... You see.... FT is a very informative paper :)

    Posted by: Yevgeny Frenkel | December 12 6:41am | Report this comment | Options

    ===

  32. @Frenkel: Sorry to disappoint you but if Wikipedia is right "Hong Kong served as the bank¹s headquarters until 1992 when it was forced to move to London as a condition of completing the acquisition of Midland Bank.[5] "

    Posted by: bezroun | December 12 6:52am | Report this comment | Options

    ===

  33. Unfortunately, it's only when the horses have run away that people are scrambling to lock the stables.

    And unfortunately also, it's easier to sacrifice scapegoats, that to recognize at the real causes.

    The bonuses were indecent indeed and they still are. But bonuses are only the symptoms of the illness, the real disease are the US monetary and fiscal policy run by the helicopter Fed and its reckless governments.

    As these policies continue no wonder why we continue to see the symptoms. Why should morphine cure a cancer?

    Posted by: ERIC BERLOTY | December 12 8:03am | Report this comment | Options

    ===

  34. The best way to structure it would be to reclassify all compensation greater than $100k per person and all contractor payments greater than $500/day equivalent as non-deductible corporate expenses. In effect this removes a 35% corporate tax deduction. This should apply to compensation paid in the US as well as overseas. The US has already done this in the past on compensation over $1 mio.

    However, rather than a tax, I would rather see regulators sharply limit the size of the compensation pools as % of revenues.....particularly revenues coming from central-bank subsidised carry trades. Those carry trade revenues, which are a huge percentage of bank profits this year, should only be used to

    1) build loan loss reserves (which at most banks are rising at slower pace than loan losses),

    2) build capital/retained earnings and 3) pay dividends to shareholders.

    Really the only reason for attacking compensation is to ensure that the carry trade revenues intended to rebuild capital and allow for aggressive loan losses are actually used for that purpose rather than to enrich employees. Regulators have the power to demand higher capital and loan loss builds, and once regulators are satisfied, shareholders have the power to demand dividends before record bonus pools are paid. Regulators and shareholders have been too passive.

    The bonus tax is just a populist election ploy by politicians. It will make the banking system worse off. Regulatory action, as I've suggested, would divert funds from employee comp to capital, reserves and shareholders. This political action instead will divert funds from capital, reserves and shareholders (as employee comp will only fall slightly) in order to help politicians get re-elected.

    Posted by: Legal Tender | December 12 8:57am | Report this comment | Options

    ===

  35. The issue of a windfall banker's bonus tax should be seen in the wider context of social and economic policy.

    I strongly suspect that a significant portion of the last 20 years of economic growth in the developed world, particularly the US and the UK, was built on a house of cards (credit cards, mortgage loans), that was not sustainable in the long-term because it was mostly consumer consumption driven as opposed to investment related.

    Even worse, much of the fruits of this "synthetic" growth was captured by a very small sliver of the population, i.e. financial intermediation workers and corporate managers. Most of these wealth transfers happened thanks to systemic institutional and social corruption underpinned by free-market ideologies that helped much in doing away with any notions of social fairness and general morality, notions that are essential to the long-term success of societies.

    It is about time that we bring back these notions to the core of the set of principles upon which modern societies are built upon and find a new balance between selfish individual greed and social responsibility.

    Taxing the windfall gains accrued to the top 1% of the population over the last 20 years would be a good start.

    Posted by: atb | December 12 11:09am | Report this comment | Options

    ===

  36. @MICHAEL POMELEARNO Interesting posting. To the questions of competency and possible abuse of power by the Fed we should also question whether Bernanke's views on monetary policy fit in with the shifting views of economists and (yes) the public. While I am not arguing that the Fed should be held hostage to public opinion and Congress, as IRA very informatively reminds us, the Fed is Congress creation and hence ultimately should be accountable to it. I think the point raised in that note is extremely important and goes much deeper than issues of monetary policy or Fed independence: it raises the question about whether the Fed's extraordinary powers are consistent with the US Constitution. I would strongly support a full and open discussion within society of this issue.

    @CATE LONG. Good postings. Think the windfall tax on bankers bonuses should be seen in the larger context of social fairness and morality. Yet again, the UK is showing the proper way in how to tackle this issues. A good paper is

    http://www.hm-trea...sector_society.htm

    Unfortunately the US, even under an Obama administration, keeps acting in a reactionary and completely unenlightened manner. To the questions of Bernanke's decisions made through the crisis, we should also add Geithner's and bring his actions taken then under full Congressional investigation.

    Posted by: atb | December 12 11:50am | Report this comment | Options

    ===

  37. Besides the fact that I doubt that the US could pass such legislation, there is little more to a windfall tax than a short-sighted public act of revenge against "bankers". Everybody else has played the game - it takes two to overborrow / overlend, after all. Also, those situated between the lenders and the borrowers (retailers, manufacturers) have easily turned a blind eye to the solvency of their customers - re. the rescue action needed for GM.

    Let everybody keep their exaggerated bonuses this year, as it will only strenghten the case for what is really needed. All forms of income have to be taxed within the same framework so as to avoid what will otherwise be a tax experts' paradise, trying to find ever more sophisticated loopholes. A (banking) sector-specific tax is also not desirable, given the extra sway such a sector would enjoy through its contribution to the public purse. Higher levels of taxation in top income categories would be desirable to curb excessive levels of executive pay - but only if the resulting tax revenues are not immeditately handed back to them through public expenditure. So Barak Obama still has a health care project he needs to fund...

    Posted by: Rolf Dockhorn | December 12 12:54pm | Report this comment | Options

    ===

> [Oct 14, 2009] Much Ado About Nothing $23B: Goldman Sachs Bonus By Barry Ritholtz
October 14, 2009

Its time for the quarterly hand-wringing amongst the populace regarding the over-sized bonuses at Goldman Sachs. This Q, its a mere $23B.

The focus on the bonuses of top performing traders and investment bankers is misplaced. There are many, many things to be upset about regarding the financial sector - but bonuses are not one of them. [BR: Or, at least not the most important thing to be enraged over]

We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is. You can complain about it, but it is all but pointless. Feel free to pursue a millionaire's tax of 1% (or 10%) on everyone who earns more than $1m - a super top tier - to pay for health care reform or whatever you want. (Best of luck with that!)

Every few years, we lament overpaid athletes, musicians, movie stars. Bruce Springsteen is going to make $100 million+ this year on tour. While you can complain about it, ask yourself how many people can fill 50,000 seat arenas 200 night a year at $100 a pop. Lebron James, Peyton Manning, and others justify their salaries by generating massive revenue and profits for their employers.

So too it is with Goldman Sachs and others.

The traders who throw off the most profits, the bankers that generate the most lucrative deals are worth tens of millions to their "team owners." That is how it is, and it is unlikely to ever change.

What should you be upset about?

• Paying people in year one for risks that last years or decades;

• The "privatized gains, socialized losses" of the current system;

• Dramatically reduced competition in the Banking sector;

• The idea that "Too Big To Fail" is now an official policy of the United States;

• The "gifting" of $100s of billions of dollars to mismanaged banks that should have been allowed to fail in a controlled fashion;

• Bank lobbyists preventing any sort of credible regulation from passing;

• Goldman Sachs wresting $19 billion from AIG;

• The absurd and poorly thought out $750 billion TARP plan;

• The suspension of mark-to-market allowing banks to hide losses and not accurately disclose their bad assets;

• The outsized influence Banks have on Congress and Goldman Sachs has within the Executive branch.

There are plenty of things to be upset about these days. Top performers earning huge paydays at the biggest firms is not one of them . . .

Previously:
Looking at Wall Street Pay (August 1st, 2009)
http://www.ritholtz.com/blog/2009/08/looking-at-wall-street-pay/

Why Financial Reform Died: "Banks Run Congress" (October 12th, 2009)
http://www.ritholtz.com/blog/2009/10/why-financial-reform-died-banks-run-congress/

What's Wrong With Billionaire Fund Managers? (April 16th, 2008)
http://www.ritholtz.com/blog/2008/04/whats-wrong-with-billionaire-fund-managers/

Single Best Investment in History = 258,449% (October 12th, 2009)
http://www.ritholtz.com/blog/2009/10/single-best-investment-in-history-258449/

Derivatives Lobby Corrupts Congress (October 12th, 2009)
http://www.ritholtz.com/blog/2009/10/derivatives-lobby-corrupts-congress/

Total Campaign Contributions/Lobbying by TARP Recipients (October 12th, 2009)
http://www.ritholtz.com/blog/2009/10/total-campaign-contributions/

Top Hedge Fund Earners (March 25th, 2009)
http://www.ritholtz.com/blog/2009/03/top-hedge-fund-earners/

  1. Bruce in Tn Says:

    In the Carter days, Barry, the top tier was taxed at 70%…even though the deductions of that era are gone, Harry and I think this marginal tax rate reinstituted today would be only fair.

    B in T

    ~~~

    BR: I don't have a problem with a super top tax rate.

  2. SINGER Says:

    To the extent that these GS bonuses are directly related to the items you listed as things to get upset about, I disagree.

    This is the question: Would theses $23B in GS bonuses exist to be paid if:

    1) No TARP;

    2) No bailout of AIG counterparties;

    3) No influential GS lobby in Congress;

    4) No gifting of hundreds of billions by governments to TBTF's;

    5) No obscene influence and conflict ridden relationships b/w GS and the Executive branch (Treasury);

    6) Future risks of the bonus worthy performance had to be taken into account????

    If the answer is that these $23 B in GS bonuses would exist even without the above, then I agree we shouldn't be mad at the bonuses.

    ~~~

    BR: I am trying to separate out the foolish actions that caused the crisis, and were the bad decisions in response to it, versus regular bonuses paid to profitible employeess.

  3. Bruce in Tn Says:

    By the way, Harry and I went out last night to see a magic act. It was pretty good. The final act though was the best by far. They put a guy flat on his back, and then the magician came out and waved his wand, and the man floated in the air for several minutes. Harry and I talked about that after we left the performance.

    "Did you see how that magician levitated that guy! Wow, that was some magic!" Harry said.

    I replied," Harry, that was just a trick, he had a forklift behind the stage that fits under the fellow that is being levitated, there is no real magic there…"

    "No, I saw it with my own eyes. The guy was flat on the ground, and then he was floating in the air. I would have known if there was something unreal about it all." Harry was adamant.

    "Well, ok, I guess we'll just have to disagree. But I did enjoy the performance. Say, what are you going to do with that raise you got with your stimulus money?"

    "They've been advertising those Chia Obamas on TV. I've got to have one…."

    …..OH, well..

  4. Barry Ritholtz Says:

    Note that AIG is a different situation than GS, JPM, etc.

  5. HCF Says:

    I have NO problem with bank bonuses whatsoever….

    However, I do have a problem that the very survival and profitability of the banks has been primarily driven by the largess of the government, and by proxy, the American taxpayer.

    Rather than lend freely at a PENALTY rate, the central bankers have chosen to lend freely to banks a ZERO rate. Give me trillions at 0% and even I could find something to do with it that would earn a $23B bonus!

    HCF

    ~~~

    BR: So what do we do about it ?

  6. Barry Ritholtz Says:

    Yet another thing to think about: the terrible deals cut by Paulson/Bernanke/Bush in lieu of bankruptcy…

  7. wunsacon Says:

    Barry, after all you've written about and know about the crisis, what have you to say in response to Singer?

    I'm surprised by your post.

  8. Mike in Nola Says:

    Agree with Singer. To the extent that the bonuses were generated with direct or indirect government support, we should be upset.

  9. spoonman Says:

    Good post, Barry. Also, aren't much of the bonuses paid out as stock that vests sometime in the future? If that's the case(I'm not sure) then traders have a huge incentive not to blow up their company(at least until they can access their stock). What kills me is not that they get paid so much, but that they are government "supported"(or whatever their relationship is – bailed out, sponsored, etc). The capitalism for gains, socialism for losses is what is so aggravating…

  10. CuriousCreature Says:

    @BR

    SINGER is dead on. The inquiry that I would like to see is how much GS contributed to the downfall of Lehman and Bear.

    This kind of rock star pay leads the best and brightest to believe that they are the masters of the universe. Their clever financial products nearly caused the collapse of our entire financial system. You may want their autograph. I want them to find another line of work.

    Curious

    ~~~

    BR: I am not referring to the AIG FP people, or the JPM derivatives creators - but the rank and file traders bankers who do their jobs and make money for their employers.

  11. David Yaseen Says:

    Barry, is there a reason the traders need to make exactly this much money? Was there an open auction of their talents (that somehow escaped my attention) where their compensation levels were set?

    If so, did the other bidders have all the relevant information regarding their performance, as they have in the NBA/NFL/NHL?

    Would $1m either way have any effect on performance? $10m? Any idea how GS (and others) decide how to compensate back-office and other employees who don't directly produce the returns?

    Is there some formula that dictates exactly how much the employees should get relative to the account holders and share owners whose money they used to generate these returns? Does anyone have any idea what proportion of the bonuses are paid for employees' loyalty rather than performance?

    I'm not against bonuses in principle, but absent transparency, IB compensation looks an awful lot like pure self-dealing with other people's money.

    ~~~

    BR: Reason? No.

    Its a math formula that reflects their revenue and profits.

  12. austincompany Says:

    I don't have a problem with bonuses per se, only with the extreme amounts. One has to ask, at what point does a bonus become "obscene"? Especially in a very, very weak economy. A better suggestion might be deferred bonuses, and/or stock grants/options.

    It is foolish of any company to think that they are an "island" in the capitalist sea and while all of those around them are drowning, they have wine and cheese. It's just bad business to give such large bonuses now while the economy is in the tank. Looks bad. And I think most "common people" would agree.

  13. Boo-urns Says:

    Barry,

    what about the argument that the bonus culture, as currently constructed, leads bankers/traders/etc. to take outsized risks, with the incentives all aligned towards the immediate profits that can be posted, and with no regard whatsoever for the long-term consequences of these actions? Can you really claim that the bonus structure had no bearing whatsoever on bank managers loading up on crap MBS and CDO during this last cycle?

    and in this era of TBTF, the bonus issue isn't simply a shareholder issue (although that might be enough justification, given that corporate governance is essentially defined by legal standards), it's also a taxpayer issue.

    to posit a highly imaginative hypothetical, supposed that these Goldman profits were entirely the result of short-term profits booked on longer-term, high variance risk. if Goldman were to go under as a result of this risk, it seems pretty well established that we the taxpayers would step in and bail them out. so why aren't their bonuses, which as the major portion of salary for most Wall Street bankers are the largest driver of behavior, of concern to us again? particularly when we are the ones who will bear the costs?

    ~~~

    BR: As I specifically noted above, "Paying people in year one for risks that last years or decades" is something that is both foolish and worthy of your anger.

  14. danm Says:

    There are plenty of things to be upset about these days. Top performers earning huge paydays at the biggest firms is not one of them
    ---–
    Springstein is filling the arenas because people want to see him. The bankers are getting their friggin' bonuses because of ALL the reasons you mention and not because people want to see them.

    It's interesting how you can rationalize some stuff. Why bother blaming people for the credit bubble then? Isn't life just unfair and what we got the natural evolution of laissez-faire?

    Bankers have 2 jobs: create leverage which is dictated by regulatory ratios and allocate capital efficiently. The first one is a commodity. The second one is a skill. But they've shown us that they have no skill whatsoever in allocating captial properly. So why should they get their bonuses?

    ~~~

    BR: Not all of them. We have to distinguish between the few people that brought the system down and the rank and file wall st employees that did not.

  15. Barry Ritholtz Says:

    Look at Citi dumping Phibro - that's $600M in revs lost, becuase people were upset the person who generated those revs was paid $100M bonus as per K.

    We as taxpayers own a huge chunk of C …

  16. HEHEHE Says:

    Capitalism? Are you kidding me? Crony capitalism perhaps but definately not capitalism!!!

    Barry they can pay out these bonuses when they take all the cr*p they dumped on the FED back onto their balance sheets. If they did that there'd be no bonuses because there's be no profit from which to pay any bonuses; half of the banks wouldn't even exist.

  17. cvienne Says:

    @BR

    I was getting prepared to type almost exactly what SINGER wrote…

    I'll add to that that it is disingenuous to group athletes, or pop artists in the same category…

    Sure, Peyton Manning & LeBron James earn their teams (and leagues) millions, but the last I checked the NFL, the NBA, the Indianapolis Colts, or the Cleveland Cavaliers weren't coming to the US taxpayer and asking for a bailout…

    When the banks can stand on their own and produce profits to pay bonuses, then they're entitled to do what they wish…

    I know this is an oversimplification, but I resent the idea of being taxed into future generations, so that capital can flow to the banks, allowing some "trader" to bid up the price of oil from $35 to $75 dollars a barrel, and collect a $100 million dollar bonus doing it…

    I'd prefer, even at the cost of enduring PAIN along the way, to let deflationary forces set in. From the ashes of that, what REAL capital that remains will find a way towards more productive ends.

    ~~~

    BR: Actually, the sport teams have huge subsidies in terms of Stadiums that cost Municipalities billions to build. And do you want to discuss anti-trust exemptions for them?

  18. danm Says:

    Look at Citi dumping Phibro - that's $600M in revs lost, becuase people were upset the person who generated those revs was paid $100M bonus as per K.

    We as taxpayers own a huge chunk of C …
    ------
    Yes. And all this fast money is what got us in the bloody mess we're in­. A lot of these dealings are integral to the credit bubble. No credit bubble no hundreds of millions per individual.

    Barry, you complain about the creators of the credit bubble but you have no qualms about those using the money supply created to line their pockets.

    We've created a layer on top of the real economy that does not produce anything and just skims the profits. This layer works fine as long as credit is being created at a fast rate. We know that debt creation forces us to create even more debt just to cover interest payments. A lot of this debt has not been created to generate productive businesses, it's financial manipulation.

  19. ItalicBold Says:

    "Its not fair, but it is how it is." – If they ever start clawing back/intervening in this area, remember these words.

    People wouldn't be so up in arms about this if there was performance to back it up. At the moment it feels like these people are not only being rewarded excessively but they are being done so for raping America.

    I fully agree it is used as a distraction and there are bigger issues, but I will be no more surprised by the govt intervening than I am about the bonuses themselves. The bottom line is we live in a rather broken and unfair system and the system as a whole needs to be fixed.

    ~~~

    BR: I am in favor of clawbacks !

  20. b_thunder Says:

    Do we really "live in a capitalist system, where there are going to be winners and losers"? We supposed to be, but where are those losers? Fuld and Cayne? Puh-leeezeeee, they're multimillionaires! I guess life's a b***ch when you have to get rid og G5 and fly on a 2nd hand G4?

    The problem with $23B (B as in Billion) bonus pool is $23T (T as in Trillion) that The Fed, FDIC and the Treasury reportedly pledged to "support the system." Not to mention that the "backstopping" also created those mega-winners – GS, JPM, and the PPIP partners. All at the public's (and smaller banks') expense.

  21. cvienne Says:

    @BR

    But I do understand your defense of the "bonus babies". After all, I wouldn't want to be "odd man out" at the cocktail parties at the East Egg Marina Club…

    ~~~

    BR: I already am!

    Its pretty ironic that after I have spent years trashing the Wall Street execs who caused this mess, no one else seems willing to defend the legitimate rank and file workers who were profitable and risk aware and didn't cause the problem.

    AIG had 86,000 employees, their FP division that killed the firm had just 400. Lehman had 25,000 employees, Bear Stearns had 16,000; The vast majority of these workers - my guess is something in excess of 95% - had nothing whatsoever to do with the collapse.

  22. DM RTA Says:

    The system is built to reward success but what kind? This discussion, ultimately, is about how to regulate the assumption of long term risks. I am no fan of regulation but if "Too big to fail" must exist(right now), then better regulation must too. Why not just go there since we expect Congress to do it and, obviously, they are not. They need to be led to the idea.
    There's got to be a good example from the past that modeled proper balancing of now and later incentives, no? And if not then that only makes the construction of new ideas to delay risk based reward more pressing.

  23. Rikky Says:

    Lebron earning his money is one thing. GS getting paid by being not only saved when they would've surely went under but also given an unfair advantage by borrowing for free from their friends in the government is a completely different story. The game is rigged and you question why there's anger over these payouts? The bonuses should be determined at the corporate level then some very large % should be given to the taxpayer for his 'investment' in this firm. Remember the investors always get paid first and with much of the pile before the workers.

  24. aupanner Says:

    how are these bonuses unlike the first point you suggest we fret over: "Paying people in year one for risks that last years or decades" ?

    ~~~

    BR: Traders on desks run mark-to-market in stocks, bonds, options, etc. The risks are very different than the AIG CDS junk

  25. wally Says:

    "Top performers earning huge paydays at the biggest firms is not one of them . . ."

    I know you're just trolling here, but perhaps you should look up the meaning of the word "earning" as applied to somebody who was given a truck full of free money. My money, your money… everybody's money.

  26. robertso2020 Says:

    Please don't compare a trader or banker from a bailed out bank to The Boss, a Pro Athlete or Movie Star. Yes, many think they too are overpaid but at least you have an option of paying with your feet. At least stadium funding comes down to a public vote. You discredit yourself when you defend record bonuses at bailed out financial institutions year one after a mini depression. At the minimum banks should have to give back the free carry trade money (ok…left field I know…but I didn't get to borrow at zero this year).

    With that said Americans typically do not condemn the likes of a Bill Gates or Sergey Brin for making boatloads of money. They are what the general populous consider true risk takers.

  27. How the Common Man Sees It Says:

    In case you were all wondering where fall went GS took that over too

  28. m111ark Says:

    You've muffed this one Barry. But I'm not surprised, one wall st. prowler NOT upset by the ill-gotten gains of other wall st. rapist – but you should be. The fine line dividing civilized behavior from mob reaction is too, too thin. This is the kind of thing that stretches it even more. The black swans are circling attracted more black swans, don't be anywhere near wall st. when the next one lands.

    ~~~

    BR: There are shades of gray that too many people are missing. Wall Street is not a wholly illegal, illegitimate business.

    There are ill-gotten gains that I have railed against, and legitimate monies earned. Stop lumping the criminal and the incompetent with highly compensated, profitable employees.

  29. KidDynamite Says:

    dead on Barry. I am well aware that SINGER"S points above are very common concerns, mainly "but if we, the people, hadn't given AIG money to funnel through to Goldman, they wouldn't be able to pay those bonuses"

    yeah – and??? BE MAD AT THE PEOPLE WHO CONSTRUCTED THAT ILL CONCEIVED BAILOUT!!!! that is the whole point… don't hate the player – hate the game. GS's job is to make money and get paid. they are good at it. They had contracts with AIG. the government gave AIG money so that it could make good on its liabilities – and that makes you hate GS?!?!?! hate Paulson… Bernanke… Geithner… Barney Franks…Bush… OBama… the guys who GAVE the money out without any foresight as to potential problems and consequences.

  30. bsneath Says:

    Barry – Aren't we overlooking what is perhaps the greatest risk of concentrated accumulation of wealth? That is the corresponding decline in incomes and wealth in the middle/working classes and their inability to sustain consumption and growth of our economy. (Declining incomes now coupled with contracting debt levels.)

    This was taught to me as one of the causes of the great depression. It seems to be overlooked in the present day circumstances. My suspicion as to why is because it is the same liberal class that should be raising this issue that instead is benefiting economically from the current status quo. Less a statement of hypocrisy than an observation on human nature.

    The consequences may very well be that the greed of the wealthy class will ultimately result in the demise of the very systems that has perpetuated their wealth. However, even if they were to recognize this, they are incapable of pursuing any path other than the continuation of their greedy behavior.

    Just some thoughts to ponder.

    ~~~

    BR: That is a very different argument, and we are then talking about Bill Gates and Warren Buffett and George Soros and Steve Jobs . . . .

  31. KidDynamite Says:

    oh – and another thing that I just realized i'm very very mad about – the BofA forced purchase of MER… someone should go to jail – i'm not quite sure who – I keep thinking it's Ken Lewis for his complete screwing of his own shareholders. The quote from this morning's NYT article between boardmember emails was ""Unfortunately it's screw the shareholders!!" " (http://www.nytimes.com/2009/10/14/business/14bank.html)... and in light of last week's Vanity Fair excerpt from Sorkin's book where he illustrates the negotiations to save MS and GS, we saw that real CEO's actually said "NO" when Geithner called Dimon and said "you have to buy MS"… "NO" said Dimon – I can't….

  32. bsneath Says:

    Really bad grammar above. Note to self: need more coffee before I write.

  33. jayblonde Says:

    "Top performers earning huge paydays at the biggest firms is not one of [the things to be upset about]…"

    Top performers generating millions for their firms do deserve their share of profits.

    But what is an appropriate share? 1 million? 10 millions? 50 millions? 1%? 10%? 50%?

    You could say: Nobody knows, so let the market decide.

    Unfortunately, the market rather resembles an oligarchy with its own standard of relative wealth (when you talk about millions, only relative wealth counts).

    As an example, the ratio of CEO to worker pay has increased from 24:1 in 1965 to around 300:1 in recent years. Have CEOs increased their skills 12 times compared to average workers? Didn't workers also have to adapt to computerization and internationalization?

    Or is it rather a race upwards between a small (admittedly highly skilled) group of people that has lost touch with the life and incomes of society in general?

  34. Mannwich Says:

    The mere fact this this firm wouldn't even exist without the generous support of we the taxpayer is enough to make me upset about anything Goldman does. I realize that you work in the biz, Barry, and can't hammer everyone and everything in it, but please, we all know this firm would be done for without gov't support. The mere fact that we have to listen to just how brilliant these fuckers were/are when all along they only exist because of gov't support is enough to get any thinking person a bit irritated.

    ~~~

    BR: I have pretty much burned every bridge there is to burn in the industry - it has nothing to do with that. I am less sure that GS would have disappeared, as opposed to Citi and BofA, who were toast.

  35. dawase Says:

    I think Singer has it right. Normally, I wouldn't join the chorus of "I agree"s, but this is too big an issue.

    And frankly, BR, you're too smart for this completely bullshit post. At the end of the day, GS is paying out a taxpayer-sponsored bonus pool.

    One thing you left out – The complete abrogation of liquidation preferences. Why have bankruptcy laws if the government can rewrite them at will?

    ~~~

    BR: I agree that AIG should have been liquidated and GS disgorged their ill gotten $19b.

    But that is very different from saying the performers who generate revs/profits should not get their bonuses.

  36. Mannwich Says:

    I agree with danm. Barry – why bother hammering this culture when you rationalize some things in it and not others? I realize that you're trying to be a pragmatist but part of me thinks you do this just to fire up the minions here at TBP a bit so you can look like the "good guy" in the process, when in reality you're just part of the machine on Wall Street that is killing this country .

    ~~~

    BR: I am part of the machine. But I try to be objective and honest and critical and pragmatic about what I see. (Its a niche abandoned long ago by the big firms).

    So far, I have seen arguments in this thread that there should be no Wall Street or Capital markets or incentive pay or profit sharing or concentration of wealth or millionaires.

    Please make an objective assessment as to how to implement any of these ideas.

  37. Mannwich Says:

    @cvienne: Not to be picky, but there are PLENTY of taxpayer subsidies and their implicit monopolies in professional and big-time college sports. Tax paying suckers get duped into funding stadiums for all these wealthy entities and that subisides indirectly affects (pushes up prices) for everything else related to those entities, including players' salaries. Without taxpayer subsidies for stadiums, the owners would have to find a way to pay for these money-losing boondoggles themselves and most wouldn't do it. This would result in lower salaries for everyone else.

  38. HarryWanger Says:

    I have no problem with the best in the game getting bonuses they deserve. I think what we see is a lot of jealousy from those who try to defend capitalism but then hate to see it in action. They cry that Obama is making a socialist state yet when true capitalism is on display they balk.

    I've been indicating to people for quite some time to share in the wealth by buying into the market. We are undoubtedly and inarguably in a mini economic boom. Look at the incredible results being posted by INTC, JPM. If these guys can navigate such rough waters and come out big winners, there employees deserve whatever bonuses they deem necessary.

  39. cvienne Says:

    @Mannwich

    At least the local citizens get a VOTE on whether or not to subsidize a stadium…

    ~~~

    BR: Not always !

  40. contrabandista13 Says:

    It's kind of like back in the late seventies and early eighties, the kids would jump into bed with me on Saturday morning and we would tune the TV to championship wrestling and watch the choreographed matches of Good vs. Evil. That's all business, politics and the media are in this country today, just one big championship wrestling pulling on your emotional strings…

    GS is what…. The Iron Sheik….? and….. Tim Geithner is who…. "FROM FLATBUSH AVENUE IN BROOKLYN NEW YORK…! THE PRETTY BOY….! GINO DE PASQUALE…!" Who jumps into the ring with the enthusiastic applause of the spectators, and immediately, to the shock and astonishment of the crowd and my daughters sitting in bed next to me, gets his ass stomped into the ground by the Iron Sheik.

    Now, that's entertainment…

    Best regards,

    Econolicious

  41. Rikky Says:

    >>At least the local citizens get a VOTE on whether or not to subsidize a stadium…

    not necessarily true. look at yankees stadium. bloomberg came up with the plan and did what he wanted. there are some very nice subsidies in the package for the yankees. but hey it's good for NY and good for baseball!

  42. Mannwich Says:

    @cvienne: Most folks do (and are too emotional and stupid about it when they do vote, not realizing they're rooting for laundry anyway nowadays), but here in Minny, they find a loophile to ram through the Twins new ballpark WITHOUT our vote even though we denizens of Hennepin County are paying for it. Me-thinks that's "taxation without representation", no? Don't get me wrong, I'm glad the Twins will play in a real baseball park outside (during the summer months), but I didn't even get to vote. The owner here is a billionaire and could have paid for the whole thing. Instead, they're paying almost half. To add insult to injury, they were too cheap to pay for a retractable roof, so games in April and October are going to be a joke, if they even play them at all.

  43. atswimtwobirds Says:

    We need a financial transaction tax (tobin tax) to redirect to redirect the energies of creative smart people like our host(and GS traders) away from financial speculation to more productive parts of the economy.

  44. LeeX Says:

    I don't know exactly how they "earned" (or scammed) that much money, and I don't care. These people are a cancer on society. Here in the boonies where the peasants live, you know, the folks who make real stuff like food and machinery – we are struggling to get by on a few crumbs. What in the world is happening to this country? The predators on Wall Street make ginormous money while ordinary people are trying to avoid financial calamity every day, and too often losing that fight.

    ~~~

    BR: Hence, the basis of our disagreement.

    Like your iPod? It is courtesy of capital markets that Apple raised cash, went public etc. Google, Cisco, Yahoo, etc the same.

    Try not to paint with too broad a brush. Distinguish between legitimate business in capital markets and the scammers, criminals,thieves and dirtbags.

  45. Marcus Aurelius Says:

    Nothing is immoral, unethical, or obscene to a person with no conscience or compunction. That's why we have laws.

    We all understand that criminality, in the form of fraud, committed specifically by "the banks" in league with "our government" (by both commission and omission, and at all levels) was what led to our current dire situation. That the money has been laundered and blessed by having passed through the corporate non-entity before being distributed among the participants in the underlying crimes is little consolation to those who have been robbed.

    The most telling and basic analysis of why such large bonuses are wrong, dangerous, and repugnant in the extreme is to observe that there are enriched "financial services" insiders on one side of the equation and defrauded (and increasingly destitute) investors and taxpayers on the other - with no net benefit or improvement in production levels or capacities, incomes, or balance sheets to be found.

    We have witnessed (as one would witness a crime) the largest illegitimate transfer of wealth in history. That wealth went from the many to the few in a very complex and entangled scheme involving new "financial products," dishonest ratings, and tortured accounting principles. All guarded by the corporate veil and supported by the corporatist government structure (a silent coup, indeed).

    The sad thing is that we know what happened and we are watching it continue. No SEC or FBI investigations? No indictments under the RICO act?

    Under legitimate government, we would let the bonuses be passed out and begin the RICO investigations starting with the recipients and following the money backwards. I don't think you'd have to dig very deep before you hit your first crime.

  46. Andy T Says:

    Ridiculous post BR. Singer absolutely nailed it.

    Additionally, the banksters are the very first people to receive the Dollars from the FedRes. They are given the cheap access to unlimited funding now. So, it's not like these hot shit traders are operating on a level playing field of any kind.

    That said, GS does have some excellent prop traders who can make money from nothing. They deserve some bucks. But, how much money should the Phibro guy get? He was using money from the taxpayers to lock in huge "cash and carry" trades when the oil market was severely contangoed. Any monkey could have made the $$s with those assets and, more importantly, the cheap cash!

  47. Mannwich Says:

    And on cue over at Naked Capitalism…….I read the William Black article yesterday as well. A very thoughtful piece.

    http://www.nakedcapitalism.com/2009/10/does-banking-contribute-to-the-good-of-society.html

  48. jdmckay Says:

    The focus on the bonuses of top performing traders and investment bankers is misplaced. There are many, many things to be upset about regarding the financial sector - but bonuses are not one of them.

    Couldn't disagree more.

    Especially at GS… there is very little real value added by these crooks: trading gains based on opportunistic electronic sophistication is one thing in a healthy economy. But these guys were at the core of everything that crippled US economy, and the same methods/practices continue in spades.

    I would go back to your articles around election time citing ideas like a Manhattan Project for economics and such, and compare that to the rolling-the-dice strategy Obama has carried over from Bush.

    GS is at the heart of that… a cancer AFAIC.

    We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is.

    Sheesh… it's a corporate welfare system w/a CAPITALISM sign hanging out front. This thing has degenerated into reap the spoils, take what you can get, and the hell w/identifying real underlying value, much less badly needed economic initiatives which CAPITALISM has entirely ignored and demonized.

    Love your blog, get a lot of great info here. But you sure miss the boat on this one Barry… seemingly ignoring everything you wrote on circumstances and practices that got us here.

  49. Mannwich Says:

    If one ultimately connects ONE too many dots, one may not ultimately like where those dots lead………

  50. Marcus Aurelius Says:

    "Sheesh… it's a corporate welfare system w/a CAPITALISM sign hanging out front."
    ______

    Ha!

  51. SINGER Says:

    As a general proposition, I am all for bonuses. I think the issue here is not so much the bonuses, in and of themselves.

    If I worked at GS I probably would take the bonus money offered to me as an aspect of my contractually agreed upon compensation package, even in the current circumstances.

    I think the real issue is the disdain that has built up, and rightly so, over the cozy relationship between: current government officials (judicial, legislative, and executive), former government officials, and current and former employees/partners/etc. of the major investment firms. This is what rubs people the wrong way.

    The distinction between the public and private sector has become blurred and the common factor between both is that neither is looking out for the taxpayers, (why we pay taxes like we do is another issue), and/or the common man/society.

    Not only that, but all this bailout money, etc. might be justifiable if it were really being used to innovate in an entrepreneurial and productive way, but alas, it appears not to be.

    Basically, people made bets that made short term money, got paid bonuses for that, those bets went south, the government/taxpayer stepped in and replenished their funds, they made more bets, which are now profitable in the short term and they, again, collect bonuses for those bets.

    Another part of the disdain is an inevitable jealousy, which although common among normal people toward those with high levels of success and wealth, is distinguishable with regards to sports/music figures and the likes of GS.

    I know that whatever I do, at this point, I will never be Peyton Manning, Lebron or Springsteen, so I can respect their individual success without being too jealous.

    On the other hand, if the government handed me $10 million at 0% and let me trade any market, I believe I could make a nice profit, after paying back my interest free loan. Therefore, because they, the ones with the cozy relationships to the government, get this boatload of cheap money to trade the markets with, and make sick money on a bounce that was pretty callable, and make huge bonuses because of that access to government money, that understandably engenders jealousy and ill will.

  52. rootless_cosmopolitan Says:

    Harry Wanger,

    "I've been indicating to people for quite some time to share in the wealth by buying into the market. We are undoubtedly and inarguably in a mini economic boom."

    This must be based on a new definition of "economic boom". Latest data for retail sales: down. Latest data for business inventories: down. But the "economic boom" is "undoubtedly" and "inarguably" here. Bullying posture of Harry "knows it all" Wanger instead of arguments, analysis, and substance.

    "Look at the incredible results being posted by INTC, JPM."

    Go ahead and buy Intel shares then, Harry. They have been doing really great for the last 10 years.

    rc

  53. carol7 Says:

    Barry, I could not believe my eyes reading your post…, I was relieved by all but 1 commentator.

    like dawase says: I think Singer has it right. Normally, I wouldn't join the chorus of "I agree"s, but this is too big an issue.

    The City example doesn´t cut it; it might have been + $ 600 million (well, $ 500 million after his $ 100 million bonus; why can he claim a hedge fund type salary, when on his own he could never get his hand on the money amounts to play with, like he did at City?), but how would it work out when he had hedged his bets for $200/bbl oil, like GS projected? The Phibro thing is a prime example of heads I win, tail you stupid taxpayer lose.

    KidDynamite: ¨that is the whole point… don't hate the player – hate the game. GS's job is to make money and get paid. they are good at it. They had contracts with AIG. the government gave AIG money so that it could make good on its liabilities – and that makes you hate GS¨

    ?????
    Without players no game, sorry Kid, but after you´ve grown up, you´ll realize that players and game go together. And if players are gaming the game, then we have all the right reasons to be very upset!
    You're reasoning like that bullying schoolkid: ¨If that other kid had not let himself be bullied, I would not have done it¨, or that thief: ¨If they had locked the door, I would not have stolen¨.

    ¨GS's job is to make money and get paid. they are good at it¨
    UTTER NONSENSE
    GS job is to EARN their living IN SOCIETY. They do not operate in a vacuum you know. There is ´collateral dammage´. Plus.., GS was so good at it, that their derivatives portfolio and other gambles were imploding in their faces September ´08.
    By the way, how much money would you have made, borrowing at 0%, riding the liquidity induced stock market rally, getting fees for selling loads of Treasuries (to pay for your bail-out), etc.?

    Barry, after having read the comments above and given this outrageous, paid-for-by-the-unwilling-taxpayers bonus issue some more thoughts, what´s your take now?

  54. Mannwich Says:

    @carol7: I don't think Barry cares. He's "getting paid". He's "good at it".

    ~~~

    BR: What I am getting paid for is intelligent insight…

  55. SteveC Says:

    Barry, the people you list like Lebron James, Bruce Springsteen, or Tiger Woods are essentially sole proprietors. They are main attractions and true rainmakers. For the majority of bankers at GS, their success has more to do with the name GS on the top of their cards (along with their access to the US treasury), than actual skill. Doug Kass says there are very few real rainmakers in the business world, and I agree.

  56. Init4good Says:

    Whatever percentage of those firms that are "owned" by "the government" (via TARP, TARP+, or bailout) – the same ratio should be used to determine the percentage of trading profits that should be "clawed back" to the taxpayer.

    If a firm is 75% owned by the gov't then 75% of the trading profits should go back to the government.

    If an entity is totally 100% owned by equity or private debt – then they can keep 100% of their trading progfits.

    How's that for an incentive to "get off the dole?"

  57. Init4good Says:

    <>

    True

  58. Marcus Aurelius Says:

    Singer:

    The whole sports figures/entertainers vs. the bankers analogy is bullshit. It's like comparing Al Capone to Charlie Chaplain.

    Your comments on jealousy, especially your last paragraph, seem misplaced and a little logically twisted. True, you'll never be a rock star, and you aren't jealous of rock stars - yet you say that jealousy exists against the banking class because of their "success and wealth." You then tie this "success and wealth" to insider connections and access to free money. So, it's not the wealth, it's how the wealth was obtained that irks people. By extension, it's not jealousy you see, it's anger. Bill Gates is a wealthy man, but no one is pointing a finger at him, 'cause he's legit.

  59. Mannwich Says:

    I have FAR more respect for the likes of Lebron James than I do Lord Blankfiend. One has real talent. I honestly don't think most of our culture cares about what elite athletest or movie starts make. I hardly EVER hear that being discussed anymore by sports fans, whereas in prior years it was discussed all the time. I think most have accepted the fact that these folks have special talents that very people in the world have, so they're OK with it for the most part.

    @MA: Great comparison. Spot on.

  60. blueoysterjoe Says:

    What Singer said:

    "To the extent that these GS bonuses are directly related to the items you listed as things to get upset about, I disagree."

    Yup. Let's give them bonuses after we subtract all the largess they have extracted from the taxpayer due to their buddy buddy status with the White House.

  61. Daffyorbugs Says:

    I want to be in the investment bankers union.

    Strongest union ever.

  62. Mannwich Says:

    Try rationalizing Goldman's bonuses to these people. It's going to be a fun holiday season when all the garish numbers start trickling out.

    http://www.nytimes.com/2009/10/14/business/economy/14income.html

  63. KidDynamite Says:

    wow BR – i'm surprised i'm the only one who agreed with your post!

    Carol – my point is that your anger is misplaced. The bailouts were a massive clusterf*ck initiated by Paulson, Bernanke, Bush, Frank etc etc… You cannot blame the recipients of the money for the lack of foresight of the idiots handing out the money. I completely agree that when money was given to the banks (and newly chartered banks, like GS) there should have been severe restrictions. but guess what – THERE WERE NOT! That's the fault of the lawmakers – BLAME THEM. The whole process was sick from top to bottom, and was evidenced from the beginning that the government got significantly inferior terms for their investment when compared to private investors like Warren Buffet. but again – that's not the fault of the recipients. It's the fault of the lawmakers. Vote them out of office.

    ps – yes, i know GS has tremendous influence and connections within the government – so what – total strawman argument – VOTE THEM OUT if you don't like it! That's how America works.

  64. SINGER Says:

    @MA

    I agree, it is anger, too… I think we need MEH to put up the definitions of anger and jealousy from that search engine he always quotes from…

    I was talking generally about how people have a tendency to be jealous of the successful and wealthy, from whatever field for whatever reason, whether it be a self-made oil billionaire, to a trust fund kid worth 100 million through no effort of their own. I was distinguishing that sort of general jealousy with that of the GS'ers and that ilk, who got help and dough from the govvie…

    I wasn't really talking about "bankers". There are people who have run hedge funds ,etc. and real traders at these major firms that have and continue to make money on their skills and merit. So my analogy isn't Al Capone to Charlie Chaplin, cuz not every Wall Street player is Al Capone-esque or a criminal.

    BTW, didn't Gates steal stuff from Apple and even "Warr Buff" was a Silver manipulator, upon information and belief, see the Martin Armstrong literature…

    Also, see my last line, "jealousy and ILL WILL" i.e., anger…

  65. Mannwich Says:

    @KD: Because you and BR are IN the business. Don't you get it? You can't totally disavow things that go on in the industry because that would be too sobering to admit to yourself. You HAVE to drink SOME of the kool aid? I, on the other hand, stopped drinking the kool aide in '06 and never went back, nor will I ever.

  66. SINGER Says:

    @Kid Dyn

    How can I vote them out? All I could theoretically do is vote for my congressman and senator from NY. So I can't vote them out. If everyone banded together, then there would be a chance.

    BTW, the GS'ers and the like have foreseen your logic, which is why the contribute mightily to the campaigns of those politicians. So while I and whoever is with me try to "vote them out" since "we don't like it", the GS'ers, et al. will be funding their being voted in…

  67. cvienne Says:

    @KidDynamite

    While I see your premise (vis-a-vis "lawmakers")

    Don't forget that it was the banks themselves that shoveled the campaign contributions TO the lawmakers to get them to do their bidding in the first place…

    Therefore, it revolves back to THEM…

  68. cvienne Says:

    Singer & I…

    Same concept… Same time stamp…

  69. Mannwich Says:

    Voting is a waste of time and energy (and money for me this past election). I won't make that mistake again.

  70. KidDynamite Says:

    mannwich – see, the interesting thing is that i am no longer in the business. i'm not one of those hypocrites that wants low taxes for the rich when i'm one of them, and high taxes for the rich when i'm not one of them. but i don't want to get off topic.

    SInger/Cvienne – it boggles my mind that you're using the "but the lawmakers are bought and paid for" argument as one that renders you helpless. COME ON! Singer – 1) vote out your congressman from new york. That's what you can do. That's what i tried to do! Now i'm moving to New Hampshire (yeah! LIVE FREE OR DIE!) where my new senator is trying to end TARP funding. i will support him in that. 2) you have a blog/website/voice/intelligent demeanor. EDUCATE people – EXPLAIN to them how much the lawmakers fk'ed up – and how we need new rule (change we can believe in -- hehehhehe). 3) use the populist anger around Goldman Sachs to explain that it's the policies of Barney Frank and the senate finance committee that made such largess possible – spread the word.

    you guys using the "banks get lawmakers to do their bidding for them" are proving my point: the problem isn't the banks – IT"S THE LAWMAKERS!

  71. KidDynamite Says:

    mannwich – with the comment that "voting is a waste of time" you are basically forfeiting any say you have in this or any other debate. if you don't like the bonuses GS is paying and the money they are making, you can work to get that changed (regulations, Glass-Steagall, etc), by campaigning (to spread the word) and voting. if you don't want to do that, well, then, I can't think of a nicer way to say STFU! (And i mean that in the nicest way possible, really).

  72. SINGER Says:

    Sorry, KD. No time. I got Giants, Yankees, and Rangers games to watch…

    Plus, saying the "it's the lawmakers" is oversimplifying it. But yes, the lawmakers are part of the problem…

  73. Dennis Says:

    How is it on our dime? They repaid the TARP in full

  74. Wednesday links: momentum effects Abnormal Returns Says:

    [...] handwringing" about record-breaking Wall Street bonuses. (WSJ also Big Picture, FT Alphaville, Rolfe [...]

  75. Lugnut Says:

    Is it ok to be pissed about how their obnoxious wives flout their largess to the great unwashed?

    http://blogs.reuters.com/reuters-dealzone/2009/08/05/mixed-messages-from-goldmans-first-family/

  76. Transor Z Says:

    I'd agree if this were true capitalism, but Barry you can't decry TBTF bailouts and regulatory capture on the one hand and defend bonuses paid to incompetent/corrupt persons benefiting from that tilted playing field on the other. WTF?

    GS was insolvent last year and that should have been that.

  77. Barry Ritholtz Says:

    This is what I am upset about:

    • Paying people in year one for risks that last years or decades;

    • The "privatized gains, socialized losses" of the current system;

    • Dramatically reduced competition in the Banking sector;

    • The idea that "Too Big To Fail" is now an official policy of the United States;

    • The "gifting" of $100s of billions of dollars to mismanaged banks that should have been allowed to fail in a controlled fashion;

    • Bank lobbyists preventing any sort of credible regulation from passing;• Goldman Sachs wresting $19 billion from AIG;

    • The absurd and poorly thought out $750 billion TARP plan;

    • The suspension of mark-to-market allowing banks to hide losses and not accurately disclose their bad assets;

    • The outsized influence Banks have on Congress and Goldman Sachs has within the Executive branch.

    Bonuses paid to profitable employees who generate real revenue do not bother me.

  78. M Says:

    "There are plenty of things to be upset about these days. Top performers earning huge paydays at the biggest firms is not one of them . . ."

    Hate to add a "me too" but really, BR, your post reeks of sophistry.

    Why, exactly, should tax payers be unconcerned that "top performers" (who's standards of performance are undisclosed) are getting huge paydays working for the "biggest firms" (in this case a firm that has been bailed out and is making profits at the public expense) when other public employees are taking huge pay cuts (eg. teachers in my state just took an 8% pay cut)? Sure there are other things that we can easily be upset about in the Big Picture, but many folks are upset at the bonuses because they have every appearance of a taking from taxpayers and because in a time of shared pain it is distasteful even unpatriotic, for folks to leverage government welfare into personal wealth.

  79. ben K Says:

    I see what you are trying to do - chase away the non Wall Street readers so your demographics show higher incomes, and hence your advertising revenues are much higher. Very clever, Barrysan!

  80. njtking Says:

    Barry,

    You should completely refrain from commenting on Goldman Sachs as your are obviously a huge fan boy just like Cramer. Goldman should have collapsed just like Bear and Lehman but they got bailed out.

    Give it a rest. I use to respect your insight. Now I just laugh at you like I laugh at Cramer.

    You are talking your position…give it a rest and stop kissing GS @$$. Pathetic!

    ~~~

    BR: I have no position in GS, and have been VERY CRITICAL of Goldman Sachs at this blog over the years:

    How to Puff Up Earnings, Goldman Sachs Style
    http://www.ritholtz.com/blog/2009/04/how-to-puff-up-earnings-goldman-sachs-style/

    Backdoor Bailouts for Goldman Sachs?
    http://www.ritholtz.com/blog/2009/03/backdoor-bailouts-for-goldman-sachs/

    Is Goldman Sachs Trustworthy? (No)
    http://www.ritholtz.com/blog/2009/09/is-goldman-sachs-trustworthy/

    The Goldman Sachs Tax
    http://www.ritholtz.com/blog/2009/07/the-goldman-sachs-tax/

    Treasury/Fed: All Goldman Sachs, All the Time
    http://www.ritholtz.com/blog/2009/01/allgoldman-allthetime/

    Feel free to disagree with me, but at least get your facts straight . . .

  81. rootless_cosmopolitan Says:

    Transor Z,

    "I'd agree if this were true capitalism"

    What is "true capitalism"?

    rc

  82. Lugnut Says:

    PS – IBs are a tax on the capitalist process

  83. KidDynamite Says:

    RC – i would guess that TransorZ meant that in TRUE capitalism, the insolvent banks would have failed, rather than been bailed out

  84. Marcus Aurelius Says:

    BR says:

    "Bonuses paid to profitable employees who generate real revenue do not bother me."
    ________

    Reminds me of the Mish/Denninger debate over fractional reserve lending.

    What, exactly, is "real revenue?" Was anything of value created or was value added to anything that resulted in "real revenue?" Is a profit actually realized if the losses are not counted? Arbitrage is easy for insiders if the markets are rigged.

  85. bsneath Says:

    @BR: "That is a very different argument, and we are then talking about Bill Gates and Warren Buffett and George Soros and Steve Jobs . . . ."

    I can distinguish between Gates and Jobs whose personal wealth is created as a result of adding significant economic value to the benefit of many and Soros, Hedge Funds & Investment Bankers who transfer and concentrate wealth without creating economic value (except for the esoteric efficient capital argument). Gates' and Jobs' wealth are dependent upon a strong economy and the concurrent creation of wealth for others. I would be more than happy to see 1,000 new Gates and Jobs because their wealth is the result of economic growth and prosperity.

    Irrespective of the above debate however, Why isn't anyone discussing the risks inherent in a society where income and wealth is increasingly concentrated? I would love to see Krugman address this. I would have much respect for him if he did.

  86. ottnott Says:

    BR, who usually is so good about, well, seeing The Big Picture, has got tunnel vision here.

    He's irked by people who automatically assume that large bonuses aren't deserved, and is having a knee-jerk response here.

    Your list of concerns, which supposedly makes this a thoughtful position on your part, merely highlights what you are missing, namely: he who has the gold makes the rules.

    $23 billion is a lot of gold, enough to influence the rules enough to make it $30 billion next time. And so on.

    You've seen the graphs showing the massive growth of financial services as a % of the U.S. economy, with little to show for it outside of trickle-down spending and massive amounts of unserviceable debt.

    Did you ever stop to wonder how that occurred? Do 23 billion reasons help at all here?

    Please, don't insult us with analysis that stops at: they made a bunch of money for clients/shareholders and have earned their cut.

  87. DL Says:

    I'm largely in agreement with all of BR's comments. There's plenty (about Congress and the financial system) to be angry/resentful about, but bonuses at GS is not among them. They paid back the TARP money, so they should be able to do what they want. In any case, I think there's more harm than good in the government trying to regulate bonuses (except where bailed out firms are concerned).

  88. Calvin Jones and the 13th Apostle Says:

    I know who should be mad at the GS bonuses. Shareholders of GS!!! They are taking value out of the company.

  89. jdmckay Says:

    Barry said:

    Bonuses paid to profitable employees who generate real revenue do not bother me.

    Key word there: real. The whole CDS fraud was most certainly not real, nor was it's insurance (AIG… no funds), nor was the entire premise upon which it was all built: that a house of cards is supported from the roof down.

    I don't see GS "profits" as real. I don't see BofA, CITI, Wells or all the others having even fessed up to what they've done. And I'm reading Treasury's management of all these assumed toxic assets by Blackstone is drawing hires from same crowd that created this whole debacle.

    You're entitled to an opinion, no problem. My opinion is that, until a legitimate economy is restored w/fundamentally sound initiatives, these bastards trading around the top can go pound sand. That they get per-centages in 6 figures for creating no value whatsoever…

    ~~~

    BR: Are you suggesting this current bonus pool is made up of CDS profits, or that they are somehow artificial?

    Help me see how that is the case . . .

  90. DL Says:

    BR @ 12:23

    I would disagree with one point here. To the extent that suspension of "mark-to-market" requirements can minimize the need for bailouts, I'm all for it.

  91. DL Says:

    Calvin Jones @ 1:11

    You may have a point there. Shareholders often get the shaft; this is yet another example.

  92. Mannwich Says:

    @KD: I did all that in the previous election. What has changed? Voting out the incumbents is all well and good and I may do that in '10, but if the system stays the same, we will get the same result no matter who's in office. Sorry……

  93. Transor Z Says:

    Barry, I'm all in favor of bonuses paid to honest hardworking people who outperform in a competitive environment. But I thought this post was about Goldman Sachs.

    @RC: One mark of true capitalism is that over-leveraged insovent businesses are allowed to fail.

    ~~~

    BR: heh heh

    I have been pounding the table about letting insolvent banks fail. But the public focus these days seems to be elsewhere . . .

  94. highside Says:

    Sorry Barry but a couple of things get in the way of this argument.

    There are no rank and file traders doing the sort of job that these bonuses are an appropriate reward. After 30 years in this business all I have seen is those who stuff the clients and external shareholders and those who allow the clients and external shareholders to be stuffed. The idea of honest Joes and Joans working in these organisations is a fantasy. That is is the Darwinian nature of this sort of organisational culture.
    Dont get me wrong, I have friends in these organisations but they are not the deserving little worker ants you describe. They either left or were morally compromised years ago.

    These bonuses are the the result of the profits obtained from interest rates massively subsidised by the taxpayer on the liability side and still over leveraged balance sheets protected by the taxpayer. The authorities are hoping that the banks can generate sufficient profits from their solvent customers to recapitalise their balance sheets. I suspect even Mr Bernanke is startled by how much of that profit is going into individuals pockets rather than recapitalising balance sheets

  95. Greg0658 Says:

    comment over 8:06am
    "BR: I am not referring to the AIG FP people, or the JPM derivatives creators - but the rank and file traders bankers who do their jobs and make money for their employers."

    I don't think we can allow the separation of profits on bankster acitivities as legal activities.

    Its like saying "it's time to Legalize All hallucinogenic addictive Drugs" .. it's commerce damnit .. and J6P needs a garage business startup now

  96. Mannwich Says:

    And let me be clear (to borrow an oft-used phrase from the O-man): I have ZERO problem with successful firms who pay their top performers whatever they deem to be equitable, as long as those the gov't was not in any way involved in propping up those firms. Otherwise, we taxpayers should have a say (I know, how quaint) in what these fuckers are paid. I'm not againt people making big money (or jealous of, for that matter), but the system on Wall Street with our politicians' help only guarantees that we will see another blow up in the near future, maybe even sooner than we think and bigger than we think. Constantly bailing out failing firms and industries only insures that such bad behavior will continue. After all, if one is rewarded for bad behavior, why change one iota?

  97. Mark E Hoffer Says:

    BR: I already am!

    Its pretty ironic that after I have spent years trashing the Wall Street execs who caused this mess, no one else seems willing to defend the legitimate rank and file workers who were profitable and risk aware and didn't cause the problem.

    AIG had 86,000 employees, their FP division that killed the firm had just 400. Lehman had 25,000 employees, Bear Stearns had 16,000; The vast majority of these workers - my guess is something in excess of 95% - had nothing whatsoever to do with the collapse."

    BR,

    carol7, above, hits on it, with: "BR: I already am!

    Its pretty ironic that after I have spent years trashing the Wall Street execs who caused this mess, no one else seems willing to defend the legitimate rank and file workers who were profitable and risk aware and didn't cause the problem.

    AIG had 86,000 employees, their FP division that killed the firm had just 400. Lehman had 25,000 employees, Bear Stearns had 16,000; The vast majority of these workers - my guess is something in excess of 95% - had nothing whatsoever to do with the collapse."

    LSS: maybe, we should re-view "The Sting"
    http://www.popentertainment.com/thesting.htm

    past that, Singer*, MA, and many others make valid points..

    but, it's good of you to open up this line of discourse, it's, yet, another boil to be lanced..
    past that, *
    http://www.thefreedictionary.com/anger
    http://www.thefreedictionary.com/jealousy as jealousy is, most, commonly used, it ~ envy..

  98. Bruce in Tn Says:

    Barry:

    Would you feel the same if, over the last year, your firm went head to head with Goldman with all the advantages they have? If GS had put you OOB, you mean you'd say," Well, gee, the better firm won…"

    Think about it for awhile…this is what the readers are getting at…

    ~~~

    BR: We did, we're still standing.
    (we are a flea on their arse, but . . . )

  99. Mark E Hoffer Says:

    nice cutting 'n pasting..

    carol7: The City example doesn´t cut it; it might have been + $ 600 million (well, $ 500 million after his $ 100 million bonus; why can he claim a hedge fund type salary, when on his own he could never get his hand on the money amounts to play with, like he did at City?), but how would it work out when he had hedged his bets for $200/bbl oil, like GS projected? The Phibro thing is a prime example of heads I win, tail you stupid taxpayer lose.

  100. mcHAPPY Says:

    Barry,

    All of your bullet points are valid and I'm sure most here agree.

    "Bonuses paid to profitable employees who generate real revenue do not bother me."

    The question I have for you is:

    Could GS have generated any of this "real revenue" without market manipulation and government intervention? The answer is clearly no because the company probably should be out of business ala BS and LB.

    The response that profitable employees deserve bonuses doesn't hold much weight either given the above. Continuing with the sports analogy – in 1992 World Series, Joe Carter hit a game winning homerun for the Toronto Blue Jays. Everyone on the Blue Jays got a World Series ring because they won – obviously. Well, why didn't everyone on the Phillies get a World Series ring except Mitch Williams – I mean, he was the one who gave up the homerun, the Phillies would have most likely won except for him. ANSWER: Because they win and lose as a team. Winners are not supposed to be picked or chosen – except on Wall Street, obviously.

    ~~~

    BR: 1) That is why we should be upset at Paulson/Bernanke/Bush for cutting such a terrible deal;

    2) The firms that repaid the TARP - what should their ongoing obligations be? (I don't know)

    3) Are you arguing against anyone earning a Wall St bonus, or just against Bailoutees ?

  101. Mannwich Says:

    Thank you, Bruce. It's ALL connected and that's why many of us have a problem with this. To dismiss this as mere "jealousy" or "envy" is a copout and misses the bigger picture and point.

  102. bsneath Says:

    @Barry Ritzholtz: "We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is. You can complain about it, but it is all but pointless. Feel free to pursue a millionaire's tax of 1% (or 10%) on everyone who earns more than $1m - a super top tier - to pay for health care reform or whatever you want. (Best of luck with that!)"

    (Best of luck with that!) – pretty much sums up my first point.

    Republicans have always represented old money and opposed progressive taxes and wealth redistribution efforts.

    Democrats of past generations were concerned with the inequalities of income that are inherent in a capitalist system and promoted high marginal income tax rates.

    Intellectuals from both the left and the right acknowledged that a strong society needs to have a strong middle class.

    Today the Democractic leadership has become a part of the wealthy class. As is human nature, they have rationalized personal wealth preservation with their liberalism and no longer advocate for higher marginal income tax rates to achieve wealth redistribution. Today they are in agreement with Republicans in this area.

    Thus that wealth is becoming increasingly concentrated and the middle and lower classes are becoming increasingly unable to maintain standards of living. Jobs are going away, wages are declining. There is a risk of collapse of the entire system.

    Of course capitalism is not equitable. It is a meritocratic system and some will do and should do much better than others.

    However, it needs to be fair and it need to recognize its inherent tendencies towards the excessive concentration of wealth. That is, to the extent that society can make it so, capitalism should not allow some to gain advantage over others when not because of merit, but because of wealth, power or influence.

    I agree with your list of items that folks should be concerned with. But that being said, wealth, power and influence will always lead to the further concentration of wealth. If unchecked, if wealth continues to accumulate in the hands of a few when the majority are experiencing permanent declining living standards – as they are so doing today as we debate – then it will ultimately destroy system. It will kill the Goose.

    Today we have nearly 20% unemployment and underemployment. We have bankrupt pension funds and devalued 401Ks. Housing wealth in the middle class has been destroyed. The workng classes have seen declining real incomes for many years – something that was hidden due to excessive bank credit. We are running deficits equal to 15% of our GDP just to keep job losses from becoming worse. And bank bonuses will be the highest in history!

    I believe we are in a battle for economic survival. Our leaders do not, apparently cannot understand who they should be fighting. Therefore they are not able to take the actions needed to prevent our economy's collapse or more likely its demise into mediocrity.

  103. Mannwich Says:

    I don't know why, but after reading this post (and several others here at TBP before in recent days/month), the term "jump the shark" just keeps popping into my head. Won't go away.

    ~~~

    BR: I calls 'em as I sees 'em and let the chips fall where they may . . .

  104. Bruce in Tn Says:

    http://www.cnbc.com/id/33308407

    Fed Unlikely to Start Raising Interest Rates for Years: Mishkin

    …And as bsneath mentions…the Fed here has chosen to vote against the older (or younger) saver at the advantage of the investment banks…the elderly, as I have harped on, will not be putting away new money into stocks, but rather are now eating their seed corn with these interest rates.

    However you think it happened Goldman and the other IB's made terrible investment decisions and have been given a taxpayer mulligan. These businesses are continuing to be favored, October 2009, over the individual citizen. No, it is not right.

  105. vasco7777 Says:

    "The traders who throw off the most profits, the bankers that generate the most lucrative deals are worth tens of millions to their "team owners."

    Right…and recently I read this:

    "These instruments were so complicated. One of these - I'm talking now about ABS CDOs, and actually the CDOs-squared are even worse. Merrill created one. I picked one particular one. To actually model out the things that are inside an ABS CDO [is difficult] because derivatives are already inside the CDOs. They're already derivatives created out of derivatives. So you have to go way underneath to get to the actual pools of mortgages. To model correctly one traunch of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. – John Thain, October 2009″

    and recalled this: http://www.bloomberg.com/news/marketsmag/mm_0208_story1.html

    So, MIT educated, trained "smartest guy in the room" Thain, former (very well paid) MBS Trader and later (REALLY well paid) CEO of GS, (a leading issuer of ABS/CDO/CMO etc during his time) and then later (REALLY well paid and seeking more) CEO of badly injured (by overpaid and irresponsible Stan O'Neal) Merrill (grand puker of securitized mysteries) admits to not really understanding these products. That might explain why Ken Lewis and the public didn't know the full extent (or did he?) of the toxic and incomprehensible sludge lying in wait but I digress. Back to bright bulb Thain's lack of insight into one of the single biggest cash cows for GS and the entire street. If he didn't get it did Paulson? Did/does Blankfein?

    I guess my point is how did/do any of them justify their astronomical pay packages (and SOX certifications based on valuations they could not comprehend which makes it hard to understand how they could sign off on financials) if they were clueless about the massive ramp up in these businesses? They were all part of the same crew running the place.

    So the CEO's got paid, all those bankers and structurer's got paid for inventing crap even they couldn't understand, marketers, traders et al, ALL got paid handsomely and what happened to investors and shareholders when the music stopped? Remind me about TALF and TARP…or maybe I'm being tangential here.

    When this Fed fueled ramp job of a stock market inflates beyond its absolute PSI limits (though GS $100MM trading days are sure going well) is anyone going to get called on it? I read comments from "strategists" wondering if the retail guy on the sidelines might jump in now that the Dow has regained 10,000. Where have we seen this movie before? Isn't that like Murray the Mayor of Amity inviting the people back in for a swim in Jaws?

    OK…let's let bygones be bygones and not get too nit-picky. I guess I can see your point.

    ~~~

    BR: That is not remotely what I am saying.

  106. DeDude Says:

    "Look at Citi dumping Phibro - that's $600M in revs lost, becuase people were upset the person who generated those revs was paid $100M bonus as per K"

    Well they earned 600M one year taking a huge risk with company money. What about the 600M loss they would have taken the following year (if not shot down), would they have been forced to pay back a $100M negative "bonus" the following year when their gamling bets lost instead of win?

    Then there is the issue of the damage to society and hard working people that these commodity speculators are doing. If the banksters didn't own so many lawmakers these people would be in jail and their loot confiscated. Danm is absolutely right that most of Wall Street is just a non-productive top layer on the real economy just skimming profits. The commodity gamblers on Wall Street are the worst of them, they not just skim profit from the real economy they are destroying it. The productive and legitimate capital distribution function of Wall Street has become a minor side-business done at the end of a days worth of "sucking-dry-whatever-comes-within-reach" "work".

    I do agree that any contract that was given to workers in the banks should be honored. But I also think we have to make sure that no more contracts are written that give the financial company employees incentives to do things that are destructive for their company or country in the long term.

    ~~~

    BR: The head of Phibro is probably the most profitable trader in oil the past decade (much better then T Boone). He's gone, with his revs and profits.

    Yeah! The taxpayer wins!

  107. bsneath Says:

    ottnott Says:

    "You've seen the graphs showing the massive growth of financial services as a % of the U.S. economy, with little to show for it outside of trickle-down spending and massive amounts of unserviceable debt."

    Well put!

  108. Boo-urns Says:

    DL, your comment seems naive at best. Yes, Goldman paid back their TARP money. But yes, they also continue to benefit from the $23 trillion or so of non-TARP support that the Fed, FDIC, and Treasury are offering to support Wall Street against their massive losses. And yes, they are benefiting from their lower cost of capital because every investor out there knows that if Goldman gets in trouble, the US Treasury (that's us taxpayers) will bail them out again.

    So should Goldman go back to business as usual, when business as usual means that if their risk gets outsized again, the US taxpayer has their back? Maybe, if you're a Mussolini-style fascist, that's an acceptable outcome. But I think for the rest of us, we want to see either a real and meaningful end to Goldman's federal support and their status as TBTF (which means they get cut off from all of the Fed liquidity programs designed to prop up toxic ABS and derivatives, and the FDIC TGLP, and they get broken up into smaller firms, none of which is TBTF), or if that's not politically palatable to you, then they are heavily regulated so that they're not allowed to take high risks (whose ultimate costs would be borne by the taxpayer), including the end of structural incentives such as bonuses based on quarterly stated (read: accounting) profits that encourage the buildup of such risk.

    But to say that Goldman has paid off TARP and that's the end of that, well that's just simple.

  109. DL Says:

    Boo-urns @ 2:30

    "they also continue to benefit from the $23 trillion or so of non-TARP support that the Fed, FDIC, and Treasury are offering.."

    Yes, they're benefiting from the low Fed funds rate. But so are many average investors; moreover I think that the unemployment rate will come down faster given the current Fed action than would be the case if money were tighter.

    I do think that GS has too much influence on the Congress, on Treasury, and on the current and previous administrations. But is putting caps on bonuses really going to change that? And if such caps on bonuses were implemented, what steps would GS take to circumvent them?

  110. Mannwich Says:

    @DL: That is precisely why they should have been broken up (and still should be), not made more powerful and even too big(ger) to fail.

  111. mcHAPPY Says:

    BR: 1) That is why we should be upset at Paulson/Bernanke/Bush for cutting such a terrible deal;

    mcHAPPY: No argument here except you can add more names – probably at the top I would add Obama. I've been ragging on Obama hard. For the first time in my life I was not a cynic or skeptic – I truly thought change was coming. Instead the world got a jellyfish. Nothing in terms of economic policy has changed – in fact you could argue it is worse. I am VERY bitter about this.

    BR: 2) The firms that repaid the TARP - what should their ongoing obligations be? (I don't know)

    mcHAPPY: Transparency. Where did the TARP money go? It certainly didn't free up credit as told it would.

    BR: 3) Are you arguing against anyone earning a Wall St bonus, or just against Bailoutees ?

    mcHAPPY: I have no problem with bonuses at companies/institutions who were able to attain those profits on their own – without accounting gimmicks, free money, bail outs, priviledged government information/contacts, or balance sheet destruction for bottom line profit (i.e. massive lay offs).

    Barry, could you answer my previous question? I would like to read your thoughts.

    "Could GS have generated any of this "real revenue" without market manipulation and government intervention?"

  112. DL Says:

    Mannwich @ 2:47

    I'd rather break up Citi or B of A; they're the ones who screwed up.

    Most of all, I want to wipe out the bondholders of bailed out banks.

  113. nemo Says:

    "Bonuses paid to profitable employees who generate real revenue do not bother me."

    It wouldn't bother me either, if I had any confidence that the finance industry is really able and willing to distinguish such profitable employees from the parasites. So far I'm not seeing much basis for such confidence.

  114. lalaland Says:

    Here's my useless analogy: I'm a real estate broker in Brooklyn NY. For many, many years the fee for a rental in BK was a month's rent. Then Corcoran, Elliman, etc. pushed into town and raised the fee to 12% of a year's rent.

    Little guys like me are now at a competitive advantage because we charge less, but I'm at a huge disadvantage in terms of resources. So in 10 years maybe they either a: push me (and all the other little guys) out of business by name recognition, advertising budgets, etc., or b: buy me (us) out.

    And maybe they think "hey, why are we charging 12% in brooklyn when we charge 15% in manhattan right across the river?" Now that they've cornered the market who will stop them, since they are enormous publicly held companies who can raise vast sums vs. a tiny little guy who wants to take them on? So the fees go to 15%.

    You know how the mafia presence in the garbage industry makes garbage disposal more expensive for all? Same damn thing here, whether it's for municipalities, pensions, endowments, etc. Those bonuses are nothing more than increased cost, and someone's paying too much for the services, by a lot….

  115. Mannwich Says:

    I agree, DL, but Goldman would have been wiped out if AIG were allowed to fail, so they're in that group too as far as I'm concerned.

  116. Barry Ritholtz Says:

    McHappy: We are in agreement - get rid of mark to model, add Sumemrs/Geithener/Obama to the mix.

    Let's focus on what we can fix: Pass finacial reform, reinstall Glass Steagall, repeal CFMA, etc.

    The focus on bonused is just so much misplaced energy . . .

  117. DL Says:

    Mannwhich,

    Of all the bailouts, the bailout of AIG bothers me the most.

  118. DL Says:

    "The focus on bonuses is just so much misplaced energy . ."

    Apparently that's happening in Europe also.

  119. Mannwich Says:

    Agreed, DL. Same here. With good reason.

  120. Christopher Says:

    None of this will change as long K Street exists. It doesn't matter who you vote for, or which Bankster party is in the majority.

    The corporations have taken over DC and thus our federal policy on nearly all issues. This is just an easier target than most.

    While the compensation issue is perhaps the least important of the financial mess, it's the one issue that the MSM can dice up into bite size chunks for the unwashed masses. The pay issue is so simple it doesn't even have an acronym. Besides if they are real lucky they can stir up enough hate so that someone snaps….if it bleeds it leads!!

    FWIW….I strongly believe that all this greed will come back to haunt. I do think there will be pushback and repercussions far beyond what any of us would consider reasonable. The mob will get there's eventually.

  121. Christopher Says:

    ugh…

  122. Christopher Says:

    my kingdom for a grammar edit button

  123. Transor Z Says:

    1) AIG

    2) CDS

    3) GS

    4) ~$12 billion

    In sports terms, this is more like multi-millionaire Carl Pohlad (late) pocketing the MLB luxury tax money the Twins got from major market teams instead of expanding payroll. Or Wayne Huizenga crying poor mouth and selling off the Florida Marlins in 1997-98 after winning the World Series. Or Peter Angelos committing his next atrocity on the once-proud Orioles franchise.

    Why is that a more apt comparison? Because MLB has an anti-trust exemption from Congress that shields the league and owners from liability for acting like a cartel of muttonheads around financial issues.

  124. Thor Says:

    I think someone else asked this question – but what percentage of the total bonus awarded was in stock versus cash?

  125. HarryWanger Says:

    Jealousy, Barry, that's all it is for these people. Everyone should get rewarded if they are increasing revenue for the company. We do it here, like thousands of other corporations. Why get so upset about it. Goldman is best of the best, the Yankees of investment banking.

    They should get top bonuses, especially in the current environment – rescuing the company from hell.

    As this economic mini boom takes hold, and we're clearly seeing the evidence of that now, those that navigate to success should be rewarded not chided.

  126. Rikky Says:

    >>Most of all, I want to wipe out the bondholders of bailed out banks.

    would never happen as a good portion of the ownership are foreign CB's and they lose we lose by them not funding our deficits.

    Amazing how the 'greatest country in the world' has painted itself into a corner where we can't make a unilateral move without cutting off our own toes.

  127. ottnott Says:

    At $23 billion per quarter, we are saying that GS's bonus babies are worth a Google in less than 2 years. In what world does that make sense, BR?

    BR wrote:

    "Let's focus on what we can fix: Pass finacial reform, reinstall Glass Steagall, repeal CFMA, etc. The focus on bonused is just so much misplaced energy . . ."

    It is misplaced energy if we are just debating whether the $23 billion should have been a lower number.

    The problem is the bonus model, where the recipients can "earn" massive amounts of personal compensation based on short-term results, yet there are no losses suffered if the sort-term results are poor or if they result in losses in the longer term. Incentive bonuses are fine, but the bonus model in the financial services industry does a terrible job of aligning trader activity with either shareholder interest or with the economic benefit produced by the activities of the traders and their firms.

    The magnitude of the bonuses just increases the magnitude of the misalignment and creates a concentration of wealth and power able to further shape rules and regulations in their favor. The total amount of the GS bonuses for a single quarter, during a deep recession, is about 10X the total amount spent by both sides to elect a President in 2008.

    Consider the Silicon Valley model, where employees and management generally receive stock options instead of massive quarterly or annual bonuses (upper execs. Although there are games played with the timing of options, the options generally reward longer-term results, generally align the employee benefit with shareholder benefit, and generally encourage employees to remain with firms that have a promising future – i.e., firms that seem likely to produce something with a substantial economic benefit. Even the most fabulously successful companies which have contributed important technologies and services to our world don't have the kind of stock gains that produce $23 billion in "bonus" gains to employees in a single quarter.

    At $23 billion per quarter, we are saying that GS's bonus babies are worth a Google in less than 2 years.

    ~~~

    BR: GOOG's Mkt cap = $169.47B
    Do not extrapolate a good Q x 8 consecutive Qs

  128. rootless_cosmopolitan Says:

    HarryWanger,

    "As this economic mini boom takes hold, and we're clearly seeing the evidence of that now…"

    Evidence like the decrease in retail sales and business inventories according to the data that have been released today?

    Or see my comment:
    http://www.ritholtz.com/blog/2009/10/much-ado-about-nothing-23b-goldman-sachs-bonus/#comment-225588

    I am still waiting for your explanations where the great recovery that is predicted by you, is going to come from, or at least for the links where you allegedly have provided your detailed responses, already. I haven't seen any. Nor any response to this:

    http://www.ritholtz.com/blog/2009/10/buoyant-market/#comment-225268

    rc

  129. vasco7777 Says:

    "Jealousy, Barry, that's all it is for these people. Everyone should get rewarded if they are increasing revenue for the company."

    All those structured finance and securitization brainiacs also massively increased revenue (including at GS) and naturally claimed the lion's share of the not surprisingly inflated bonus pools that followed.

    Of course, the writedowns that followed vaporized the previous 20 years worth of gains for some major firms while creating core meltdown at others that no longer exist. Meanwhile the cratering of the stock market (10,000 today = 7500 in 1999 $) trashed trillions in 401K fund but you're right, it must be petty jealousy that's irking some of us.

  130. vasco7777 Says:

    HarryWanger,

    "As this economic mini boom takes hold, and we're clearly seeing the evidence of that now…"

    So you would see no reason for any further QE by the Fed?

    And we can get a grip on FHA lending if it's not already too late?

    Housing market's bottomed?

    Unemployment's reached its nadir?

    Discretionary consumer spending is poised for an about face upswell?

    Commercial RE is now stable?

    FDIC doesn't need help?

    Cauliforneeya's OK?

    Auto Industry's revved up now?

    OK….and then there's the USD

  131. flipspiceland Says:

    I fail to see why the IB community has special rules for compensation unlike any other industry.

    If the top Sales people at Diebold Corporati0n sell huge bank vaults costing tens of millions of dollars and their commissions on these sales amount to millions, BUT the company in unprofitable, then the bonuses they would have received are deferred until such time as the company AS A WHOLE returns to profitablity; or forsaken if the company goes bankrupt.

    If Trader Joe bought the bottom in March and tripled 'his' investment, and he is entitled to a bonus of one third, has the trade gone full circle or is the bonus paid on Market Price profits even though it is still inventory?

    The bonus structure needs far more light upon it in order to determine if these characters are being paid on phantom performance in which the same trade above results in a quadruple loss a year down the road, exacerbated by the bonus paid on it.

  132. Greg0658 Says:

    "How is it on our dime? They repaid the TARP in full" .. seen that comment a couple times .. your answer by this poster:
    "Key word there: real. The whole CDS fraud was most certainly not real, nor was it's insurance (AIG no funds), nor was the entire premise upon which it was all built"

    in other words a round'n'round pass-thru AIG back to GS via taxpayer bailout that will Not most likely be repaid .. so a repaid TARP in full .. NOT

    "BR: Are you suggesting this current bonus pool is made up of CDS profits, or that they are somehow artificial?
    Help me see how that is the case" … isn't that what Bloomberg asked for and was denied

    "Voting out the incumbents is all well and good and I may do that in '10, but if the system stays the same" .. I hear your pain and revenge action – there is 1 flaw tho – your state will loss its ranking member (its a start over from go) and contrary to Goldilocks "control of the government is the best path to prosperity"

    "I truly thought change was coming. Instead the world got a jellyfish" .. as opposed to the world according to POTUS McCain VP Palin and TresSec Gramm .. LOL

  133. dawase Says:

    @lalaland

    "Those bonuses are nothing more than increased cost, and someone's paying too much for the services, by a lot…."

    Another great point that's not getting any attention… the cash returns for GS are way beyond what should be feasible based on economic theory… Why? Because the system is completely rigged! The bonuses are prima facie evidence.

    PS. For the record, I'm not a big proponent of professional sports, and I've actually boycotted them for over a year (and I'm a lifelong New Yawker so this has been hard). Sorry, but if you're paid millions (as a player, manager, or owner) a year and think 1. it entitles you to carry a concealed weapon in public (football), or 2. it makes it ok for you to physically assault the fans in the stands (basketball), or 3. you should strike for half a season to demand more money (hockey), or 4. it's ok to take performance enhancing drugs (illegal or otherwise) and in doing so denigrate every record-holder that came before you and made your lifestyle a possibility (baseball), or 5. that the public should subsidize your new stadiums when you're increasing ticket prices and pricing out decades-long season-ticket holders (take your pick) then you're not going to get my attention or my entertainment dollars.

  134. Greg0658 Says:

    "stir up enough hate so that someone snaps….if it bleeds it leads!!"
    humm .. did most of us pass TBP SAT mid-terms?

    liked the relation to mob garbage collection contracts

    "Jealousy" .. maybe .. self-scorn ? ..
    folks wish they had ahold of the family jewels like this .. and could shoot money all over their own island

  135. mitchcalderwood Says:

    BR, you act like higher taxes on multi-millionaires is some kind of pie in the sky idea that Tim Leary might have had on one of his acid trips in the 60s.

    The great rise of the American middle class occurred during the 50s and early 60s under tax rates of 90% and 70% for the richest Americans.

    I think that returning to these tax rates would be beneficial to the country as a whole.

    ~~~

    BR: I dont disagree

  136. Seattle Chill Says:

    Barry, in the real world, when your employer goes broke, it doesn't make a damn bit of difference how good you are at your job: you will be out on the street, looking for work.

    Do you have any idea how many brilliant scientists are right now pulling lattes at the corner bistro while you and your trader pals are out shopping for new toys?

  137. dagmountain Says:

    Wow Barry! I've been following your blog for a few years now and you've always been able to until now squirm out of a post like that. How do you know that George Soros trades ethically? He doesn't manipulate currencies?

    We know Warren Buffet traded in derivatives.

    Steve Jobs has been guilty of Security and Exchange violations. To hold these guys up as some kind of super heroes is disgusting and shamefull!

    ~~~

    BR: I didn't say hey were heroes - I said they were wealthy

  138. m111ark Says:

    BR, sure, there must be at least one honest person on wall st., but he's not getting any bonus either. You can never convince me, and I'll bet no one else, that GS, et al, don't CONTROL Washington with a bought and paid for congress. [BR: I don't disagree] The banksters perpetrated a FRAUD that resulted in a financial panic that cost the average american jobs, retirement savings and, in a few cases, lives. Come to think of it, I'm now more than ever convinced that the honest people have been driven out of the bankster business. When the pitchforks come out, no one's going to care who's honest and who's not, who deserves and who doesn't… mob's don't ask, just react.

    I expect you to respond as you have, but you should expect that we, outside of New York and Washington, have had it with the fraud, theft, and corruption that this bankster run non-economy has become. Gerald Celente has said, "when people have nothing to lose, they lose it," a sentiment that we all hope never comes to pass. Absent these fraudsters going to jail, that's exactly what's going to happen.

  139. rootless_cosmopolitan Says:

    Transor Z,

    "One mark of true capitalism is that over-leveraged insolvent businesses are allowed to fail."

    Why is this "true capitalism"? I wonder what the adjective "true" is supposed to mean in this context. What makes something "true"? In contrast to what? "untrue capitalism"? What would this be, then?

    rc

  140. Transor Z Says:

    @rc:

    5 card draw, played properly, doesn't have deuces, tens and one-eyed jacks wild. And the dealer definitely doesn't get to name wild cards after he's seen his own hand.

    After some conversations with Lloyd, the dealer named AIG CDSs wild and, lo and behold, GS was holding some.

    The fairness principle in capitalistic rule of law is simple: you play, you pay. Work for an insolvent employer, lose your job. Unless your industry is obsolete, good people land on their feet in a free market system.

    All GS employees deserve to be either unemployed or rehired at other institutions. GS should be gone.



Etc

FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit exclusivly for research and educational purposes.   If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. 

ABUSE: IPs or network segments from which we detect a stream of probes might be blocked for no less then 90 days. Multiple types of probes increase this period.  

Society

Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy

Quotes

War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


Copyright © 1996-2016 by Dr. Nikolai Bezroukov. www.softpanorama.org was created as a service to the UN Sustainable Development Networking Programme (SDNP) in the author free time. This document is an industrial compilation designed and created exclusively for educational use and is distributed under the Softpanorama Content License.

The site uses AdSense so you need to be aware of Google privacy policy. You you do not want to be tracked by Google please disable Javascript for this site. This site is perfectly usable without Javascript.

Original materials copyright belong to respective owners. Quotes are made for educational purposes only in compliance with the fair use doctrine.

FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to advance understanding of computer science, IT technology, economic, scientific, and social issues. We believe this constitutes a 'fair use' of any such copyrighted material as provided by section 107 of the US Copyright Law according to which such material can be distributed without profit exclusively for research and educational purposes.

This is a Spartan WHYFF (We Help You For Free) site written by people for whom English is not a native language. Grammar and spelling errors should be expected. The site contain some broken links as it develops like a living tree...

You can use PayPal to make a contribution, supporting development of this site and speed up access. In case softpanorama.org is down you can use the at softpanorama.info

Disclaimer:

The statements, views and opinions presented on this web page are those of the author (or referenced source) and are not endorsed by, nor do they necessarily reflect, the opinions of the author present and former employers, SDNP or any other organization the author may be associated with. We do not warrant the correctness of the information provided or its fitness for any purpose.

Last modified: September 20, 2017