Party's Over, Wall Street

Nestled inside the $787 billion stimulus bill signed into law yesterday were a handful of provisions that ended the raucous payday party Wall Street's enjoyed for years. The most significant:

  • Banks receiving more than $500 million in TARP funds can't pay their 20 top-earning employees bonuses equating to more than one-third of their total compensation. So a banker with a $500,000 salary cannot receive a bonus greater than $250,000. Even better, bonuses have to be paid in restricted stock that can't be cashed out until taxpayers are repaid.
  • A new law mandates retroactive review of compensation paid to the top 25 earners of banks receiving TARP funds, seeking reimbursement if the compensation was "contrary to the public interest." (Hint: Most of it was.)

Money for nothing and bailouts for free
Needless to say, pay was nothing short of spectacular at the top investment banks during the boom years. Have a look:

Company

Average employee compensation 2007

Average employee compensation 2006

Average employee compensation 2005

Lehman Brothers

$332,000

$335,000

$315,000

Bear Stearns*

$242,000

$320,000

$300,000

Merrill Lynch**

$248,000

$300,000

$226,000

Morgan Stanley (NYSE: MS  )

$343,000

$324,000

$271,000

Goldman Sachs (NYSE: GS  )

$661,000

$622,000

$498,000

*Now part of JPMorgan Chase (NYSE: JPM  ) .
**Now part of Bank of America.

This table depicts the mean compensation of everyone from janitors to CEOs. Hence, it's skewed by the top few who took home tens of millions. According to the U.S. Census Bureau, the average annual income for 2007 was around $40,000. Wall Street, meet reality. Proceed to hate each other.  

Despite the pay distortion between Wall Street and the average American, plenty of economists, politicians, and (of course) Wall Streeters are stomping their feet over the unintended consequences reining in pay could have. Their arguments focus on two points:

  • Restricting pay will create a brain drain of top talent from TARP-indebted companies like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) to those not affected by the new restrictions. The problem, critics say, is that by losing top talent, TARP-indebted companies will have a harder time repaying taxpayers.
  • Capping pay across the board at banks isn't fair to the employees of departments that are still profitable. Not every employee was peddling subprime mortgage-backed securities, and therefore, the innocents shouldn't be lumped in with their wayward peers.

Oh, please
I think both arguments are utter hogwash. Let's start with the obvious: Employee retention isn't a problem these days, especially on Wall Street. Global merger-and-acquisition volume is expected to fall 35% in 2009, and that's after 2008's plunge of around 30%. One estimate predicts that 2,000 hedge funds -- about 20% of the current total -- will go out of business in the next two years. That's on top of the 1,300 that closed their doors last year.

Those worried about a mass exodus of disgruntled bankers should have to answer an important question: Where will they all go? Who's hiring? Show me one bank recruiting in a meaningful way, and I'll show you 10 on the verge of bankruptcy.

Nevertheless, a few of the higher-ups will indeed find new positions elsewhere. Let them. Good riddance. Believe it or not, the sun will rise without John Thain. The thought that we should worry that the same people who caused this mess won't be around to try and fix it is borderline insanity. Rather than fretting about bankers quitting, it might be more appropriate to wonder why more haven't been arrested.

Their mistake, your problem
And how about the argument that not every employee working at these banks should be burdened by pay restrictions? "Those not directly involved in the credit market's undoing shouldn't be punished," the thought goes.

Give me a break. Try telling the laid-off employees of Microsoft (Nasdaq: MSFT  ) and Pfizer (NYSE: PFE  ) that everyone not tied to subprime mortgages deserves a gainful job. Or try telling the next generation of taxpayers (who'll be on the hook for these bailouts) that only those who were directly involved should have to pay. It's absurd.

Not everyone was involved in the economy's ruin, but everyone has been forced to make dealing with the outcome a personal sacrifice. The notion that demanding every bank employee sacrifice along with the rest of the economy is somehow "unfair" is utterly nuts.

Game over
Your party is over, Wall Street. You had your fun. The bill has come due. If you politely wouldn't mind, the rest of the economy would like to ask you to pay your fair share of the tab.

Considering what we've been through, that's not asking much.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer and JPMorgan Chase are Motley Fool Income Investor recommendations. Pfizer and Microsoft are Motley Fool Inside Value picks. The Fool has a disclosure policy.


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  • Report this Comment On February 18, 2009, at 2:32 PM, gman415 wrote:

    Its very easy to jump on the bandwagon to bash the rich Wall Street banker. Believe me I'd lilke to as well. Not only did I not see huge paydays like them I lost a lot of my investment portfolio last year. However, as an investor, I'd see a cap on compensation as being taxing to the financials. Sure these "poor" folk can't get work by jumping to other competitors. But new grads are not going to work there either. The talent whether its existing talent and/or future talent will go to other industries to get paid. Did the tech industry get pay caps when it destroyed our portfolios ten years ago? No. Do we need another gadget or do we need someone to protect our money?

  • Report this Comment On February 18, 2009, at 2:52 PM, verdure wrote:

    gman,

    I'd like to respectfully disagree. First of all, most new business school graduates will be happy for a decent job. Banking isn't like brain surgery. Second, there wasn't a TARP for the tech industry. Third, I see over-compensation as a tax on stockholders and taxpayers.

  • Report this Comment On February 18, 2009, at 3:10 PM, thismarketrox wrote:

    Brain Drain? You mean the same "brains" that got us to where we are today? Sounds like a good plan to me.

  • Report this Comment On February 18, 2009, at 3:11 PM, jglidden45 wrote:

    I'm a bit astounded that so many are in favor of giving up the freedom between private parties to contract and set prices for labor. Sure, the federal government has an investment but they should stand with other shareholders on these issues instead of making their vote the only one that counts.

    The government can set prices but they cannot suspend the forces of supply and demand. Any significant talent that stays at these banks will be doing so for some reason other than a paycheck. Talent will leave or never arrive. To quote Thomas Woods (author of Meltdown) from an interview I heard last week - "You can't wage war on reality forever."

  • Report this Comment On February 18, 2009, at 3:19 PM, allegra wrote:

    What I think is hilarious are the comments by the free market analysts on CNBC, notably Kudlow and Co, that the executives of American financial institutions will flee abroad to foreign banks if their pay is curtailed.

    It's only here in America where executives and CEOs make 128 to 132 times their emplyees salaries. NO foreign companies pay American style bonuses. Boy will these fleeing CEOs be surprised. As will all those laid off from Lehmen, et al, who will take their jobs with gratitude.

  • Report this Comment On February 18, 2009, at 3:37 PM, Knobee wrote:

    They managed to blow up the US economy -- maybe it's a really good idea for them to run (the quicker the better) to <anywhere-but-here>... :\

  • Report this Comment On February 18, 2009, at 5:11 PM, ccbarker wrote:

    It is all about the moral & ethical decay that has been making it's way through America for the last 35 years that I have seen. In this time I have said that America has the best politicians money can buy (but at that time it was Japan that was doing the buying) Now we find that it has moved out further. Our large companies are being run for the greater good of the executives (most own no stake in the companies they run) and the stockholders feel they have no say or control.

    Some want to lay this at the door and bring the bible out. I think you can remember all of the ministers that preach one thing and do as they please after church. (You know all of the names as well as I do) Greed is good as long as it is tempered with work and a morality. Most of the fat cats do not feel this applys to them. They feel that they are above and smarter than they really are. So this is more of an entitlement in there opinion.

    The movie GREED should be played again. Not as what should be done, But as what should not be done. As for the lowly hard working people that work for the banks and brokerage houses. Sorry, go out and find a job that builds something or start your own company, this is a new age. I will have to start all over on my retirement. At a time I should be getting ready to enjoy it. I know this house of cards was coming. I just did not know it could fall so quickly (I wonder if I can get a government bailout)

  • Report this Comment On February 18, 2009, at 5:25 PM, SteveL103 wrote:

    The heavy hand of govt is doing what shareholders couldn't (and boards of directors wouldn't). I don't like that the free market of labor isn't free anymore, but fortunately this is only true for TARP recipients. If you want a bailout, it comes with major strings. However, the idea that all these brilliant people will go abroad or leave banking for greener pasteurs is BS. Where will they go? Nobody is hiring and big bonuses are gone. The bubble simply burst! Welcome to the real world.

  • Report this Comment On February 18, 2009, at 5:41 PM, ccbarker wrote:

    Ask any criminal psychologist, and he will tell you that a lot of the criminals locked away in prisons have a very high IQ (just misguided moral and ethical thoughts) sounds familiar. So if they leave for another country then it is all the better for the ones of us that stay and have to pay and clean up their mess.

  • Report this Comment On February 18, 2009, at 6:13 PM, cautiouswillie wrote:

    Brain drain? The general comment that these people need to be bribed with big bucks to do this (presumably) horrendously nasty work is total hogwash, baloney and more. I listened to the 8 corporals of the universe being grilled by lawmakers last week. Pertinent question: would you have done this work for $1? Most answered yes.

    Either their brains won't drain with "back to earth" comp, or they lied, in which case they shouldn't be there anyway.

    The truth is many people want in, but it's hard to get those jobs. So there's no shortage of people wanting to work on Wall Street. Therefore no exceptional compensation is needed to attract them. They just discovered they can get the money by simply taking it. Now they feel entitled. If they can get away without my (taxpayer) money, bully for them. If I'm paying, forgive me for not having any sympathy for them at all.

    If they don't like it, they can leave. There are MANY well-qualified people standing in line for their jobs, who may be more in touch with the real world, capable of doing a better job.

  • Report this Comment On February 18, 2009, at 6:44 PM, AtlasAynRand wrote:

    Amen!!

    Finally an article that dares to tell it like it really is.

    It would be refreshing if all that high paid talent joined the real world, and then we can have real people repair the mess these sociopaths brought on all of us regular folks.

    Life isn't fair, and it's about time these bankers get a wake up call. Time to joint the real world!

  • Report this Comment On February 18, 2009, at 6:51 PM, pmbarrett wrote:

    Two words sum up this whole piece. WEALTH ENVY. Yep, everyone on Wall Street is bad and everyone in Washington is good.

    Let's see, if you join a Wall Street firm, or large bank, and work hard and rise through the ranks you could make good money.......Go to Washington, do a horrible job, but keep a few money folks back home happy, and retire rich. Why do politicians spend millions of OPM, to get elected to a position that pays very little, but are able to amass considerable wealth, like say Joe Biden? Maybe we should use the same standards on those in Washington! Nah, Americans don't have the spine for that.

  • Report this Comment On February 18, 2009, at 7:50 PM, nerd1951 wrote:

    Wealth envy? Please. These guys screwed up and need us to bail them out. Why does anyone defend rewarding management that destroys wealth?

    My biggest fear is that they may leave finance to work in industries that aren't restricted by taking TARP money. Then they will destroy those industries too!

  • Report this Comment On February 18, 2009, at 8:45 PM, xetn wrote:

    So what if the government decided to mandate that YOU could only earn $10,000 per year. Would you be ok with that? I didn't think so. And for all of you people that think banks are deregulated, guess again. They are one of the most regulated industries in the US. So the real cure for them is more regulation.

  • Report this Comment On February 18, 2009, at 8:58 PM, TMFHousel wrote:

    xetn,

    Thanks for your comments. A few thoughts:

    "So what if the government decided to mandate that YOU could only earn $10,000 per year. Would you be ok with that?"

    1) If I worked at a company that would otherwise be bankrupt without a taxpayer bailout, yes, I would fully expect some sort of salary cap.

    2) $10,000 a year? Even with compensation restrictions, many of these bankers will be earning $10,000 per day. Let's not act like "only" making a few million a year is a sign of abject poverty.

  • Report this Comment On February 18, 2009, at 9:29 PM, xetn wrote:

    So (TMFHousel) you like being the recipient of my tax dollars to pay your salary? Maybe I would prefer that your tax dollars paid my salary and you get nothing in return. Still ok? If you were the one receiving the multi-million dollar pay, I do not think you would be have the same feelings. However, you miss the point, it is the government mandate that is wrong. But all socialists want everyone to be "average" except for those in power.

    As for limiting greed as the reason for big salaries and bonuses, what is everyone doing here if not trying to become rich from investing in the stocks of these companies? We rely on these companies to make a lot of money in a free economy so we can participate as shareholders. If I could just find the one company that would bring me a 10000% return every month, I would certainly take it and the more the better. That is why I invest in stocks instead of CDs. I guess the rest of this list would be against that return. Or, better still have the government mandate that that rate of return is just plain greed and should not be allowed.

  • Report this Comment On February 18, 2009, at 9:47 PM, TMFHousel wrote:

    xetn,

    "So (TMFHousel) you like being the recipient of my tax dollars to pay your salary?"

    Your tax dollars don't pay my salary. I'm not sure what you're getting at here. I don't think anyone's tax dollars should pay anyone's salary, and that's why I think it's insane not to have compensation restrictions on companies 100% reliant on taxpayer dough.

    -Morgan

  • Report this Comment On February 18, 2009, at 11:49 PM, vdlspore wrote:

    Nothing wrong with high pay where it's due. (Think of all the tech titans who have made our lives a more pleasurable experience). But high pay for creating nothing, blowing bubbles and destroying plenty is inexcusable. We all enjoyed the party while it lasted, but a dose of reality won't do us any harm. And a bigger dose for Wall Street is more than overdue.

  • Report this Comment On February 19, 2009, at 12:30 AM, TMFDiogenes wrote:

    We have Kudlow on mute near my desk from time to time. When this debate over compensation came up, I thought I was in the twilight zone when he and the other commentators were outraged about how much "talent" would be lost by these measures. That's insane.

    Thank you for this article, Morgan. This stuff needed to be said.

  • Report this Comment On February 19, 2009, at 4:17 AM, Computergeeksta wrote:

    I'm sure that some great talent will disappear with the salary cap. But at the same time, there will be many that are equally qualified ready to line up and make the necessary decisions to turn things around for lesser pay. To think that only the highest paid people are the most qualified is an insult to the the people who chose to their time and resources to the community before self. If there's any truth to the saying 'you get what you pay for' well this one time everyone seems to have been played a fool as CEO's made away with loot. So lesson learned, lets not make the same mistakes again.

  • Report this Comment On February 19, 2009, at 8:11 AM, MrsCathyGF wrote:

    Seems that financial envy has writer, but good.

    So, who convinced you that freemarket capitalism is so unfair ? It's reality. Buck up, pal. Not all get to play the packman machine at the same time, young man. Odviously not everyone is talented enough to land a Wall Street salary either....Play the game, and deal with the dynamics. That's just life. Prosperity is there for anyone with the ability to capture it, in this great country of ours.

  • Report this Comment On February 19, 2009, at 11:04 AM, 4wheeldrifter wrote:

    "Nevertheless, a few of the higher-ups will indeed find new positions elsewhere. Let them. Good riddance. Believe it or not, the sun will rise without John Thain. The thought that we should worry that the same people who caused this mess won't be around to try and fix it is borderline insanity. Rather than fretting about bankers quitting, it might be more appropriate to wonder why more haven't been arrested."

    This paragraph from the article should have been in bold. It is spot on.

    One way to be sure that the "brains" of Wall Street's bankrupt firms don't jump ship to a non-bankrupt competitor is to put these folks where they belong: prison.

  • Report this Comment On February 19, 2009, at 8:39 PM, dc46and2 wrote:

    As usual, one form of government meddling always requires additional, more-obtrusive government meddling to "fix" the problems caused by the original meddling.

    Why don't we just cut to the chase, and have full-on communism. Then the government will control exactly how much everyone makes and make sure no-one ever does anything "contrary to public interest" and we will all live happily ever after in Utopian bliss.

  • Report this Comment On February 22, 2009, at 10:38 AM, TMFHousel wrote:

    pmbarrett,

    "Two words sum up this whole piece. WEALTH ENVY."

    Wealth envy? Really? Take a look at this quote and tell me how much "wealth" was actually created over the years:

    "Losses reported by Merrill as a result of the credit crisis totaled $35.8 billion in 2007 and 2008, enough to wipe out 11 years of earnings previously reported by the company."

  • Report this Comment On February 25, 2009, at 2:46 AM, PauvrePapillon wrote:

    Fibpotus meet Karl Benz.

    How can it be that the Fibpotus doesn’t even know that Karl Benz invented the automobile? Inspires confidence, doesn’t he? He’s going to save the auto industry but he doesn’t even know the most basic history of the automobile industry. In the third line of his inaugural address he claims he is the 44th person to take the oath of office of the President of the United States. Doesn’t even know his basic U.S. history. This guy is an empty suit, an absolute moron. Was his reference to 57 states an early senior moment or did he really think there were 57 states? You have to wonder. How did this fool ever become president? Oh, I remember. It was time for a Fibpotus and he butted into the front of the line.

    http://www.foxnews.com/politics/first100days/2009/02/24/obam...

    The market was up today but then Tuesday night the Fibpotus opens his mouth and the overnights are down again. If you want to see the markets go up 1,000 points, all we need is for the Fibpotus to shut up for a month. The economy is not now and never has been as bad as advertised. That’s the real reason the Marxists had to fast track their massive pork package through Congress. They’re afraid that the economy will recover before they can take credit for it. Too bad they won’t stand up and take credit for crashing the whole finance system in the first place.

    From the NYTimes September 1999:

    Fannie Mae Eases Credit To Aid Mortgage Lending

    ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

    ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

    Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

    Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

    http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF...

  • Report this Comment On February 25, 2009, at 2:33 PM, temp2290 wrote:

    I agree with you. Heh, "Brain drain", as if in some magical world the truly smart people go get jobs at Wall Street. "Top talent" will still be attracting the same guys, mainly because they have nowhere else to go. What are these "smarties" gonna do, get a PhD in physics and be on their merry way? Fogetaboutit.

  • Report this Comment On February 25, 2009, at 9:32 PM, nopcmerde wrote:

    PauvrePapillon is exactly right. Fannie Mae insures 1/2 the mortgages in this country and it is precisely the lowering of credit standards described in his post that in large measure led to the predicament that we find ourselves in today. The greedy bankers and the greedy "homeowners" who made and took loans that should not have happened are the ones we hear the most about, especially the former, but at least as much to blame is Fannie Mae and its liberal protectors in congress who would not let Bush regulate Fannie Mae. And the congressional liberals who prevented the regulation, like B. Hussein himself, get a free ride. Even the befuudled Alan Greenspan gets less of free ride. It's pathetic. And now the clowns who would not allow Fannie Mae to be regulated when it deeply needed it want to regulate the banks. Not a bad idea, but exactly the wrong people to be doing it.

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