Wall Street's Unemployment Machine

One of the great ironies of the 2009 meltdown caused by Wall Street was how much of Wall Street ended up unscathed. Compensation hit records while nearly every other industry collapsed. Profits surged. Confidence gained. Bankers' sense of superiority grew.

But things are changing.                                                                      

Big banks on both sides of the Atlantic have announced layoffs over the past few months. The numbers are menacing:

Source: Business Insider.

Blame the European debt crisis for a lot of this, particularly among foreign banks. In the U.S., weak lending, falling trading volumes, and fed-up shareholders have sparked a new sense of frugality.

But there's more to the layoff story than that.

Banker bonuses have been a hot-button issue in recent years. Paying Wall Street bonuses during a financial crisis just sounded like insult to injury. The name implies going above and beyond at a time when Wall Street was viewed as putting the economy below and behind.

Bonuses have always been big on Wall Street. People were paid fairly modest salaries with a variable bonus tied to performance (or bailouts).

That changed in 2009. In a bid to soften bonus envy, banks began issuing higher salaries, yet lower bonuses. Total pay didn't move in most cases -- just the pay structure. "What's really happened is you've traded your salary going up by $100,000 for your bonus going down $100,000," one compensation consultant told The New York Times.

European banks, which have strict disclosure requirements, provide a good example. At Credit Suisse, 81% of compensation is now fixed, up from 66% two years ago, according the Times. At UBS, 63% of compensation is fixed, up from 55%.

With higher fixed costs, banks are less flexible during downturns (like now). In the past, falling revenue meant lower bonuses. Today, they mean pink slips.

Unleash the schadenfreude!
What should you make of it? I'm tempted to paraphrase Mark Twain: I've never wished a man unemployed, but I've read some layoff notices with great pleasure.

No one wants higher unemployment. But any sound analysis of high finance uncovers two disheartening facts: It relies heavily on taxpayer support (both implicitly and through bailouts) and has an uncanny ability of extracting productivity from society, rather than increasing it. Berkshire Hathaway (NYSE: BRK-B) Vice Chairman Charlie Munger had more to say earlier this year:

We would be better off if we downsized the whole financial sector by about 80%. I don't think the rest of us have anything to gain having massive trading between computers which try to outwit one another with their algorithms to the extent that when one succeeds, the rest of us are all paying for it. And why should we want to encourage our brightest minds to do what amounts to code-breaking and electronic trading? I think the whole system is stark-raving mad. Why should we want 25% of our graduating engineers going into finance? ... I don't see any social contribution.

Finance made up 2.4% of the economy in the 1940s. By the 1960s, it was 3.5%, Today, it's 8.5%. Some of this growth may be beneficial. Much, though, leaves people asking the question, "What have we gained?"

During the housing bust, several made the point that while foreclosures are tragic, many of these people never should have bought a house to begin with. A similar point can be made about finance jobs. There's no joy in seeing people lose their jobs, but some of these jobs never should have existed in the first place.

We're sorry about your unemployment, but good riddance to your job.