It's true. I was a real, live investment banker. And while that used to be a source of pride for many financial professionals, the media today has made investment bankers seem more like something that crawled up from the pits of Hades.
There are some very valid reasons for citizens' outrage against the banking sector. Though financial institutions have been banging down the government's door to give them handouts, they still managed to find loose change in their collective purses to pay out $18 billion in bonuses for 2008. The specific case of Merrill Lynch and its rushed bonus payouts under John Thain has garnered extra attention, as that firm crumbles under the new ownership of Bank of America
But before you grab the pitchforks ...
The term "investment banker" -- or just "banker" -- itself is a pretty broad brush. It tends to cover everyone who works at an investment bank, from Goldman Sachs
In an industry that can see unbelievable revenue production from small numbers of employees, would it really be in the banks' best interest to tick off their best people by cutting out the potential for big bonus payouts? Let's consider a few realistic (though not necessarily real) examples:
A group within JPMorgan's
A sales-trader at Goldman Sachs has doubled her account list over the past year, landing huge trades from a handful of big-name clients. Her trading volume is up by leaps and bounds, generating a lot of trading fees for Goldman. This trader's clients trust her and her execution ability, and they would likely follow her to another bank. Would you give her a bonus?
M&A teams at Morgan Stanley
Personally, I can't speak to the specifics of the tech groups at the big banks or the traders, but having actually worked on M&A deals, I know that the bankers working on that Pfizer-Wyeth deal haven't done much sleeping for a while. Heck, their families may have started to forget what they look like. It's not a fun lifestyle (a major reason why I was an investment banker), but it does promise big bonuses – in exchange for a lot of 100-hour weeks and a little bit of luck.
The trick is how to pay
Bonuses aren't anything new. They've been motivating salespeople in just about every industry for a long, long time. They're the epitome of rewarding employees based on merit, and I think it would be a big mistake for the government or anybody else to push Wall Street to guillotine the bonus as an incentive tool.
But in many cases, Wall Street has botched what it means to deserve a bonus. The examples above are all instances where the banks collect fees (or reduce expenses) with no further future exposure to loss. But as we have seen all too well, there are plenty of similar businesses within banks and investment banks that potentially expose the bank to huge losses down the road. It would be fairer to compensate employees based on the eventual outcome, rather than the transaction or the initial fee. That setup would also change the whole incentive structure, encouraging employees to do what's right for the long term, not just for today.
In a similar way, C-level executive pay has been little more than a "heads I win, tails I also win" proposition. Merrill Lynch's former boss Stan O'Neal was a perfect example of this, walking away from a firm that he helped drive into the ground with far more than $100 million. It's troubling to say that the heads of hedge funds are more responsible, and more beholden to their shareholders, than the CEOs of our major financial institutions, but at least hedge fund bosses face compensation clawbacks if their performance tanks.
I'm not an investment banker ...
... but maybe I'm still drinking the investment banking Kool-Aid. Maybe the services that bankers provide really aren't worth the hundreds of millions that they get paid. But if, as a country, we still want to at least pay lip service to capitalism, I don't see how we can cry foul when employees who singlehandedly make millions for their companies take home a fat paycheck. There's a lot of work that needs to be done on Wall Street, but come on! Put the pitchforks down, back away from the tar and feathers, and let's do this the right way.
A bonus helping of Foolishness:
Pfizer and JPMorgan Chase are Motley Fool Income Investor picks. Pfizer is a Motley Fool Inside Value recommendation. The Fool owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. Bank of America is a former Motley Fool Income Investor pick. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...