by Randall Lane Info
Randall Lane is editor at large at The Daily Beast. The former editor in chief of Trader Monthly, Dealmaker and P.O.V. magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.
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A trader looks at a large screen at Madrid's Stock Exchange on Friday, May 7th, 2010. (Photo: Arturo Rodriguez / AP Photo) The European Parliament yesterday decided to cap banker bonuses. Randall Laneâ??author of the new book, The Zeroes: My Misadventures in the Decade Wall Street Went Insaneâ??on why Americaâ??s inability to enact a similar bonus crackdown directly risks another market meltdown.
Itâ??s Management 101: Employees act in accordance with how you pay them. Managers with long-term contracts stick around. Executives compensated in stock act like owners. Salespeople paid commission-only hock their first-born.
Wall Street reacts that way, too. If you want to trace virtually every stupid risk, every trend thatâ??s turned the markets into a casino, every root cause for the meltdown that nearly imploded the global economy, just follow the tyrannical path of the five sweetest letters on Wall Street: the almighty bonus.
Why does our country tip-toe around this problem, while Europe hits it over the head with a hammer?
Europe, collectively, seems to understand this. On Wednesday, the European Parliament voted overwhelmingly, 625-28, to limit to 30 percent the amount of a bonus that can be paid in cash. The rest of the loot, pending a rubber stamp from the continentâ??s finance ministers next week, will essentially be deferred over three years, to ensure that the risks taken to get the bonus donâ??t subsequently blow up the bank or the economy.
Yet on this side of the pond, we seem to be entirely unwilling to address the destructive nature of the bonus system head-on. The tepid financial-reform package that continues to weakly stumble through Congress doesnâ??t tackle the topic directly. And while the Federal Reserve issued guidelines last month that make it clear it agrees with the actions in Europe, its enforcement boils down to vague threats about vetoing compensation plans that donâ??t meet â??standards.â?
The obscene numbers donâ??t make the Wall Street bonus system destructive. Paying a 25-year-old commodities trader $20 million a year is no more inherently stupid or illogical than paying 25-year-old LeBron James $20 million. Itâ??s how bonuses get paid.
At a typical Wall Street bank, 80 or 90 percent of annual compensation arrives in one giant check, generally determined before Christmas and then paid in February. All that pent-up uncertaintyâ??a â??bonus,â? by definition, is discretionaryâ??creates paranoia pretty much all year. For those on the lower rungs, each bank and fund has compensation committees that divide the loot by group based on how the firm did overall, and how much each unit contributed to it, and then the head of each desk, like a Mafia boss, divides the spoils among his crew, based on individual performance and other intangibles. While I was making calls for my book, The Zeroes, one manager, who determines the bonuses of a few dozen traders, put it to me this way: â??I have some guys who work for me, who I take $50,000 from just because I think theyâ??re a dick.â?
So much money. All in one check. All dependent on how much you make managing other peopleâ??s money. This warped system corrupts even good people. â??If Iâ??m going to get paid zero,â? another money manager told me about his autumn mindset during down years, â??I might as well take some risk and try to make some money.â? The only risk to his bonus, in other words, is not taking risks. A dangerous way to think when you can borrow roughly 20 times the amount of your initial bet to really raise the stakes.
In this system, long-term performance is irrelevant. Bonuses deal with the year at hand, and if that means buying or selling junk that explodes later, that hasnâ??t been an issue. â??All you worried about was whether you could sell it,â? says one Wall Street sales executive, describing the attitude pre-meltdown. Wall Streetâ??s musical chairs meant youâ??d be at another firm, or somewhere else in your current firm, when the song stopped. And stop it did.
Why does our country tip-toe around this problem, while Europe hits it over the head with a hammer? A lot of it has to do with entitlement. Try to muck with a Wall Streeterâ??s bonus, and youâ??ll get a reaction similar to what youâ??d hear after telling a 70-year-old youâ??d like to reform Social Security. No matter that bonuses are a recent phenomenon. Until 1971, almost every single major bank was a private partnership. At the end of the year, the partners simply divided the profits among themselves; the vast majority of employees got regular paychecks like schoolteachers and firemen and other normal working people. Only once the big banks went publicâ??and faced shareholder pressure for consistent bottom-line performanceâ??did the talent demand fat checks at year-end.
Thereâ??s also something slightly un-American about the idea of capping salaries. And rightly so. But what Europe is launching isnâ??t a cap; itâ??s just a glorified escrow account. And banks are different. When a hedge fund blows up, whether Amaranth or Madoff, it makes headlines, but really only affects the rich people or institutions that willingly chose to invest or deal with them. Ever since the bone-headed repeal of Glass-Steagall, and the ensuing co-mingling of the Jimmy Stewart/Itâ??s a Wonderful Life bank ideal with the Al Pacino/Dog Day Afternoon version, the risky casino half of the bank can take out the essential deposits-and-loans side. (See Lehman Brothers, Bear Stearns, and Merrill Lynch.) Thatâ??s why the way bankers get paid affects all of us. America generally leads on this kind of stuffâ??for once, itâ??s time to follow.
Randall Lane is editor at large at The Daily Beast. The former editor in chief of Trader Monthly, Dealmaker and P.O.V. magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.
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Europe's Got Balls? That's good because the American president is a dick, should be a good fit all around,eh? The left on both continents always have to fight a boogeyman to cover up their inadequacies, Eek! it's Wall street bankers! Wha! it's big pharma! Look out! it's big oil! But the finger NEVER points out their own entitlement boondoggles to the tune of now untold $trillions of dollars swirling once prosperous countries down into the bowl of crumbling bankruptcy...The people can now see what you libturds have done and come November it's going to really suck being a parasitic liberal.
That's very funny.
It was Wall Street's risks that got America into this financial meltdown, so why do you cry about addressing the problem? You don't find anything wrong with these bankers essentially taking people's savings and gambling with it in order to get themselves a fat paycheck? Must be great to be a greedy, selfish conservatard ignoring the ills of the real world.
Mbuna, it wasn't wall street and you know it,rather it was barney frank and chris dodd and andrew cuomo shoving sub-prime mortgages down the banks throats all in the name of "leveling the playing field" for people who couldn't afford it to own a home....These people defaulted on their mortgages and the banks got left holding the bag and now obama has passed the bag onto the U.S. taxpayers to the tune of hundreds and hundreds of $billions...Get a freakin' clue will ya'?
Yeah, a Global economic meltdown is all Frank and Dodd's fault. NY'ers are smarter than that, so yes, you are not typical.
New Yorker: The problem was that the banks DIDN'T get stuck "holding the bag", they were making the loans, generating big fees, packaging subprime mortgages as bundles of securities, bribing Moody's and Standard & Poors to say they were golden, and dumping that crap on unsuspecting buyers. Then people started defaulting on those crappy loans that were the basis for the supposedly AAA rated instruments. That's what caused the crash you idiot.
I think its funny too...but true
Billions for the military, no, trillions! But it is entitlements that are bankrupting us? Open your eyes, winger. Take care of our own people and stop spending billions on other countries that do us no good. In your world, companies mean more than people, right?
Military spending is only 20% of total government spending roughly half of entitlement spending despite the fact military spending benefits everyone while entitlement spending only benefits the entitled. But I am open to compromise, cut all spending by the amount necessary to eliminate the deficit.
With all due respect, newswoman, how difficult is it to look up "U.S. budget" on either Google or Wiki? Please take a look at how the federal governent spends your tax dollar vis a vis the military and entitlement programs and then get back to us: http://en.wikipedia.org/wiki/File:Fy2009spendingbycategory2.png
newswoman can't do that tkondaks, it would ruin the narrative she holds so dear. She can't be confused with the facts because then she'll be proved wrong and we can't have that now, can we? Better to be blissfully ignorant and happy!
dalelama and tkondaks: actually annual total military spending is rapidly nearing 45% of what the fed govt. takes in from taxpayers. It is an untenable situation and is, in large part, why we have a crumbling infrastructure, as well as enormous corruption surrounding Pentagon contracts and Congress. This is what Eisenhower warned about. Americans never pay attention until a situation mutates into a gargantuan crisis. By then, it's generally too late to fix, so nothing changes and no heads roll. Business as usual.
Military spending is the biggest Govt spending of all.
ABSOLUTELY RIGHT ON TARGET! WE NEED TO KEEP THE FIRE LIT AND BLAST THESE AHOLES OUT OF HERE! ITS ALL IN THE NAME OF INEXPERIENCED, UNACCOUNTABLE, UNCHALLENGED, NEVER-HAD-A-JOB, INSANE PROGRESSIVES LIKE OBAMA WHO WANT TO PLAY DICTATOR AND HIS MAIN GOAL IS STICK IT TO WHITEY! JUST LOOK AT THE "NEW BLACK LANGUAGE"...KILL THE CRACKERS! KILL THEIR BABIES! YEAH OBAMA, WAY TO BRING US TOGETHER!
Thanks, timeflies. I had read that the military budget is the biggest part of the Fed budget, not 20% as dale, and NYTNY and tkondaks would have us believe. Remember, people, it is all about Obama, the Socialist, and not about the real world! (sarcasm)
the finger also never points at the regulatory agencies that are supposed to be keeping alleged corporate crooks in line. How many agencies do we haver overseeing the financial sector? The energy industry? Health care? This administration has been nothing but consistent regarding its contempt for the private sector and for capitalism in general. It believes all corporate profit to be its for the taking. Not a single initiative has come out of this Congress to do something that improves the regulatory/bureaucratic structure, only ideas that give more power to an already incompetent apparatus.
Ware, we need regulatory agencies because corporate crooks abound and do everything to get out of paying taxes and doing honest business. You should know that by now. Remember Enron?
Randall, there might be a reason why "we seem to be entirely unwilling" to have the govt step in to regulate bonuses. It's because if that can be done with banks today, then it will surely be done with some other industry tomororow. That's how govt works; it lives by the 'camel's nose under the tent' theory - give it an inch and it will attempt to take 3 miles. As it is, the US has a plethora of agencies and bureaucracies dedicated to overseeing the financial community. Yet time and again, those agencies get a free pass when the people they are supposed to watch step out of bounds. Why is that? I understand that banksters have become America's favorite political whipping boys, even though the same pols who profess to hate them with one breath ask for campaign cash with the next. But, this is a case of be careful what you wish for - when govt begins to dictate what is an acceptable bonus, how long before it also mandates acceptable commissions for salesman, allowable bonuses for managers in industries other than banking, and on and on. Years ago, anti-smoking zealots were excited about state attorneys-general targeting tobacco companies for a giant settlement. No one had the balls to make tobacco illegal, so they chose to target that specific vice. Since then? There are places that have banned transfats, mandated the posting of calorie counts, moved to ban the sale of sodas and snacks in certain places, even dictated where fast food chains can and cannot build in certain cities. At what point do people cede all responsibility for any personal decision-making? I'm not in the financial industry but Wall St did not act without the complicity of govt. But, folks like Randall insist on a tonic of convenience - limiting bonuses, as though that constitutes substantive action. What happens, however, when a different industry falls out of favor with Washington, perhaps the one that employs you. What happens when some politician thinks he has the power to regulate your compensation?
You could've stopped (and started) with two little words: campaign contributions.
warbird, you are correct. The same thing happened with drug testing in the workplace. It originally began within certain constraints limited to "employees" who could endanger the public - people who drove buses, railroad engineers, big rig drivers - but has now become a cottage industry that tests all children in high schools who want to participate in extracurricular activities. The "camel nose under the tent" analogy has now morphed, though, into the "camel toe" under the skirt. That camel toe has become the U.S. taxpayer, who is always there with the endless invitation to get screwed by the politicians. Afterall, who would really care if Andrew Hall took home a bonus of $50,000,000 for a good year's bets, with other people's money, if it weren't for the fact that that bonus was subsidized by Hank Paulson's grab of our public coffers? I think Warren Buffet's idea of the boy at the helm taking a personal bath, when his corporate entity is gutted is the way to go. But, how would this be implemented without the gorillas crying "socialism, socialism"? Having said that, I think the author has a good point. Europe has now taken the step that Britain basically took last year, when they decided to tax those obscene bankers' bonuses at 90%. If the U.S. were to somehow create it's own disincentive for this risky behavior, then at least this "talent" would have no place in which to flee. And the fleeing of this "talent" isn't really like rats fleeing a sinking ship. This particular species of gorilla-rats have demonstrated that they have the capacity to actually sink the damn ship itself.
Do conservatives who rant and rave for deregulation have any idea how our corporate market economy is fundamentally structured? Apparently not, for if they did they would realize that owners of companies AGREE to be regulated by GOVERNMENT when they apply for their GOVERNMENT GRANTED CHARTERS. In exchange, they receive the extremely beneficial protection of LIMITED LIABILITY. Don't want to be regulated? Simple. Don't Incorporate! Good Luck trying to find anyone who will invest in your business in that case. Granting corporations limited liability without also prudently regulating them is not the equivalent of letting the foxes guard the henhouse; it is equivalent to chopping the henhouse into bite-sized bits, and feeding it to the foxes on a silver platter, along with a glass of fine Chianti! (with or without the fava beans)
When government starts dictating bank compensation, it can also start dictating journalist compensation.
I think that has already started flyoverland, but not by obamy since the media is in HIS pockets. The public at large is doing a fine job of bankrupting these leftist rags. It is getting so bad for them that several leftists want to tax the Internet to subsidize obamy's support in the msm.
Anyone who thinks that a banker bonus cap does one single thing except 1-making the left feel better or 2- chasing those bankers into private companies not subject to the tax, where they will conduct the exact same trades, is a complete and utter fool.
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