“SHE ASKS ME WHAT I MAKE…”

1/31/09

One of the most heated topics floating around Wall Street and Washington of late is the issue of compensation in the financial business.

While Senator Claire McCaskill (D., MO) has been saying some perfectly sensible things about “massive self indulgences” (sic; if I am wrong about my “said in context,” and Senator McCaskill did mean to say indulgences, perhaps she share my Catholic religion and meant to say “indulgences” and was talking about something having nothing to do with Wall Street. However, I get the sense that she meant to say “indulgence,” in the singular. But I digress.) and “a bunch of idiots on Wall Street,” she has hatched a perfectly ludicrous plan that proposes to limit Wall Street compensation to $400,000, the salary of the President of the United States. As ludicrous as this piece of central planning might be, however, Senator McCaskill makes a point when she argues that, once these Wall Street Wonderboys started taking Uncle Sam’s money, they left themselves subject to whatever dictates emanated from the sachems who occupy the den of iniquity on the Potomac. (See one of today’s other posts, “GEORGE BAILEY, CALL YOUR OFFICE.”)

Senator McCaskill’s proposal is, of course, not the only example floating in the ether above Washington of drumbeating for limitations on executive. Most of these proposals, like Senator McCaskill’s, are idiotic but entirely justified because, as the old adage says, once you take the man’s money, you do what the man says. And all these guys have taken the man’s money; though there was some duress involved in “persuading” the then apparently healthy banks to take the money (See my 10/14/08 post.), any of these estimable, highly paid, and supposedly big, tough CEOs could have said no. Instead, they went shuffling off, bowing and scraping to their new federal masters.

As moronic as these pay limit proposals are, some of the defenses of the compensation customs on Wall Street are equally imbecilic. As one might expect, the most gormless of these defenses comes from the Wall Street Journal, which still laughingly insists on fancying itself the voice of the free market.

The Journal points out in one of its 1/31/09 editorials that

“That ‘irresponsible' bonus pool of $18 billion was for every worker in the New York financial industry, from top dogs to secretaries. The average bonus (in 2008) was $112,000; bonuses typically make up most of an employee’s salary (sic) on Wall Street.”

First of all, $112,000 is, for most people, even for most people who read the Wall Street Journal, a lot of money. But even aside from this flight from reality, this whopper was alarmingly disingenuous even for the Journal, the most salient feature of which of late has been its disingenuousness. Reading this, the Journal would have us believe that the typical Wall Street trader, salesperson, or investment banker makes a relatively modest, or at least not outrageous salary (less than $112,000) and then gets a bonus of around $112,000 for a total compensation package of around $200,000. Nice money (way too much for the job most of these bozos has done of late), but not eye-popping. But just how naïve does the Journal think people are? The Journal defeats its own argument when it says that the $112,000 average includes everyone, including secretaries. How big a bonus do you suppose the typical secretary or mail room worker will get this year? Probably pretty close to bupkus. Yes, the average is $112,000, but the big guys, the guys who are in a position to really screw things up (and who did so with a special gusto over these last few years) are getting a LOT more than $112,000. Yes, bonuses “make up most of an employee’s salary (sic) on Wall Street.” But for the professionals, the guys who have crippled, if not destroyed, our financial system, that salary isn’t $112,000 (or anything like it) and, yes, the bonus remains the largest part of their compensation, i.e., a large multiple of a salary of which most Americans, even most college educated Americans, can only dream.

People who read this may protest “Don’t you believe in the free market?” Yes, I do, far more than almost all of Wall Street. That is why this pay for failure so appalls me so. Let’s do some simple arithmetic. From 2002 to 2008, Wall Street securities firms paid about $190 billion in bonuses, which spread over six years averages $31.7 billion per year. Spread over seven years (The 2002 to 2008 time frame could be so interpreted if one includes each of the “end” years.), that would average $27.1 billion. During that time frame, those companies showed (post bonus) profits of $76 billion, or either $12.7 billion or $10.9 billion per year. (Some, especially some shareholders, might argue quite legitimately, that these bonuses were outrageous, but let’s leave that argument for another time.) In 2008, these firms paid out bonuses of $26 billion, not substantially below the average for the “good” years, but the firms collectively lost, post bonus, $25.3 billion. One does not have to be a shareholder to argue that these payouts were ridiculous. In a free market economy, one does not pay for failure, and one assumes that payouts should bear some relationship to the profitability of one’s employer. But, as I have said ad nauseam in the past, we are no longer in a free market economy. We are in a fixed, “not what you know but who you know,” “once you are in the club you are set for life even if you are a witless, irresponsible dolt” economy, an abomination before God and man concocted by the interplay of big government, big business, and Wall Street, an abomination that will be a substantial contributor to the rapid and incipient downfall of our once great nation (just in case you wondered how I really feel).

Others may argue that if Wall Street firms don’t pay (still) gargantuan bonuses, their top talent will flee to more profitable employment. In the first place, it would be a blessing for these firms, or at least for their shareholders, if such “talent” went far, far away. But even I will concede that there remain some bright, talented, hardworking, responsible people on Wall Street, and it would be in their employers’, Wall Street’s, and the nation’s, interest to keep such people toiling away solving the problems their esurient and excerebrose colleagues have created. But the opportunities awaiting those who walk out the door are limited in this environment; Wall Street, and its counterparts overseas, is not lining up to hire people. The opportunities available for those who think they are underpaid simply are not all that abundant. Most sensible people will realize that they are best off remaining where they are, even if doing so entails some financial (hah!) “sacrifice.” If they think otherwise, perhaps they aren’t so smart, or at least not so prudent (I know this from personal experience, but that is a long and distant story best left for another time, or never.), and what we need now, above all, is prudence.

Yes, the proposals coming from Washington to limit pay are ridiculous. But Wall Street brought such potential diktats on itself both by taking federal money and from paying itself according to Alice in Wonderland logic for years.

You made your bed, guys, now enjoy sleeping in it. We can only hope there were some excess nails involved in its construction.