Blog on the Run: Reloaded

Friday, July 31, 2009 12:05 pm

Rigged game

Filed under: I want my money back. — Lex @ 12:05 pm

More documentation of how U.S. taxpayers are getting screwed by the banking industry, from the office of New York Attorney General (and, let it be assumed, ambitious Democratic politician) Andrew Cuomo:

As one would expect, in describing their compensation programs, most banks emphasize the importance of tying pay to performance. Indeed, one senior bank executive noted recently that individual compensation should hot be set without taking into strong consideration the performance of the business unit and the overall firm. As this executive put it, “employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.”

But despite such claims, one thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees. In many ways, the past three years have provided a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based. But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.

An analysis of the 2008 bonuses and earnings at the original nine TARP recipients illustrates the point. Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion ateach firm. Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received TARP bailouts totaling $55 billion.

I haven’t had a chance to read the whole report (22-page pdf), but I hope to soon. More importantly, I hope Congress, the SEC, the Justice Department and the other 49 state AGs read it, too.

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