More Than Just Money Depends on the Banks Being Able to Lavish Bonuses on Top Bankers

William Krehm

The New York Times (01/10, “For Top Banker On Wall Street 7 Figures or 8?” by Louise Story and Eric Dash) recounts a cloven tale: “Everyone on Wall Street is fixated on The Number.

“The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry have ever seen.

“Bank executives are grappling with as question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for constraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years.

“Industry executives acknowledge that the numbers being tossed around – six, seven, and even eight-figure for some chief executives and top producers – will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

“Goldman Sachs is expected to pay its employees an average of $595,000 each for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JPMorgan Chase stand to collect about $463,000 on average.…

“While average bonuses are expected to hover around half a million dollars, they will not be evenly distributed. Senior banking executives and top Wall Street producers expect to reap millions. Last year, the big winners were bond and currency traders, as well as investment bankers specializing in health care.

“Even some industry veterans warn that such paydays could further tarnish the industry’s sullied reputation. John S. Reed, a founder of Citigroup, said Wall Street would not fully regain the public’s trust until banks scaled back bonuses for good – something that, to many, seems a distant prospect.”

Nothing Learned from Past Crises

“‘There is nothing I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis,” Mr. Reed said. ‘They just don’t get it. They are off in a different world.’

“The power that the federal government once had over banker pay has waned in recent months as most big banks have started repaying the billions of dollars in federal aid that propped them up during the crisis. All have benefited from an array of federal programs and low interest rate policies that enabled the industry to roar back in profitability in 2009.

“Most companies pay bonuses only when they make money. But big banks paid bonuses during the financial crisis even though the their profits tumbled or, in some cases, vanished altogether.

“This year, compensation will again eat up much of Wall Street’s revenue. During the first nine months of 2009, five of the largest banks that received federal aid – Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley – together set aside about $90 billion for compensation. That figure includes salaries, benefits and bonuses, but at several companies, bonuses make up more than half of the compensation.

“Goldman broke with its peers in December and announced that its top 30 executives would be paid back only in stock. Nearly everybody on Wall Street is waiting to see how much stock is awarded to Lloyd C. Blankfein, Goldman’s chairman and chief executive, who is a lightning rod for criticism over executive pay. In 2007, Mr. Blankfein was paid $68 million, a Wall Street record. He did not receive a bonus in 2008.

“Goldman put aside $16.7 billion for compensation during the first nine months of 2009. At that rate, its compensation pool would total $21 billion for the year, according to an analyst consensus projections tallied by Thomson Reuters. A spokesman for Goldman, Lucas van Proog, declined to comment.

“Responding to criticism over its pay practices, Goldman has already begun decreasing the percentage of revenue that it pays to employees. The bank set aside 50 percent in the first quarter, but that figure fell to 48% and then to 43% in the next two quarters.

“JPMorgan’s investment bank, which employs about 25,000 people, has already reduced the share of revenue going to the compensation pool, from 40% in the first quarter to 37% in the third quarter.

“At Bank of America, traders and bankers are wondering how much Brian J. Moynihan, the Bank’s new chief will be awarded for 2010. Bank of America, which is still absorbing Merrill Lynch, is expected to pay large bonuses, given the bank’s sizable trading profits.

“Bank of America has also introduced provisions that would enable it to reclaim employees’ pay in the event that the bank’s business sours, and it is increasing the percentage of bonuses paid in the form of stock.

“‘We’re paying for results, and there were some areas of the company that had terrific results, and they will be compensated for that,’ said Bob Sticler, a Bank of America spokesman.

“At Morgan Stanley, which has had weaker trading revenue than the other banks, managers are focusing on how to pay stars in line with the industry. The bank created a pay program this year for its top 25 workers, tying a fifth of their deferred pay to metrics based on the company’s later performance.

“A company spokesman, Mark Lake, said, ‘Morgan Stanley’s board and management clearly understands the extraordinary environment in which we operate and, as a result, have made a series of changes to the firm’s compensation practices.’

“The top 25 executives will be paid mostly in stock and deferred cash payments. John J. Mack, the chairman who retired as chief executive at the end of 2009, is forgoing a bonus.

“And at Citigroup, whose sprawling consumer banking business is still ailing, some managers were disappointed in receiving in recent weeks the preliminary estimates of their bonus pools, according to people familiar with the matter. Citigroup’s overall 2009 bonus pool is expected to be about $5.3 billion, about the same as it was in 2008.

“The highest bonus awarded to a Citigroup executive is already known. The banks said in a regulatory filing last week that the head of its investment bank, John Havens, would receive $9 million in stock. But the bank’s chief executive, Vikram S. Pandit, is forgoing a bonus and taking a salary of just $1.”

Introducing Douglass North’s Law

What we are confronted with, in fact, straddles and instinctively attempts to neutralize an important law by an American economic historian Douglass North in 1993 for which he was awarded a Nobel Prize for Economics.

We describe it on page 167 of Meltdown, Volume 4), as follows: “[Dr. North deals with] the political consequences of a fundamental shift in the distribution of the national income. He showed that the latter can undermine the dominant political alliances based on the previous income distribution [in society]. The end of the statutory reserves put our chartered banks in the direct line of succession of our ancestral monarchs in the creation of money.

That spells power beyond anything decided at the ballot box. That was at once evident in the further deregulation of our banks shortly after their unpublicized bailout. That in turn permitted them to acquire stock brokerages, enter merchant banking, underwriting, insurance. This had been expressly forbidden by the 1933 banking legislation of F. Roosevelt that threw up firewalls between commercial banking and the four non-banking pillars of the financial system – banks and the stock market, insurance, and stock brokerages. It was echoed throughout much of the Western world.

“Each of these financial specialties has its own pools of capital essential for the conduct of its particular business. Allow the banks with their multipliers of money creation access to these capital pools, particularly with the wild leverage that the end of statutory reserves had allowed them, and the result was bound to be speculative inflation.

“In the perspective of Douglass North’s work, the break-up of the reigning Conservative Party [in Canada] arising from Brian Mulroney’s surrender to the banks was inevitable. And, notably, the surrender of most of our money creation was continued by the succeeding Liberal government with hardly a burp. As a result the Liberal Party seems headed for a not dissimilar fate. And the obstinate refusal of the NDP to even mention the importance of using the legislation and ownership of the Bank of Canada by the government of Canada as a major source of our economic troubles, slams the door on any possibility of working our way out of the present deepening crisis in a peaceful, logical way.”

In Mexico where the achievements of the Former Cardenas regime in nationalizing the oil fields and replacing the recurrent civil wars with a peaceful, social-minded regime, has not only been abandoned but the old-fashioned assassinations as a feature of political process has cropped up again.

What Douglass North has achieved is a sort of inverse of the “dominant revenue” law of Perroux. He draws attention to the break-down when the old dominant revenue is not functioning, and political alliances based on the existing dominant revenue have started crumbling.

At that time naked force is called upon and military actions come to the fore, to distract from the internal economic crisis by foreign military adventures that, of course, have their role in strong-arming domestic politics as well.

The Douglass North “theorem” explains why the Obama regime, frustrated in curbing the banks that have dug their sharp dentures into the breasts of the economy, should also be relying increasingly on further military adventure in Afghanistan, in which the personnel of the previous rightist regime can be expected to play an increasing part.

William Krehm

– from COMER, March 2010