The New York Times DealBook recently asked the question "Should banks take back their bonuses?"
The top investment banks will be paying out a record $39 billion in bonuses for 2007, a year in which most posted massive writedowns on bad subprime loans and saw their share prices shrink precipitously.
Making matters worse, traders and investment bankers earned huge bonuses on deals in past year that have now been written down. The deals weren't valued properly in the first place, but who cares! They already got their bonuses.
At the risk of being inflammatory, I have to tell you: This reminds me of Enron, where executives "marked to market" deals based on hypothetical future profits, paid themselves huge bonuses and, in one case, had cashed out and become the largest landowner in Colorado by the time stuff hit the fan.
The problem with the Wall Street bonus system is that it rewards risk over prudence. The compensation philosophy on Wall Street seems to be "Heads I win, tails I still win, as long as I can convince people it was actually a heads at the time I toss the coin. When they find out it was really a tails in a few years, I'll already have spent my bonus on that mansion in the Hamptons, and the shareholders can jolly well deal with it." Or something.
Until someone has the courage to make some changes in the Wall Street bonus structure, we can expect big blow-ups like this from time to time. As economics teaches us, people respond to incentives, and Wall Streeters are incentivized to take big risks with other people's money.











Reader Comments (Page 1 of 1)
1-22-2008 @ 10:27PM
Henrietta Alexander said...
Stockholders need better directors, the directors must have approved the compensation packages. No integrity. Those directors should all be held accountable for the banks going south and then compensating their mighty CEO's , but it's like the fox guarding the hen house. We need people in business who have ethics, integrity, and God forbid I even say it morals. This is what happens today when you hope someone else is working in your best interest. All stockholders need to keep informed and use their votes when necessary. If those directors all lost their jobs wall street would be quaking.
1-22-2008 @ 11:34PM
Rob said...
Right on. A CEO walking away with $15 mill bonus, while the stock price is 50% off and shareholders are unhappy? What kind of person needs that kind of money and feels they deserve it?
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1-24-2008 @ 3:54PM
Boards0000000 said...
Very true. But what's just as bothersome is some of these brokers sold these junk CDO's and then turned around and bet against them to make their bank or investment co. make double money on the subprime mortgages. What's that say about their ethics? They sell a junky product to one group and then bet against it with another group. That's greed at it's lowest.