Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.
How so? After buying $159 billion worth of preferred stock in 24 banks, I have not seen any evidence that the Treasury required the banks to lend it out. There is nothing stopping the banks from using the money for paying bonuses. And while the original estimate of 2008 bonuses was down 20% from 2007 -- to $26.6 billion -- I am thinking that eliminating executive bonuses could lead to at least a $6 billion lower figure -- particularly if this cut provides bank CEOs leverage to reduce the amount of bonuses paid to lower level people.
So far, top executives from Goldman Sachs (NYSE: GS), UBS AG (NYSE: UBS), Deutsche Bank, and Barclays have said they will skip their bonuses for 2008. Ironically, the ethically challenged UBS has the most interesting idea -- starting in 2009, it will be able to claw back bonuses in the years after their award with a third paid immediately, while the remainder will be put into a participant's account and can be reduced if there is a loss at the division or the whole bank. I started proposing an escrow account along these lines in October 2007.
I may be the only one, but I am not confident that using $20 billion worth of taxpayer money to pay bonuses to the people who created this financial catastrophe is really the best way to save the global economy.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
11-18-2008 @ 7:11PM
Jerry said...
I just DO NOT understand why there is even a question about this. When your company does bad you DO NOT get a bonus. RIGHT ? ? ? ? ? ? ? This is the way of the world everywhere else but in the make believe paper wealth world that is Wall Street. Please stop this imeadiately. It is not only unethical but it should be against the law ! ! ! ! ! !
12-03-2008 @ 10:48AM
Craig said...
The banks act as if this melt down is outside of them. We the citizens have given them every tool in which to repair this and open the credit markets. However they will not loan for fear of the markets crashing even further. Here is a fix prepay interest for every home loan out there up to 3%. With the median home price at 300k this is equivelent to +/- 9,000 dollars a home loan. 9,000 multiplied by 100 million loans equals 900 Billion. This does three things stablizes the housing market and puts capital at the lower income levels. And takes a way our tax dollars from the budget busting hipo's. Also you don't give it to the bank until they provide modified loans. This helps everyone including the people that have kept up on all their payments.