For the past year, the bailout banks have been complaining that the compensation restraints that came along with their acceptance of government aid would cause their best employees to flee to greener pastures. Although we've begun to see some repots of that, Bloomberg has a more tangible one, explaining who some of the major beneficiaries have been: Barclays and Nomura. I don't think we can be particularly surprised, but should we care?
First, here's what Bloomberg is reporting:
Barclays Plc and Nomura Holdings Inc., which never ranked among the top 10 merger advisers worldwide in the past decade, are luring hundreds of bankers as competitors cut jobs and cap bonuses under government pressure.
The banks are expanding globally after they bought parts of Lehman Brothers Holdings Inc. out of bankruptcy last year. Barclays, which acquired Lehman's U.S. unit, plans to hire more than 30 bankers in Europe for its mergers advisory business and has hired about 750 people for European and Asian equities this year. Nomura, which bought Lehman's European arm, has increased its U.S. workforce by about 36 percent since March and this week hired former Goldman Sachs Group Inc. currency strategist Jens Nordvig, 35.
The article goes on to explain that some significant bankers from Bank of America and Citi have also been poached. It's interesting to note, however, that these two firms are even going after bankers from healthier banks like Goldman. Obviously, they will have a much easier time luring talent away from bailout banks that can't pay their employees what others can.
My first reaction to news like this is: so what? If banks like Citi and Bank of America deserved to fail, who cares if bankers and traders leave? After all, they would have anyway if the companies didn't survive.
The problem is that the government saved them. As a result, taxpayers are stuck with the bill that will result if they do, ultimately, fail. But Washington clearly has no intention of lifting its compensation restraints. Indeed, they're as strict as ever. That leaves taxpayers in a precarious situation, since the more talent that departs, the less likely they'll get their money back.
This raises an important problem with bailouts: if you're going to play the game, you have to play by the rules of the industry you bail out. Otherwise, the bailouts can't be fully successful. If you don't allow banks to pay their employees what the market demands, then those firms won't be able to compete.
Now I'm not saying that the government compensation requirements aren't sensible for a variety of reasons -- they are. But you can't realistically expect Citi or Bank of America to retain investment banking talent with the current restraints in place.
The solution? Well, there might not be one. The public will, rightly, get their pitchforks out if Uncle Sam starts letting these firms pay their bankers seven-figure bonuses again. Meanwhile, more talent leaves with each day the banks remain under the government's watchful eye.
My suggestion would be to wind down or sell the investment banking arms of these institutions and turn them into just retail banks. Even under current pay restraints, those firms would be able to retain most of the talent necessary to compete in that sphere, especially given their existing dominance of the retail market. That's the strategy the government should encourage to ensure that taxpayers get as much as they can from these institutions.
Oh boo hoo. The same thieves, thugs and con men who got us into this mess are now complaining that they aren't being paid enough? Don't let the door hit you on your bonus on the way out.
Ah, yes. Cutting off your nose to spite your face.
You realize that you have an ownership stake in these banks, right? Why are you rooting for your investment to fail?
What "investment?"
The government, still under control of the kind of people who created this crisis (Bernanke et.al.) crafted a plan that rescued failed institutions in violation of the rules of capitalism.
Nationalization right down to the floor was and still is the best policy here, followed by thorough restructuring that reassembles the Depression-era laws that once made these financial shenanigans impossible.
Smart young people need to find a future in science and the arts, not these "plumbing" fields, where their corrupted talents have demonstrably resulted in disaster.
We don't need financial"industry" innovation, we need scientific and cultural innovation.
I think that getting rid of the highest fliers is probably best for the long-term health of the banks. Middle of the road employees aren't likely to lever up so much, and when everything eventually blows up again, I'd be happy to have other tax payers need to bail them out.
The myth here is that these "best" employees are doing something of value for these banks. They're not. They just good at capitalizing on short term trends while pushing risk into the future.
Banking should be *much* less profitable, and make for a considerably less attractive career. It should be boring.
LOL. Oh, jeez.
You obviously don't work in investment banking.
Hmm, losing guys who were freely inflating the bubble and lying their way to profitability? They should have been fired and barred from the financial industry. Banking is not hard, if you are doing it legally and conservatively. Which is what needs to happen for the next 10 years. The loss of cowboys who have faith in Gaussian cupola functions is a gain.
Collectively, we were *all* inflating the bubble - to be certain the so called "Masters of the Universe" were encouraging it - but we were quite happy to drink their wine and taste their herb and believe that housing values could do nothing but keep going up. We bought houses, we elected congress critters who enacted policies to encourage (if you were for it) or entice (if you thought it was a siren's song) even more people to buy, we refinanced and took-out equity to buy SUVs and big-screen TVs and whatnot, and then the bloom fell of the tulip and everyone wants to point a finger anywhere but in the mirror.
There is no single cause to any disaster. They are, invariably, a chain of faults and errors along the path to failure.
You clearly don't know much about the industry, wallyz.
Top investment bankers have valuable relationships that bring in lucrative deals for their firms. So when they leave to go to other banks, the banks they leave behind take a hit. Just like sports teams losing top contributors to rival teams.
You (and American taxpayers) have an ownership stake in Citi and BofA. Rooting for the team of which you are a part owner to lose its best players to the other team is just stupid.
Oh we understand, all right.
As I said earlier, our "ownership stake" needs to be complete, and not focused on profits for these schemers. Let them find work as aisle mangers at Wal-Mart or some other socially useful task. If they migrate to other nations where fraud is permitted, good riddance.
Somalia, I believe, has a refreshing lack of intrusive government regulation . . .
I have to agree, good riddance. The huge fortunes these companies made don't really exist they were bets made with borrowed money that was delivered. As has been pointed out many times, when they won they took their profit out of the system, when they lost they shifted the losses to their bookie. In the real world with real money someone would have at least broken their legs by now.
My bad; NOT delivered.
I'm just gonna jump in here with other posters and say boo-hoo.
I'm about as skeptical as I could be about the "talent" that we might be losing. These doofuses got us into this mess and you're worried about losing them? Really.
Yeah I know some of these guys aren't the same doofuses that screwed things up, but still. The myth that there are these talented "Master of the Universe" types on Wall Street who are uniquely capable of managing money is what got us into this mess in the first place, and I see no reason to worry about whether or not we can keep that kind of seven figure "talent" in place.
If they want to get reimbursed the way they used to get reimbursed, they can hurry up and pay us back all that bailout money.
I know I sound like on of those pichfork waving populists, but I promise I'm not. I just don't really believe that there is a class of investment bankers who are brilliant enough to really warrant that kind of pay. They GET that kind of pay because of serious structural problems in the relationships between corporate boards and shareholders. I don't think they deliver anything that is worth the money. Since they weren't able to figure out the housing market we had for a decade was a giant pyramid scheme, I'm not sure they are all they are cracked up to be.
I think we can "get by" with six figure salaried benchwarmers. . . six figures. . . I'm going to stop before I get sick. We're worrying about people being reduced to making six figures?
Boo hoo.
Kelly, Wally, Jamie,
With all that money to be made why didn't any of you guys go into finance?
Your answer to that question will explain why they get paid so much.
So really, why aren't you an investment banker?
I didn't want to work 22 hour days and software startups offer pretty good upside potential. And I don't have to work with investment bankers.
I got my degree in another field, and worked with kids and in construction because it allowed me to start a family early. I am disabled now, but I still invest, and am doing well, but all my growth has been fairly conservative. This is who I am, and the finance people wouldn't have hired me.
For the same reason i didn't become a drug dealer or hit man.
LOL - that's a great line. And it has the virtue of being absolutely true. Not everyone is cut out to check their morality at the office door.
Yawn...
How many more wrongs must be perpetrated by the government to make this right? It isn't clear there are enough wrongs to be made to make it right. Indeed the institutions should have been allowed to fail, and the "bailout" should have been to those non-culpable and affected by the failures. Now we are left with but two choices - first, that cronyism is alive and well and spans political parties so we got the bailout in the first place, or the preposterous, tin-foil hat version that says this is a perfect way to justify further nationalization of the industry.
As for boo hoo's for the folks with six figure salaries, just from whom does everyone expect the additional taxes to pay for healthcare are going to come? Without those "Golden Geese" and their eggs ask not for whom the tax man cometh, he'll come for thee. (*) Of course to one way of thinking, perhaps that would be best, for that would be the only way to have everyone see and feel the cost... but I digress.
As for the specific case of six figure earners in the financial services industry, it is dry and arcane research, but from what I can tell from reading:
http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
"Services" (which I presume includes financial services) are a net positive for the United States - we export more than we import. Put another way, the nation as a whole makes money on services. If all the actually capable folks go to other firms, at least some will be to foreign firms and what used to be a money maker for the United States will turn into an additional source of loss. So, if you want to toss the six-figure babies out with the bath water, best have something lined-up to replace them first.
(*) And thus the gauntlet is thrown in challenge to mix even more metaphors in a single sentence!-)
These pay restrictions, while a disgrace to the concept of a 'government of laws, not men', are having a good effect. They are the only thing out there preventing even more banks from jumping into the arms of government and demanding bailouts.
They call it 'moral hazard' when government support causes more bad behavior. These pay restrictions are the only policy out there working against moral hazard.
Leaving aside the widespread desire to burn the management of any taxpayer-owned business entity at the stake; a couple of thoughts.
1) There are those who are to blame for the financial debacle that dragged down the economy. While I submit that most of the blame is not necessarily from the business world, let us for the sake of argument assume that ALL the blame is due to the evil capitalists.
2) I think it is fair to say, after the organic waste impacted the rotating airfoil; that those in charge who were responsible either have been removed or have bailed out via golden parachute, your choice. That assumption may be rebutted, and I will gladly accept such rebuttal; albeit given that the government now runs the companies that leaves questions as to the competence of their oversight.
3) Of those remaining, I think that it is reasonable to assume that their abilities fit on the standard distribution bell curve, and there is no specific indication as of yet that they have an intent to commit the same evil capitalist acts as those who are gone. That is also subject to rebuttal, and the same questions as #2 above.
4) It would, presumably, be to the benefit of the government and of the taxpayers if the firms were run at least competently, and hopefully well.
5) There is a correlation between compensation and the ability to attract and hold talent [It may not be 100%, but it is a factor.], although that compensation is not necessarily purely monetary. Job satisfaction, patriotism, religious faith, etc. can replace parts of the compensation; but there has to be an acceptable level of financial security, with acceptable levels being determined in large part by the wider market for comparable positions. I rather doubt that there is much satisfaction working for government controlled firms. I do not think that patriotism has been invoked as an incentive as of yet, and I suspect that those employed by those firms are not acolytes of the Lightworker. That leaves standard forms of compensation.
6) I very carefully said "financial security" above. A major part of that involves a surety of actually being paid for one's work. Since January 20, 2009, we have seen that there is no such surety for those who work at government controlled firms. Pay arrangements for those who were trying to fix AIG [specifically those who were NOT responsible for the problems] were agreed to by the Secretary of the Treasury, enshrined in statute, and approved by the President. And they all reneged, with the President threatening mob violence against the employees and their families. Just recently it was ruled that the previously contracted pay of the top 25 officials in each government controlled firm would by cut by 90% by fiat. And the Pay Czar has promised to extend it next to the top 100. And Congress is considering placing pay controls on ALL publicly held corporations. If it is the political view that contracts mean nothing in a government controlled firm, you have to expect those who work for and are customers of those firms to take that into account.
There is a huge disincentive, strongest for the most competent employees, against remaining at a government controlled firm, and an incentive to consider working for a foreign firm. There are repeated examples of the administration choosing apparent transient political advantage over stewardship of either the interests of the firm and its human capital, or of the taxpayers' interests. Those who are the most honest, competent, and in a reasonable world who would be considered valuable employees are being pushed to leave. Because they cannot trust that they will be paid, regardless of value to the company, to the customer, or innocence in what went before.
There is another angle that will eventually surface. Firms, government controlled or not, need customers to survive unless they are fully subsidized by the taxpayer. If you were Joe Customer, and you could see that a) over time the competent people were leaving "Government Conglomerate Inc.", and b) that the management's actions shifted with the political winds rather than what was in the interest of either the company or the customer, would you place your hard earned money with "GCI" trusting them not to screw you either by incompetence or political intent, or would you not look elsewhere?
This seems to duplicate the worst management practices of last century; arrogantly abusing both customers and employees, yet expecting profits.
As noted above the screwing with pay is a good thing in that it discourages any firm from seeking government aid. To be honest, liquidation is probably better than accepting government aid. But there is another problem. The way the system is set up now, it guarantees failure for those firms already seized. And the more and longer that the government intrudes on the management of a business, the greater the failure.
If the State is to take over firms "too big to fail", we probably need to realize that this can only be a temporary expedient. And the longer that the government controls things, the worse things will get. Now that we are so deeply into the quagmire, the path out is not clear. But we need to find one as soon as possible. If the companies fail, so be it. Because they are going to fail anyway if we do not get out.
Subotai Bahadur
I'm not as adept at this stuff as most of you, but doesn't most measurable growth historically come from conservative investments made in solid, diverse categories over the long term? It seems that it was these young guns now fleeing for more cash who were trying to make a quick buck and who bankrupted the Citibanks and BOAs of the world; the organizations that behaved conservatively weathered the storm. Is the government doing Citibank a favor when it forces them to create a conservative, acetic corporate culture? I think it may be.
The key part of the article that most people are missing is that Main St. Americans are PISSED. So angry that if you work on Wall St. you don't go home this Christmas. And this isn't the "flash in the pan" anger Americans are famous for, that disappears when the next celebrity scandal hits. This is the "slow, burning, fear for your life" anger we used to be famous for (in the 19th and early 20th centuries). If the banks don't straighten up and fly right, they'll get a real taste of American-style populism. Believe me - you can't lobby or spin your way out of that once it starts.
I'm actually a little surprised there hasn't been any violence directed at Wall Street as of yet. If jobs start coming back, it may yet be avoided, but if things get really grim on Main St., I'd be pretty surprised not to see some.
>>If you don't allow banks to pay their employees what the market demands, then those firms won't be able to compete.
This may have one of two consequences:
- the megabank may find that investment banking is becoming less profitable and subsequently scale down its investment banking division in favor of a focus on commercial banking
- the megabank may find itself unprofitable and shrinking
In terms of reducing the systemic risk to the banking system, either of these outcomes is a good thing. This is exactly what the government should be incentivizing these banks to do.
Upsidedownpoint & Lars Poulson:
Yes, the American public is mad. And they [and the administration and the government controlled media] are pushing the assumption that every single person who ever worked at those firms is both criminally and morally liable. The logical end of that then is that a) the criminals should be prosecuted with the full weight of the State [which this administration is carefully not doing, even to the ones we can reasonably assign blame to] and b) the firms should be broken up, the fragments burned, the ashes scattered, and salt plowed into the soil. In which case, we should not be both on the hook for trillions of dollars AND running the same companies trying to do the same things. If everyone working at those companies past, present, and future is so irredeemably evil; why are we keeping those companies alive? If they are all beyond the Pale, our current actions are akin to using 'former' members of Al Capone's gang to run the anti-bootlegging program in Chicago. If they are not, and are competent [and the default public assumption of the government seems to be that they are not] why not pay them something akin to market scale? If they are not competent, why are they being kept?
Instead, the administration while talking up a pogrom, is doing its best to re-inflate the same bubble again, with taxpayer funds. They are not interested in a sustainable recovery. They are interested in power, as was plain the moment that it was found that sound firms were forced to take funds, not allowed to repay them, and held prisoner for having taken them. The concept of forever extending political controls on all businesses in lieu of settled commercial law, regardless of financial stability or guilt is economic suicide.
Which path is more productive in the long run for the economy? Punishing, actually punishing, the guilty [which admittedly would turn up a lot of things from under rocks that both parties want to keep hidden] and letting those who are not guilty get on with fixing things; or letting the guilty go free [enjoying their golden parachutes] and punishing those trying to fix things?
The actions and incentives are perversely opposite of what it is claimed to be desired.
I have no problem at all if investment firms taken over by the government are steered out of investments and into conservative banking [or other legitimate economic activity] that yields a safer profit. That should be the goal, and should lead to the government getting out of control of the firms. But this government, and this administration is not even vaguely trying to do that. Just because there are bad guys, it does not mean that those who defeat them are good guys. Just because some firms screwed the pooch big time, legally and morally, it does not mean that the government gets the automatic assumption that they are fixing things, when their policies are doing the opposite of what is needed.
Too many people in our government and media are capable of fiercely holding mutually exclusive concepts in mind as matters of faith; and not having the salutory effect of realizing that there is a cognitive dissonance involved that needs to be sorted out. That gets to be an expensive luxury for the rest of us.
Of course, YMMV.
Subotai Bahadur
I actually thought all of Wall-Street were reckless maniacs, until reading Too Big To Fall. Employees in the companies saw the disaster that was going to happen a couple years before the bailouts. When they tried to warn the Executives they ignored it.
They kept acquiring or producing the terrible assets, in some cases greatly increased it in order to gain short-term bonuses. Pretty appalling that you could knowingly take actions that destroy a company to make yourself more money.
Once the board of directors saw the results of the CEOs strategy,they terminated the CEOs, giving them huge severance packages, while leaving the company in ruins. So blaming the average worker in these firms is totally unfair, just like blaming everyone in Enron.
The government has to pass laws that ban short-term results bonuses in financial companies. The CEOs would just pay themselves a ton of money upfront, so the government would have to cap how much they make. Though any realistic cap number that wouldn't scare them off wouldn't be politically popular. Passing a law saying Wall-Street can't pay more than 30 million a year wouldn't fly.
Wages in the financial industry are artificially high because these public firms have been captured by management and are operated to deliver short to mid term benefit to managers not long term returns to shareholders. I would call it management looting and it is an old problem in the theory of the firm in microeconomics.
It is noteworthy that the Canadian Banks, which did not suffer any meltdown in the current crisis have an interesting corporate structure which really separates the board of directors and the management team. The management team at the Canadian banks are grilled by various of the boards audit committees multiple times during the year to make sure they are performing to the right standard. The CEO's of Canadian banks are paid much less then other international bank CEO's I would say proper shareholder control via the board of directors is the reason why. This legal reform should be key for the American industry; no more management golfing with board members if you know what I mean.
Good post, Daniel.
And unfortunately, many of the responses to your article here demonstrate the problem you address. Americans have an ownership stake in these banks... yet they want the banks to fail (or be severely handicapped) because they are mad they had to bail out the banks. So these people are effectively rooting for their money to go to waste (or comforting themselves with the ignorant notion that all investment bankers are the same and thus the talent drain isn't real).
A classic example of why government ownership of industry is pretty much always a really bad idea.
People who didn't work hard enough and be smart enough to work in wall street are just being jealous as jmo3 wanted to illustrate. These people don't even know the underlying cause of how the crisis happened and instead assign blame to others instead of themselves. However, this is to be expected because people who do not succeed always assign blame on others and not on themselves.
The ironic thing about the situation is that these people, the masses that blame wall street are the ones that caused the crisis and believe that they bailed out wall street. To believe so is also a characteristic of being losers, as they assign more importance to their actions than is warranted.
Main street people, who believe they bailed out wall street, in fact are just minority shareholders. The top 1% of the population pays 40% of the taxes and the top 5% pay 90% of the taxes. Therefore, the taxpayer money that was used to bail out wall street came from the rich, not from main street. Sorry to burst your bubble guys. Your contributions to taxes are just not worthy of consideration... too small.
But it is fitting that main street and the government does not recognize this, and as does main street. It is also fitting that people who are not qualified to comment on these issues are the most vocal and they have ignorant people run these companies into the ground.
I really hope there is a brain drain, because the people who end up getting screwed the most are main street. In their ignorance and hatred, they unknowingly and of course stupidly killed themselves.
BF,
You and Ayn Rand go enjoy yourselves in Galtland, ok now?
Trust me bf, if you are getting 100 performance at 100 million a year for top financial, operational and CEO talent in the banking/finance industry you can get 95% performance for 10 to 20 million a year. It's a no brainer; cut the diva's bring in the grey suits and let the shareholders save some cash. The recent meltdown proves the overpaying top people does not guarantee stable returns, in fact it increases the likelihood of spectacular failure as the overpaid try riskier strategies to get bigger returns and justify their incomes.
You know your tax thing is all wrong right? Or rather it reflects America's income inequality and not 'unfairness' in the tax system.
Why do the top 1% pay 40% of the income taxes .... because that's where the money is. Let me spell it out for you. America is not a country where everyone makes 50K a year. It's one where the bulk make 20K to 40K with a steep jump up at the top of the pyramid. So if people with high incomes are paying the bulk of the tax it is because they are earning the bulk of the national income. The poor and lower middle class do not have the income to make sure the top pay less, duh.
Also your stat is for federal income tax only. When you add in payroll taxes (SS), state and local taxes, it turns out that America basically has a flat tax. The bottom pays about 30% and the top pays about 36%. So all this malarkey about the oppressed 40/1 people is just class warfare (of the top against everyone else... again oh so very Rand)
It may be bad form to post a link to another website, but back in April, the NYT put-up some charts showing income and tax data from the CBO that might be helpful:
economix.blogs.nytimes.com/2009/04/08/how-much-americans-actually-pay-in-taxes
Whether or not SS taxes should "count" I suppose depends on whether or not you believe that what one pays in SS taxes is forced retirement savings you will see again when you retire, or if you believe it is a tax to pay for current retirees. That may depend on where on the earnings curve one sits and whether one believes she will actually see any of that money again when she retires.