Wall Street firms that figured their lavish pay practices might escape public outrage and scrutiny once they paid back their bailout funds have come in for a rude awakening.
In the wake of revelations that Goldman Sachs, JP Morgan and other big banks plan to distribute a record-breaking $74 billion in bonuses after a prosperous half-year of trading in the financial markets, members of Congress and their constituents are refocusing on what they consider to be overpaid Wall Street employees. The House moved last week on legislation to severely restrict future financial pay.
Wall Street firms sought to head off public opposition by meticulously repaying bailout funds from the Treasury before announcing the bonuses.
Goldman and JP Morgan bought back stock warrants given to the Treasury. By the letter of the law, that freed them from restrictions on executive compensation imposed by Treasury under the federal bailout program.
Still, it didn’t stop a renewed outpouring of criticism from Congress and the American public.
Labor unions and other Democratic groups decried the overcompensation and short memories on Wall Street, and the House approved a bill to prohibit risky financial pay practices through broader regulation and require executives at all corporations to give shareholders a “say on pay” packages.
“As millions of families struggle just to hang on to their homes and get through the next month’s bills, the architects of the economic crisis are using our tax-dollar bailouts on the kind of bonus money that finances glitzy Upper East Side penthouses and glamorous Riviera getaways,” said Andy Stern, president of the Service Employees International Union.
Congress also is honing plans to levy heavy taxes on the rich to pay for an expansion of health care and other government programs, and Wall Street for decades has hosted the world’s wealthiest enclave of millionaires and billionaires.
Robert Shapiro, who was an economic adviser to President Clinton and now heads NDN’s Globalization Initiative, a center-left economic think tank, said giant bonuses on Wall Street were widely thought to have helped cause the financial crisis last year.
“The old practices that got us into this mess still go on,” he said, noting that Goldman Sachs and other Wall Street firms that made big profits trading in stocks, commodities, currencies and other markets this year plan to distribute the bonuses as they have in the past to employees who helped generate such large, short-term profits. The problem is, he said, some of their trading strategies — such as placing big, leveraged bets on rising oil prices or a fall in the dollar — might involve substantial long-term risks and losses as well.
The incentives for taking inordinate risks to reap short-term gains have only increased on Wall Street since last year, Mr. Shapiro said, because the top banks and Wall Street firms know the federal government is ready to bail them out if their trading and investment strategies fail. Should their risky activities result in bailouts, the traders who created the problems likely will have long departed and taken their generous bonuses with them.
“These compensation practices have to go,” Mr. Shapiro said.
Goldman and other Wall Street firms apparently took pains to avoid a backlash after the rage over bonuses at American International Group Inc. earlier this year.
In its rush to be free from federal pay restrictions, Goldman was among the first to repay its bailout funds and may have overpaid Treasury to buy back its stock warrants. Meanwhile, it quietly urged employees to avoid any conspicuous consumption that might attract attention, according to reports circulating on Wall Street.
Goldman trumpeted last week that the taxpayers had made a 23 percent return on their investment in the company — the same as Goldman’s own returns on equity during the second quarter. But that did not prevent a new round of finger-wagging by members of Congress or an investigation into the company’s pay practices by federal regulators, which was disclosed in a Goldman regulatory filing this week.
A raft of news reports has blamed the high-flying Wall Street firm for playing a major role in creating various financial crises in the past decade — from the housing and credit bubbles to last year’s oil and commodity price bubbles.
The criticism of Goldman is the “price of success,” said Richard Beales, an analyst at Breakingviews.com.
He noted that Goldman ranks among the most successful investment houses in Wall Street history and has spawned an array of influential policymakers, including former Treasury Secretaries Henry M. Paulson Jr. and Robert Rubin as well as one-time senator and New Jersey Gov. Jon Corzine.
Goldman remains in the “politically charged spotlight,” he said, because of the roles some of its alumni played in deregulating the financial industry and — in the case of Mr. Paulson — authoring the banking bailout.
Members of Congress have suggested that Goldman has received preferential treatment from federal regulators because of its well-placed Washington connections. The firm received a large share of the bailout funds the Federal Reserve provided to AIG to cover credit derivative insurance contracts last year.
Knowing that it is “first in line for any backlash, justified or not,” Mr. Beales said the firm was trying to “soothe political and popular indignation” — apparently with little success — by paying Treasury its asking price for the stock warrants, which he said was unjustifiably low at nearly $40 below Goldman’s current stock price.
Workers who enjoyed lavish bonuses from Merrill Lynch last year just before the firm’s acquisition by Bank of America will not receive such largesse this year. Bank of America, based in Charlotte, N.C., has a reputation for stingy compensation packages, said Breakingviews’ Jeffrey Goldfarb.
Many of Merrill’s senior staffers have left, some to work for foreign rivals such as London’s Barclays Bank and Japan’s Nomura Securities, which are not under the same scrutiny and pay restrictions as Wall Street firms.
“The anti-greed frenzy doesn’t seem to have reached all the trading floors and plush offices where pay is determined,” said Mr. Goldfarb. “New entrants such as Barclays and Nomura are helping to keep the bonus culture alive.”
Several of the biggest banks — notably, Citigroup, Bank of America and Wells Fargo — remain under the close control and scrutiny of the Treasury and its “pay czar,” Kenneth Feinberg, because they have not repaid their bailout funds. To avert an outcry over bonuses and pass muster with Mr. Feinberg, Citigroup and Wells Fargo have moved to pare back annual bonuses for employees and replace them with higher salaries.