Wall Street Fat Cats Back in Town with Firms to Pay Record Salaries
Looks like the recession is over at Wall Street as the money comes pouring in. Many blame the current recession on Wall Street and it's over leveraging ways, so it is not surprising that those of us on "Main Street" and government officials in Washington are outraged that after seemingly such a short time and the billions in taxpayer bailouts that the Wall Street firms are paying such large salaries and bonuses.
Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by the Wall Street Journal.Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year's $117 billion - and to top 2007's $130 billion 
payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from the 2007 pre-recession and bailout levels.
The growth in compensation reflects Wall Street firms' rapid return to pre-crisis revenue levels. Even as the economy is sluggish and unemploymentt approaches 10%, these firms have been boosted by a stronger stock market, thawing credit market, a resurgence in deal making and the continuing effects of various government aid programs. The rebound also reflects growing confidence by some Wall Street firms that they can again pay top dollar for top talent, especially once they have repaid the taxpayer-funded capital infusions they received at the height of the crisis. So far, regulators and lawmakers have focused on making sure pay practices discourage excessive risk-taking, leaving to companies the question of how much is too much.
Many financial firms, however, say they need competitive pay packages, pointing to threats from non-U.S. companies, private-equity firms and hedge funds. Mr. van Praag, a Goldman spokesman, said the firm understands public sentiment over bankers' pay, but added: "The easiest way to destroy the firm would be if we didn't pay our people....Destroying a profitable enterprise would not be in anybody's interest." Goldman Sachs, one of the highest paying firms, also says employees have long had a stake in its long-term results because many are compensated in part with shares they can't touch for several years. Average compensation per employee at the firm is on pace to reach about $743,000 this year, double last year's $364,000 and up 12% from about $622,000 in 2007, according to the Journal analysis. The average American earns less than $50,000, so talk about the growing level of income and wealth inequality!
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October 17, 2009 6:08 PM
There's something deeply disfunctional with the culture at these institutions. Personally, I'm not certain that this is fixable with anything less than completely cleaning out these firms and hiring new staff. I do realize this would probably completely explode the economy and so isn't an option.
What I am increasingly wondering though is whether these firms actually contribute anything or if they are profitting off of solely structural necessities. If so, we could probably replace the entire financial industry with a bunch of GS-13 federal employees and still get almost as efficient allocations of capital. There's probably something I'm missing but so much of the industry seems to fill a purely systemic funtion that I'm beginning to wonder if it is all that much different from roads and other physical infrastructure. What role are these companies fulfilling as private institutions that couldn't be relatively efficiently handled as public institutions?
Given that this raises the rather scary prospect of the nationalization of other sectors of the economy that we know from experience perform very poorly under government control (real goods) this probably would be disastrous in practice. I do think discussion over what parts of the industry are purely systemic and do not benefit from private enterprise and which parts have added value from free competition would be a worthwhile discussion to have. Too much of the profit these firms seem to make come purely from necessary transaction costs that have to be handled by someone and relatively little (if anything) is added through private competition.
To put it in other words, how much of the jobs these people are doing could just as easily be filled by someone working 9 to 5 and pulling a high 5 figure salary? How much of it truly benefits from getting the best and the brightest which requires the high pay? Despite the billions being handled I personally believe much of the work could be handled by someone pulling a relatively low salary and only small parts of it benefit from getting the Master's of the Universe types. Not having done the job I could (very likely) be wrong, but from all the articles I read much of this seems systemic and the work being done seems to do little to fulfill the main function of the financial industry, efficient allocation of capital.
For people to approve of these bonuses they need to start trying to convince us that they are actually allocating billions of dollars more efficiently. We know they make their firms billions, what isn't so clear is that these billions represent billions of dollars of additional capital that couldn't have been just as efficiently allocated by the senior staff at the local DMV (slight exaggeration, but you get my drift). How is the real economy benefitting from their actions? To restate, it seems they are playing a shell game and are getting paid billions simply to manipulate the system, not to actually lead to billions of additional value in the real economy.
If you want those bonuses, prove that what you're doing is leading to new factories and businesses and not just collecting
October 17, 2009 6:09 PM
Politicians and the bankers just hope this will all blow over and the good times will start rolling again. The politicians think the next financial sector crash won't happen on their watch and the bankers will have devised new ways to salt away their continued ill gotten gains.
The reality is that the problems have not been tackled and may well come back to haunt us sooner rather than later.