New Bank Bonus Releases – Heads: Bankers Win, Tails : Taxpayers Lose

posted by Nima

July 31, 2009 · Posted in General Economics 

And more unsurprising news on the TARP front. Cuomo releases ugly details on bank bonuses:

NY Attorney General Andrew Cuomo released his report on bonuses at the TARP Top 9.  At these firms alone, over 800 people made north of $3 million in 2008.  That’s a lot of scharole.  See Appendix B for the bonus breakdown at each bank.

The key info is in one particular table, however:

(Click to enlarge in new window)

picture-1

The columns to the right list the number of employees that received bonuses in excess of $3 mil/$2 mil/ $1 mil.

Banks that are still sitting on their TARP money (Citi, BofA, Wells among them) have no business paying out big bonuses before paying back the government. For that matter, neither do the others, who all continue to benefit from FDIC guarantees on debt and Fed lending facilities through which they’ve traded toxic loans in exchange for perfectly liquid Treasuries. They can use the Treasuries for repo collateral, get cash and then put that on deposit at the Fed where they now get paid interest on their excess reserves. It’s a great scam. One that feeds lots of cash into the 2009 bonus pool.

And GazetteOnline writes:

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo’s office focused on 2008 bonuses paid to the initial nine banks that received loans under the government’s Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Comparisons to historical payouts weren’t available, as the banks are not required to disclose the information publicly. They provided 2008 details to Cuomo’s office under subpoena.

Cuomo’s office found that the companies, which also included Bank of America Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., awarded nearly 4,800 million-dollar-plus bonuses, with much of the money going to Wall Street investment bankers.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo’s office said. The bank’s top four recipients received a combined $43.7 million.

The New York-based bank received $45 billion in government money and guarantees to protect it against hundreds of billions of dollars on potential losses from risky investments.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” Cuomo said in the report, noting banks have not in recent years actually tied pay to performance as they claim when describing their compensation programs. Cuomo added that when banks’ performance deteriorated significantly, “they were bailed out by taxpayers and their employees were still paid well.”

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Bank of America has been sharply criticized for its acquisition of Merrill Lynch because of mounting losses at the Wall Street bank and the size of bonuses Merrill paid its employees. Of the $45 billion in bailout funds Bank of America received, $20 billion was to support the acquisition of Merrill. Neither Bank of America nor Citigroup have repaid their TARP loans.

A Bank of America spokesman declined to comment on the report. A spokesman for Citigroup did not return repeated calls for comment.

The truth is: The public has no business discussing and quarreling about how much banks decide to pay their employees in bonuses. Legislators had the choice to unconditionally reject the TARP bailout ripoff. Many tried to talks sense into people. They didn’t listen. They rewarded companies whose financial irresponsibility led them to collapse, so they could continue their adventures in screw-up land. What did they expect to see happen? Now these clowns are running around, trying to find scapegoats for their own incompetence and cluelessness. What a circus!

Paola Sapienza and Luigi Zingales appropriately call for the government to Stop Subsidizing the Street:

The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity. That’s because every crisis challenges the status quo and in so doing creates the opportunity for something new to emerge. “This process of Creative Destruction,” wrote economist Joseph Schumpeter, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

We have experienced the destruction wrought by the financial crisis. Now it’s time to focus on the opportunities it brings. The first place to look is the site of the greatest destruction: the banking sector. While finance will remain a pillar of a well-functioning economy, it’s unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.

Even more important is that Americans are rapidly losing trust in their banks. A survey we conducted at the end of March showed that only 29% of Americans trusted banks, down from 34% three months earlier and 42% a year ago. Twenty percent of respondents felt that a bank had cheated or misled them in the previous 12 months, while 10% had withdrawn their FDIC-insured deposits and squirreled away the cash. The word “credit,” speaking of telling etymologies, comes from the Latin credere, which means “to trust.” Trust is essential in banking, and it’s unlikely that banks can restore it. It’s always difficult to regain trust; it’s easier to start anew.

Luckily, starting anew is exactly what’s happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It’s too early to tell if these attempts will succeed, but it’s vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government’s record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

TARP was sold as a way to keep credit flowing, but it could wind up delaying the success of new ventures that could help revive credit in the economy. For finance to begin allocating resources efficiently again, the government must stop propping up Wall Street.

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