When the US government started talking about paycuts for banks' "top executives", it seemed at the time that they were talking only about the top four or five C-suite officers of the company. When the press uses the term, however, it seems to mean "anybody at the company who makes a lot of money".
The WSJ reports that "David Gu, head of Merrill's global-rates division, made $18.7 million in 2008" -- but Gu doesn't even appear on Merrill's old "executive management team" list, which includes no fewer than 34 different names. Merrill's top earner, Andrea Orcel, is on the list, but only in 13th place. And I suspect that many of the 11 eight-figure earners were either on guaranteed bonuses or were traders with essentially no executive role in the company.
Which is not to say that they deserved their bonuses, of course. If the company you work for loses billions of dollars every quarter of the year, then you can't reasonably expect that company to give you a whopping great bonus, even if you personally did well.
From the employee's perspective, why not? These guys don't think of themselves as part of Merrill; they're free agents. They're at Merrill for the money, not because they have some great loyalty to the firm; they might as well be contractors. I doubt Merrill's IT consultants offered to give back performance bonuses because the firm was having a bad year. Besides, from their perspective, they kept a bad situation from getting worse.
The public wants these employees to identify with the firms, to accept the group responsibility for what happened. And in the old partnership days, they probably would have felt some responsibility--a partner's fortunes rose and fell with his firm. (And in return, partnerships took care of partners whose production fell off). But that 40+ year model of employment is gone. Not just because people got greedy--though anyone who watched one of the banking houses go public can testify, the partners got greedy. But because markets change too fast. The current travails of GM workers illustrate what happens to people who bank everything on the fortunes of one firm.
In the case of banking, however, I might be willing to make an exception. Pretty much everyone agrees that two of our biggest problems are, first, excess risk-taking by banks, and second, the existance of institutions that are too big to fail. So why not force banks to operate the way they used to: as partnerships? I don't think that anyone believed they were creating the kind of massive systemic exposure we ended up with, and in fact the heads of the banks tended to have their personal fortunes tied up in the bank's operations. But the lower level employees, the ones who actually knew what was going on in their trading books, didn't. If the banks had been partnerships, I'm willing to bet that a lot fewer of them would have been tempted to lever up quite so far.
They also wouldn't have been able to get too big to fail; the rationale behind going public, other than sheer greed, was the ability to raise more capital. We'd have a lot of little banks, no one of them big enough to take the whole system down with it.
I'm not saying that this would have been a panacea; it would have costs, of course, and some banks would probably still have failed. But things might not have gotten so bad so fast if everyone hadn't had such huge incentives to make highly leveraged bets.
I don't understand why we can't have a government that keeps an eye on the financial world, in much the same way as (ideally) a doctor would keep an eye on a healthy patient, offering advice, keeping the cholesterol down, etc. I believe in capitalism, not anarchy. It's not like there was some big secret about super-highly-leveraged financial instruments, unstable hedge funds, the occassional crisis every year or so. I don't think we need to change the way companies operate; I do think that we need a proactive government (and it would help if Democrats and Republicans could work together... not that I actually expect to see that) that keeps its eye on the financial system, in much the same way as it should keep its eye on other countries, domestic terrorists, etc., and is not shy about nipping a potential crisis in the bud.
Ming:
Why yes, it would be nice if we had a government that could predict the future.
It would also be nice if we had flying ponies.
I don't understand why we can't have a government that keeps an eye on the financial world, in much the same way as (ideally) a doctor would keep an eye on a healthy patient, offering advice, keeping the cholesterol down, etc.
Why would you need a government to offer advice? Anyone can offer advice. You don't think the financial world listens to advice already? Indeed, the government had plenty of advice to offer. Advice like "offer more high-risk loans to marginal home buyers". This turned out to be not such great advice.
"But the lower level employees, the ones who actually knew what was going on in their trading books, didn't. If the banks had been partnerships, I'm willing to bet that a lot fewer of them would have been tempted to lever up quite so far."
As partners, would they also be less likely to get fired for voicing their concerns?
Also, from the CEO level, as managing partner he has less to fear if the company's performace lags its peers. As long as he can convince the 400 partners he's right, he can keep his job.
1) They were not like contractors in that they were gambling with the money of Merrill's shareholders, many of whom have now taken a bath, thank you. Nobody is clamoring to seize the earnings of people who made their money on etrade, but most of us on etrade don't make that kind of money, and with good reason. If they needed an institution's support to make their money, then they should not be surprised when that institution's failures mean that they no longer get their money.
This is not unique to bankers, which brings me to:
2) I don't understand how you can make the above analysis yet think exactly the opposite about the autoworkers. You are right that every employee is in some sense a private contractor for her labor. However, why do you wish that the autoworkers would realize that their companies' failures mean the demise of the payments they had coming to them, while defending these gentlemen's right to be paid despite their firms' failings?
For a reader, it is hard to avoid the suspicion that your conclusions are guided more by class loyalty or myopia than by objective reasoning.
Vermando,
If you are a broker at Merill with a $100 million book of business you can pick up the phone at any time and have a new job and a substantial cash bonus within days. If you are an auto worker it's not like you can call Toyota or Honda and they will make you an offer.
A good broker is worth millions. No matter how good you are as a windshield installer, you aren't worth more than 50k a year in that role.
LTCM was a partnership and they exploded just fine.
Besides, from their perspective, they kept a bad situation from getting worse.
That's like Obama's "create or save" line, isn't it?
Why yes, it would be nice if we had a government that could predict the future.
Maybe Geithner can call FreedomWorks and ask if he can borrow their time machine.
I'm curious, what's stopping the financial sector from instituting a code of professional ethics with a qualification like the legal profession's bar exam and subsequent threat of disbarment?
Would we have these arguments about chilling hiring by capping compensation and such if people who didn't hue to certain standards of professional ethics could be disqualified from working in the financial sector ever again?
Given how important banks and financial institutions are to society, why not have this sort of standard of accountability?
Nob:
The institution administering the ethics exam will use it as an entry barrier. You wouldn't accomplish much.
What I don't understand is, how is a corporation different from a very large partnership, in which each partner holds so little of a share that most don't bother showing up for work.
Well, if it's a general partnership and not a limited liability partnership, then it's pretty different because if the company goes out of business you can lose all your assets.
But in most of the cases of these large partnerships, including LLPs, a lot (most) of the employees were not partners, but had the dream of becoming partners some day. Their motivation to show up to work was to make partner if successful.
Compared it to a university. Professors with tenure don't have to both showing for work. But people trying to make tenure do.
Megan, you should stick to reviewing gadgets. There already are financial firms structured as partnerships. Have a long hard think about what they might be, and whether they avoid leverage just because they have their own money invested. These firms (go on, try hard, you'll get there; someone left you a clue already in this thread) are structured *so that* they can lever up more than a commercial bank. As usual, you don't think past your own navel, and the obvious goes sailing by.
Dr. Zen - heal thyself! The only bank of any size that hasn't needed TARP money is Brown Brothers Harriman & Co., which is a partnership of primarily general partners, bearing full liability for their deposits. The majority of its nearly $500mm in capital is owned principally by about 35 of the partners. It has no federal insurance. Despite all these disadvantages BBH had a record year last year with ROEs that most public companies would die for and is beating away depositors with a stick. One other advantage - it is taxed once, at the individual partner level.
Those of you going on about LTCM do understand the difference between a limited partnership using other people's money and a general partnership using your own, right?
It does inhibit capital raising. If in the future we still need $30 Billion backup credit facilities it would take am awful lot of BBHs to put those together.
This whole crises has made me realize that financial firms should not be corporate. Personal liability, along with vested self interest, would make our lenders a *lot* less risky with other peoples' money.
"They're at Merrill for the money, not because they have some great loyalty to the firm; they might as well be contractors."
Then why aren't they contractors? Could it be because they need to prestige (such as it is) of working at a firm like Merril in order for anybody to take them seriously?
This whole "me first, screw everybody else even at my own firm" attitude you're espousing is exactly the one that got us into this mess. Who cares about writing a bad loan as long as you're getting bonused? From an employee perspective - why not? Sure the bank will go down in flames bringing the entire global economy with it along with shareholder wealth, but from my perspective I'm an independant contractor out to earn my bonus.
The confusing thing is why you don't think anybody would be able to see this. You're still espousing dubious academic theories to ehance the elite as if it were 1982 and nobody knew any better.
These guys don't think of themselves as part of Merrill; they're free agents. They're at Merrill for the money, not because they have some great loyalty to the firm; they might as well be contractors.
I am so tired of hearing this crap from whinny overpaid prima donnas. It doesn't matter what these guys think. They work for a company that is bleeding money and struggling to survive. If they can't tolerate a cut to their grotesque compensation packages, then f*** em. If they are unhappy, they can quit and find someone else willing to pony up the cash.
Having a lot of little banks is all very well. But if those little banks are still all tied to the Federal Reserve, the Federal Reserve will still be acting as one big bank that can make bad decisions for the whole economy.
Rum,
Well, that's exactly what is going to happen.
The papers in NY are full of stories about Deutsche Bank poaching the most productive and profitable employees away from the other banks in town. Why shouldn't they? Why shouldn't the Merrill trader who can earn profits for the bank of hundreds of millions go someplace else that will pay him fair value for doing that?
I also read today that NY Attorney General Cuomo - a Spitzer wannabee - has subpoenaed various Merrill employees to come testify about their pay packages. I hope they stick it to him: "I deserved my $28 million because I made $500 million for the bank last year - what the hell did you ever do to make any money for anyone, Mr. Blowhard Atorney General?"
"I'm curious, what's stopping the financial sector from instituting a code of professional ethics with a qualification like the legal profession's bar exam and subsequent threat of disbarment?"
- Nob Akimoto
I'm not sure having the ethics of lawyers would be an IMPROVEMENT.
Mike Shedlock posted this on his blog yesterday
"By attempting to bail out Fannie Mae, Freddie Mac, AIG, Citigroup, Bank of America, and Merrill Lynch, the Fed is making irresponsible bets, taking huge losses, and has no regulatory oversight. There is a huge gap in the system, and that gap is the Fed itself."
This problem always exists, if you have a large unregulated market that you attempt to regulate you need a large and powerful body to do so. Then the regulator itself becomes a large, powerful market without regulation and you end up with a "turtles all the way down" issue every time you 'fix' the system. Long story short, even if you believe capitalism can't self regulate it still has a massive advantage central regulation and that's competition. At least when one sector fails there are other experts in the field ready to expand and soak up as much market share as possible. Perfect? No, but its far better than the alternative of having the Federal Reserve making massive mistakes and not only retaining but expanding their power. What happens when the Fed fails? that certainly seems to be the path they are on.
DBL is right. My guess is that the government is currently (and unwittingly) demonstrating why it is too incompetent...no strike that...too stupid to run most enterprises successfully.
Just remember that the "infamous" AIG corporate retreat was intended for AIG's top independent brokers.
Historical point: Adam Smith was not a fan of what was then called the joint-stock company and is now called the corporation. He felt that having so many owners with such small shares led to a lack of oversight and thus a poorly-run company. Perhaps he was right.
Odd that you talk about smaller banks as being more reliable - I'm Canadian, and we have five banks that do something like 90% of the business in the country. It's a total oligopoly. Of those five, one is among the best-performing banks in the world right now(it stayed completely out of mortgage securitization and all that other fun stuff), three are humming along nicely, and one took some billion-range losses but is back into profit now.
Of course, Canada's banking system has always been freakishly stable - when the US was shedding banks by the thousands during the Depression, Canada lost exactly zero - and it's not as simple as just comparing the two systems on one variable. But while my data points are few, I still feel the need to question the assumption that smaller, more tightly run, banks are automatically more stable.
"These guys don't think of themselves as part of Merrill; they're free agents."
"Free agent" elevates them to sound like superstar baseball players who, basically, have teams at their mercy and do whatever they can get away with. I'm sure some of these people are very talented but unless you are a fan of Wall Street I don't think that is a particularly accurate or useful analogy.
If you meant to say "they're like freelancers" and should be paid like any outside supplier would be (regardless of the company's performance) that would be a reasonable argument except that a) they do not fit that definition since they do not have multiple clients and b) as soon as the winning streak ended why didn't the companies either cut back on their services or switch to a lower-priced supplier? You seem to want it both ways here.