By Mark Huffman
ConsumerAffairs.com
July 31, 2009
New York Attorney General Andrew Cuomo says his office has
examined the compensation structures employed by various banks and
firms and found many that received federal bailouts gave their
executives lavish bonuses.
In several cases, says Cuomo, the total of bonuses paid greatly exceeded the banks' total earnings.
In compiling the report, he says his office, conducted an investigation into compensation practices in the American banking system, reviewed historic and current data on numerous banks' compensation and bonus plans, and taken testimony from participants in all aspects of,the process, including bank executives who set and administer the compensation process, members of boards of directors who review company salary and bonus structures, compensation consultants who advise the companies, and the recipients of bonuses.
The investigation found that most banks emphasize the importance of tying pay to performance. Indeed, one senior bank executive noted that individual compensation should hot be set without taking into strong consideration the performance of the business unit and the overall firm.
But despite such claims, one thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees, Cuomo said. In many ways, the past three years have provided a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based. But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance.
According to Cuomo's investigation, when the banks did well, their employees were paid well. When the banks did poorly, their employees were also paid well.
And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well, Cuomo said. Bonuses and overall compensation did not vary significantly as profits diminished.
An analysis of the 2008 bonuses and earnings at the original nine TARP recipients illustrates the point. Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion ateach firm. Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses, according to the report. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received bailouts totaling $55 billion.
For three other firms -Goldman Sachs, Morgan Stanley, and JP. Morgan Chase -2008 bonus payments were substantially greater than the banks' net income. Goldman earned $2.3 billion, paid out $4.8 billion in bonuses, and received $10 billion in TARP funding.
Morgan Stanley earned $1.7 billion, paid $4.475 billion in bonuses, and received $10 billion in TARP funding.
JP Morgan Chase earned $5.6 billion, paid $8.69 bil1ion in bonuses, and received $25 billion in TARP funding.
Combined, these three firms earned $9.6 billion, paid bonuses of nearly $18 billion, and received TARP taxpayer funds worth $45 bil1ion. Other banks, like State Street and Bank of New York Mellon, paid bonuses that were more in line with their net income, the report found.
Thus, the relationship between performance of the firms and bonuses varied immensely and the bonus incentive system does not appear to have been tethered to any consistent principles tying compensation to performance or risk metrics.
In some senses, large payouts became a cultural expectation at banks and a source of competition among the firms, Cuomo said.
The U.S. government launched a $700 billion bank bailout program last October, when it appeared the credit market was in danger of collapse. Under the plan, the Treasury Department was authorized to use the money to buy so-called toxic assets, complex mortgage backed securities that had lost most of their value, making the banks that held them virtually insolvent.
Instead of purchasing the securities, the government instead gave billions to the banks in exchange for stock.
