$173,403 Average Pay for Bankers (Estimated for 2008)
Saturday, December 6th, 2008
Greenwich Hedge Fund Guy Laments Era of Greed: Michael R. Sesit
Commentary by Michael R. Sesit
Dec. 5 (Bloomberg) — It’s a good bet that the global financial crisis was the topic du jour at many Thanksgiving gatherings last week.
That was especially the case at one house in Greenwich, Connecticut, the unofficial home of the U.S. hedge-fund industry.
The annual affair of family and friends was hosted by a lawyer and his wife. The 35 or so guests included a physicist, three physicians, a social worker, a systems analyst, several folks with marketing backgrounds, assorted spouses and children, and, you guessed it, a hedge-fund manager, who happens to be the lawyer’s son-in-law.
Aside from wanting to know when the crisis will end, the crowd was especially concerned about the gargantuan sums Uncle Sam was shelling out to rescue various parts of corporate America and the outsized pay packages offered by banks and securities firms, especially bonuses.
All told, the U.S. government is providing more than $8.5 trillion in investments, loans and guarantees, according to data compiled by Bloomberg. That’s about 62 percent of the U.S. gross domestic product.
The figure includes $122.8 billion to backstop American International Group. Inc., once the world’s biggest insurer. It also includes a $20 billion cash injection and $306 billion in guarantees for troubled mortgages and toxic assets at Citigroup Inc. It doesn’t include $34 billion being sought by General Motors Corp., Ford Motor Co. and Chrysler LLC.
Shift the Burden
Instead of putting U.S. taxpayers on the hook for the entire bill, the Greenwich diners argued that financial-services firms should have to contribute directly to the bailout efforts, relieving at least some of the government’s burden. The conversation was heated, even testy. The lawyer even asserted that all bankers should be shot.
Among the less extreme suggestions were the following:
– Employees at financial service companies earning more than a certain amount or receiving a bonus in excess of $25,000 must purchase a new vehicle from one of the Big Three U.S. automakers. What’s left of the bonus should be invested in GM or Ford stock or bonds issued by these companies.
– Employees of banks and securities firms must use credit cards issued by Citigroup.
To the extent that U.S. banks and foreign institutions operating in the U.S. and their employees need insurance, it must be purchased from AIG.
Redirect Bonus Pools
– Every banker must ensure that at least one home with a mortgage is protected against foreclosure. “The ones who fiddled while Rome burned should be made to pay for the fire brigade,” one guest said.
– Banks’ bonus pools should be used to finance a beefed-up U.S. regulatory structure, not doled out to employees.
These suggestions might help the government deploy its influence and money to support larger objectives, as a European country might do.
They also help align the interests of bankers and taxpayers. Instead of focusing on the design of new bonus structures, the banking industry would be required to contribute more to cleaning up the systemic mess it helped create.
These suggestions admittedly don’t do much for free choice. Yet if you want the government to pay for the band, it ought to have the right to dictate the tune.
Outsized Pay Packages
Compensation in the financial sector is a sore subject, especially since taxpayers are being stuck with a hefty bill and most Americans earn a fraction of what bankers make. The global finance industry has racked up $979 billion in losses and writedowns since mid-2007, according to Bloomberg data.
Lawmakers, including Representative Henry Waxman and New York Attorney General Andrew Cuomo, are scrutinizing compensation at nine U.S. banks that received the initial $125 billion of government bailout money in October.
Several banks, including Citigroup and Wells Fargo & Co., have said they won’t use government funds to pay bonuses. But that’s a bogus argument, because money is fungible.
Bonuses are slated to fall along with the decline in revenue. Several institutions — including Goldman Sachs Group Inc., Barclays Plc, UBS AG and Deutsche Bank AG — have said they won’t pay bonuses to top executives this year. Year-end payouts to other workers at Wall Street firms will decline by 10 percent to 45 percent, according to a report by compensation consultants Johnson Associates.
Wanting Ferraris
Still, they aren’t headed for the poor house. Last year, the five biggest U.S. securities firms paid their employees an average $353,089, including an average bonus award of $211,849. Merrill Lynch & Co. plans to cut year-end bonuses by about 50 percent on average. Based on 2007 figures, that would mean an average bonus of $74,307 and imply an average $173,403 in total compensation per employee. Not bad for a firm whose revenue for the first nine months of this year was a measly $13,695 per employee.
Returning to that Thanksgiving dinner, the hedge-fund executive said that American society was marked by greed, with college graduates more interested in earning enough money to purchase a Ferrari than pursuing less lucrative, more socially useful careers.
Spot on. But what is the solution?
(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net
Last Updated: December 4, 2008 18:01 EST
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_sesit&sid=aFrUhw3qKXoc