Shorter Floyd Norris:

It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge blunders that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.

So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.

Are financial workers overpaid? And if so, will it continue? The answers, according to a new study by two economists, are yes, they are overpaid, and no, it will not last.

“Wages in finance were excessively high around 1930 and from the mid 1990s until 2006,” wrote Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, in a National Bureau of Economic Research working paper released this week, “Wages and Human Capital in the U.S. Financial Industry, 1909-2006.”

Gee, I wonder why taxpayers are upset at the bailouts . . .

Source:
Wall Street Paychecks May Wither
FLOYD NORRIS
NYT, January 23, 2009

http://www.nytimes.com/2009/01/23/business/23norris.html

Category: Bailouts, Markets, Taxes and Policy, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

50 Responses to “Wall Street Pay”

  1. Thisson says:

    That’s a very funny caption. Are you going to add photocranking to this blog, too? They had that over at the fake steve jobs blog and it was pretty funny.

  2. Lugnut says:

    like any other commodity, they are worth what someone will pay for them on the open market. Like McMansions in Nevada, when you have an oversupply of mediocre product, prices fall.

    Lots of inventory(suites), very few buyers (banks) right now. Karma is a biotch…

  3. ben22 says:

    BR,

    If I were to just eye that chart it looks like income on WS is about to plummet, at least if the 30′s were any guide. What is probably more likely is just a lot less people on WS, less hedge fund managers, less brokers, etc. and the wages remain very high.

  4. Mannwich says:

    @Lugnut: Except when the government subsidizes them, it creates a distortion that lends itself to higher pay than a real “open market” would afford. In a real “open market”, most of these firms would have been BK by now.

  5. Mannwich says:

    @ben22: Not if the “talent” pool of quality hires far exceeds the demand for them.

  6. I-Man says:

    The I-Banker schmucks are doomed… but if you are a good trader, Wall St is always a meritocracy… even for a lower middle class rasta like I-Man… at least, thats what I keep telling myself as I slog through my ‘support’ role at a brokerage firm…

  7. Pat G. says:

    You gotta love the analogy in that pic.

  8. FrancoisT says:

    Remind me again why all these firms haven’t been put through receivership/nationalization/BK proceedings?

    Hmmm! Oh! That’s right! They are too big to fail…but fail who or what exactly?

  9. ben22 says:

    @Mannwich,

    That might be the case, but there aren’t a lot of “hires” right now on the street.

    In fact, brokerage houses have already started to make it so that only top producers make any money now anyway.

    Take Merrill for example, if you are a broker there doing 200,000 in comm’s each year you get a 20% or so payout now. So how many people do you really think are going to stay in that job, get killed every day on the phone, and walk home with a gross income of $40k per year. Top payout at ML doesn’t happen until 5mm and above.

    Try doing $40k in Manhattan.

    Those folks are getting out of the biz. Problem is I don’t think they are going to build roads and bridges.

  10. ben22 says:

    I-man,

    I totally agree with what you say but it is getting harder and harder for people to enter the biz. That’s all I was trying to get across, if you are good, you will get paid.

  11. going broke says:

    NICE PIC!

    When all of the banks fail… where am I going to deposit my unemployment check?

  12. Thisson says:

    The thing that does suck about the I-banks/Hedge Funds getting pummeled is that they used to provide a route for people who grew up poor to become rich through hard work and talent.

    If you grew up in a disadvantaged area, but were the cream of the cream, you used to be able to get into a top school on scholarships, do well, get hired by a Goldman Sachs-type firm, work your ass off, and be worth $10mm plus by 35.

    If the I-bank/Hedge Fund model of excessive fees dies, how will lower class americans be able to work their way up the food chain? The days of starting dot-coms or winning big on stock options in start-ups seems to be long gone. Medicine doesn’t pay anything. Wages in law will decline (lawyers have to make less than the bankers they work for, no?). Where’s the money? Brokerage (after X years of living on Ramen noodles?)?

  13. Tom K says:

    Pay to play:

    http://www.washingtontimes.com/news/2009/jan/23/top-bailout-recipients-also-major-lobbyists/

    “A Washington Times review of lobbying disclosure reports found that 18 of the top 20 recipients of federal bailout money spent a combined $12.2 million lobbying the White House, the Treasury Department, Congress and federal agencies during the last quarter of 2008.”

  14. SteveC says:

    The bonus structure fails when rewards are paid regardless of the financial performance of the firm. Case in point is the bonus structure this year at MER. The company had a poor business plan, starts to sink, asks for taxpayer bailout (or else), then pays bonuses with taxpayer cash. They reward many on the lower levels with generous bonuses, so as to make the enormous payouts at the top seem more palatable.

    My solution…No bonuses to anyone when relying on taxpayer funds. (Sorry). Those that want to leave and start-up their own business do so. We now have new healthy businesses, instead of the one wrecked by the poor management.

  15. DL says:

    It also helps that executives at the large banks and (erstwhile) investment banks have the politicians wrapped around their collective finger… they get what they want when it comes to regulation (or lack thereof), and they get what they want when it comes to bailouts.

  16. karen says:

    John Thain called out by President Obama. This is too much:

    Who would have thought that Merrill Lynch would already have an ex-CEO that is less popular than Stan O’Neal? Somewhere out there, Mr. O’Neal is saying, “Thank God for John Thain!”

    http://bespokeinvest.typepad.com/bespoke/2009/01/called-out-by-the-president-badge-of-honor-or-cause-for-concern.html

  17. ottovbvs says:

    It’s grotesque and always has been grotesque. The problem was no one got to excited as long as their portfolios were going up and of course you had a govt that was being funded by these folks under our political system of legalized bribery to make sure that no tax or other checks were put in their way. Actually I think the clamp down is going to happen fairly quickly, much faster than the thirties and the govt has far greater oversight of the financial system than back then. The outrage of events like Thain cutting the bonus pool by 6% when Merrill has lost tens of billions was frankly criminal, I’m not surprised Cuomo is checking it out.

    As for comments like this by Thisson :
    If the I-bank/Hedge Fund model of excessive fees dies, how will lower class americans be able to work their way up the food chain? The days of starting dot-coms or winning big on stock options in start-ups seems to be long gone. Medicine doesn’t pay anything. Wages in law will decline (lawyers have to make less than the bankers they work for, no?).

    I’d say it’s all a matter of degree and he’s being way too pessimistic about future technology breakthroughs. Obviously he doesn’t think an income of say 1-10 million a year is sufficient to keep him in the style to which he wishes to become accustomed. And there are tons of lawyers, doctors, CEO’S and owners of small to medium sized businesses making this kind of money. He can always work on his baseball game I suppose.

  18. larster says:

    I think Thisson is right on. We are a debtor nation that will have to accept a lower standard of living until things get back into some kind of balance. How long this takes is a matter of debate, but it will happen.

  19. Al Bergette says:

    I am a small business owner.

    I think I read this phrase in a post on TBP, “The banks are great at giving you an umbrella when it is sunny out and then they take it away when it is raining.”

    That is so true. Plus they make you pay for the umbrella.

    When things were going well and and business was humming, I factored my receivables to finance cash-flow. The banks I talked to required a lien on all assets, they wanted me to have insurance on my receivables (which was relatively expensive making me less price competitive in the marketplace) and they wanted me to pay way over prime even though I had good credit history. Plus they wanted me to pledge the stock which I held in blue chip companies equal to roughly 50 percent of what they were willing to loan me and they wanted a “commitment fee (application fee).” I went with NBD bank which gave me prime and waived the commitment fee just after they aquired First Chicago

    Now I ask you. With all the aforementioned stops/insurance, how does a bank fuck it up and go broke? I know. They find people like me to pay for fucks that don’t pay promptly or at all on loans.

    I did it for a few years and when in about 2006 after First Chicago which turned into NBD Bank which turned in to Bank One which turned in to Chase had me come in for my annual loan renewal and expected me to pay more interest on the money with another higher “commitment fee” I said to the Loan Officer, “Why are you raising my fees? I’ve never missed a payment on this loan in the three years I’ve had it and I’ve never paid a “commitment fee” Didn’t you look up my history? The Loan Officer is a new one and not the one who originally set me up. The original LO was canned after the merger. Anyway, the new LO say, “Mr. Bergette, we’re a very large bank, I don’t know the history of every customer and EVERYBODY must pay a commitment fee.” Right then I told her, “Don’t do anything. Leave everything the way it is.” and I got up and started walking out of the cubicle when she says, “Mr. Bergette, you realize ofcourse if you don’t sign the papers today the bank will call the loan.”

    I knew that because in the loan agreement I read where if the bank chose to, they could pretty arbitralily call the loan and if they were not paid in some period of time, a week, ten days, I forget the exact window, they could compel my trade debtors to pay Chase directly in stedt of making payment to my company; and because of that and so I could re-negotiate or maintain the same loan provisions from a position of strength and independance, I’d payed-off the loan before this laughable renewal meeting with the new Loan Officer nazi who in hindsight seemed to take for ever to get the OK for the renewal until just about the day of our meeting which was just about the day the loan expired. What a coninky dinky. So if I had all that money committed out there in my trade, it would have been a real bitch to not sign.

    I turned around and told her, “Yes, you’re so big you don’t know that there is no balance on the loan. Look it up on your computer Lady.”

    I walked out of the bank and opened up a new account with another bank and ever since I’ve taken the tact if I can’t grow with my own money. I’m not growing. They are worse then the mob.

    When I closed my account at Chase, nobody asked me why.

    Now every time I see a Chase bank on every fucking corner I think to myself….we are bailing them out and they still have a fucking bank on every corner?

    We have people at these banks and in government who have NEVER had to meet a payroll. They have not a clue what is needed.

  20. Al Bergette says:

    P.S….

    There industry-wind performance of those in ‘finance, fleecing and banking” proves-out they were and are overpaid.

    There is a whole lot of them that are going to be working at Wal-Mart.

  21. Mannwich says:

    @Al B: That story says it all. Time to stop this madness. Me-thinks it will stop (it has to) but not before we possibly ruin this country for good.

  22. Mannwich says:

    @ben22: Back from the grocery store. Agree with you that SOME Wall Streeters will get theirs but here’s the thing – if the banks are no longer making fictitious profits (which is what those “profits” were in recent years, fake), then how can they justify their millions in pay? The ones who truly make money for the firms will get paid, no doubt, but the other faker, empty suits will not and that’s the way it should be.

  23. Stuart says:

    So much talk of more bailouts. Where are the funds going to come from? Do we really expect the Chinese et al to take “Turbo Tim” seriously anymore, just at a time when he needs the funds more than ever?

  24. karen says:

    If you trade ETFs, you may want to read this article. Unfortunately, it was too long for me : )

    Warning: Leveraged and Inverse ETFs Kill Portfolios

    http://news.morningstar.com/articlenet/article.aspx?id=271892

  25. MRegan says:

    WRT ETFs and the morningstar article, the main point in my view is summarized here:

    “Leveraged and inverse ETFs are NOT meant to be held as long-term investments. Let me repeat myself: Very bad things not only can happen whenever you hold these ETFs longer than their indicated compounding period (typically one day for stock-based ETFs, sometimes monthly for commodities), you are almost mathematically guaranteed to get a return that is not double that of the index.”

    WRT DXO which I commented on in a thread about trading, the author noted the following:

    “Let’s say oil is priced at $35 today, and the price is going to go up by $5 every month for the next six months. After six months, you’d be delighted to see that your initial $100 investment had grown to around $325, which is even greater than twice the promised return. The reason the fund would have gained 225% up to this point is that there was no single downtick:…”

    My question is that if the market offers you a 225% gain in a six month time frame, how epically moronic one must be to refuse it? Also, please note that DXO has moved sharply today…between 13-15%, and returning to my point- if the market offers you 13-15 in a session, why refuse it? As an aside, I-Man’s comment regarding DXO in spirit is correct- a gamble, and I agree that USO is probably a more stable option for a position in this. If you want a conservative stock pick, buy PBOF.ob. (I’m probably joking).

  26. DeDude says:

    Unfortunately, these salaries are not determined by “free-market” forces. The compensation is set by members of a backscratching circle of people who would not reduce compensation to any of its members for fear that they themselves would be subjected to similar cuts, in retribution. The only way the actual investors (not institutional managers, who would never do it because they are members of the same circle) could say no way, is if they all at the same time decided to boycott stocks until this problem is fixed (how likely is that). Isn’t it strange that there is not a single fund with “fair-and-sensible” compensation as its investment criteria? No not strange at all, because anybody who ever suggested to create such a fund would get the pink slip next day from his overcompensated boss.

  27. phb says:

    @Al – I worked for a time at competitor of Chase/Bank One/NBD/First Chicago that was dubbed a Super Regional (from Cincinnati who bought a bank in Chicago) and let me add, they did the VERY same crapolla. My assessment is that it is not out of some conspiracy or intent to screw someone, no, no it is far less romantic. This stuff happens because of the total and complete incompetence at loose in these organizations. They attract the lowest common denominator employee, who may have good intentions when they start, quickly turn into some safety seeking boob and get off on having some type of authority over a borrower. It is a strange thing to watch when as an entrepreneur you are trained to cut through the bureaucracy and make a buck. I had to move on, just couldn’t take it…

    As Mannwich implies, we are a f’d up mess until they are allowed to fail and learn to make a profit the old fashioned way, EARN IT!

  28. DeDude says:

    Thisson @ 12:47

    No matter how hard you work you do not deserve to be worth $10mm by age 35. 100h x 52 wks x $25 = $ 130,000 per year. That is all that anybody working their a$$ of actually deserves. Anything above that is (admittedly legal) robbery of the limited resources created by working people in this country. The “talent” you are talking about as deserving special rewards do more harm than good to society and it should if anything be “rewarded” with less pay than actual work making actual products.

  29. Ken says:

    going broke wrote: “When all of the banks fail… where am I going to deposit my unemployment check?”

    Back with the bank on which the check is drawn. Now if only the Treasury had more branches…

  30. ndmaster says:

    @karen- The article was intended for long term investors, for whom inverse or leveraged ETFs are not well suited. You said traders, which these funds are perfectly suited for. They are perfect for traders because you can use less capital and get the same exposure, but for short periods of time, not for long term investing.

  31. call me ahab says:

    @ DeDude

    to paraphrase Supreme Court Justice Potter Stewart (although he was talking about pornography)- I may not be able to define excessive compensation but I’ll know it when I see it. It is pretty tough to nail down a a one-size-fits-all definition for excessive compensation.

  32. Thisson says:

    Well, they’re not all louts. And 130k doesn’t get you anything in a place like Manhattan (which is part of the problem — the bankers bid up the price for everything!)

  33. donna says:

    merit, my butt. People at the top hire who they know.

    All CEOs in this country for the most part are drastically overpayed for what they do. And those at the bottom are underpaid. The greed in this country desperately needs to just Go Away. HOw many millions or billions does anyone need to live on? Find some other way to stroke the massive egos of these people.

  34. donna says:

    Or at least tax them appropriately to turn that excess wealth into some kind of good, instead of letting it run around trying to seek higher and higher returns from phony hedge funds and investment banks…

  35. donna says:

    And Al B, I wish everyone had been as smart as you were. I hate JPM Chase with an intense passion after they screwed around with my mom’s estate for five freakin’ years. She never changed her will from the small little bank that handled their money being the executor. We all paid dearly for that mistake.

  36. willid3 says:

    not sure they are all over paid. but some of the executives and management certainly are. and some of the problems with the others is how their pay structured. after all if your pay is structured to encourage you to make stupid decisions, what does management expect to get? smart decisions?

  37. DeDude says:

    @ call me ahab

    I would take a crack at defining excessive compensation as 10 times the average hourly compensation of the country.

    @ Thisson

    I agree that 130K dosn’t get you far in a place like Manhattan. But as you suggest, the reason is that most people there are making a lot more. If only a few % made more than 130K the prices would be a lot lower. Not saying that YOU are doing anything “wrong” just that everything is out of whack – including how we value/compensate.

  38. AGG says:

    Al Bergette is right.
    Donna too and many others here.
    We all instinctively know the way this was done. Crooks and liars hired more crooks and liars. They used up all the good will from ther prudent, serious predecessors in the financial community. They know they had a limmited time to steal so they made the most of it. Oh, they had talent all right. They were and are talented liars.
    These types are always around. What catapulted them to prominence was a corrupt government.
    As I’ve said before, locks are to keep honest people honest; crooks always find a way. When the government removes the locks, the tsunami of stealing occurs.

  39. I-Man says:

    John Thain anyone?

  40. AGG says:

    To the greedsters, excessive compensation is an impossibility.
    We need to bring back the old “outlaw” law. A person declared an outlaw was stripped of his assets. Anyone could attack him with impunity.
    Greedsters are outlaws. They steal from their family, friends and enemies. They are role models for their children. They are proud of what they do. It’s a tough world, they say.
    I say: You greedsters are about to find out how tough it is.

  41. ottovbvs says:

    Thisson Says:

    January 23rd, 2009 at 3:25 pm
    Well, they’re not all louts. And 130k doesn’t get you anything in a place like Manhattan (which is part of the problem — the bankers bid up the price for everything!)

    Of course they are not all louts since “they” include some of my kids and relations. $130k is small potatoes in NYC but that’s not you were suggesting in your original posting. The implication of:

    “If the I-bank/Hedge Fund model of excessive fees dies, how will lower class americans be able to work their way up the food chain? The days of starting dot-coms or winning big on stock options in start-ups seems to be long gone. Medicine doesn’t pay anything. Wages in law will decline (lawyers have to make less than the bankers they work for, no?). ”

    Was that salaries/bonuses in the tens or hundreds of millions of dollars were a) justifiable and b) likely to disappear permanently. Neither is necessarily true.

  42. call me ahab says:

    @ DeDude

    but what if the company the executive works for pays his workforce 10X the average hourly salary- does that mean his pay should be equal to his employees. In some industries and in some localities pay is going to substantially different due to cost of living and skills levels required of the employees- e.g. a software developer at a software firm vs. a forklift driver at a packing firm. Both employees may make the lower tier pay at the companys they work for but are paid considerably different wages. I am not saying I disagree with you- I am only saying that it is hard to define reasonable pay.

  43. DeDude says:

    “John Thain anyone?”

    I say we start a bonfire. It cannot wait until he get to hell.

  44. momus says:

    One of these banking geniuses recently said, that the golden goose turned into a black swan. It was a black swan all along.

  45. Thisson says:

    I think that to put it in perspective we should remember that there are a lot of people in this world making only about $2 a *day*

    In that sense, we are all overpaid. It’s just a question of degree.

    I think we will see a repricing of Land and Labor (maybe Capital, too).

    So, changing subjects, who here thinks the FDIC will seize a significant bank over the weekend? (5th Third? Regions?)

  46. DeDude says:

    @ call me ahab

    I know pleanty of people who own(ed) their own business and at times were payed less than some of their employees. Heck that is a gimmy until you break even :-). Furthermore, I am not suggesting that we can stop all excessive compensation, just lets call it for what it is. Furthermore, lets also tax it for the rip-off of our collective productivity that it is (say at least 80% on the first few dollars). Lets also make it extremely difficult for it to occur in publically traded companies, by requirering at least 75% of all shareholders to vote positively for any compensation that is excessive, and to do that every single year. Lets also require restriction for any company that get any public money (including contracts).

  47. call me ahab says:

    @ DeDude

    I like the shareholder idea- I would prefer a simple majority however. Not too keen on the taxation angle but maybe there is something to that as well.

  48. AGG says:

    Here’s the solution to all this.
    1) No leverage without real collateral.
    2) Pure democracy among common stock holders (present technology doesn’t require a board of directors). No proxies. No “controlling interest”. No SEC required permission for owning more than 15% stock. One % of shares = one % of vote. PERIOD.
    3) The CEO’s secretary puts ALL decisions to common stock holder vote.
    4) CEOs are paid in money, not stock, stock options, pussy or pals.
    5) Auditiors muxt operate 24/7 on the books. This laid back, 19th century supervision of “books” is a carry over of good old boy networks. Modern technology obviates it.
    6) Complete access to the books by stock holders 24/7 with a proper ID and password.

    It’s easy to do but the conniving, bullying, crooks always block reasonable efforts at reform.

  49. TPC says:

    I placed debt as a % of GDP over the same chart. Interesting correlation: http://www.pragcap.com
    Good stuff….

  50. ben22 says:

    @ Donna

    Or at least tax them appropriately to turn that excess wealth into some kind of good, instead of letting it run around trying to seek higher and higher returns from phony hedge funds and investment banks…

    You can’t be serious right? Do you know what your taxes are used for? Do you know why you are being taxed? I don’t at all disagree with what you are trying to get across however, saying that we could turn some more taxes into something good is just way way off to me.