There’s been rather a lot of self-righteous indignation lately about the bonuses paid out for 2008 by Wall Street. The hullabaloo started off with the New York State Comptroller announcing that bonuses were down 44% year-on-year. This was meant as a dire warning that the economy of New York City was going to hell in a hand basket. Somehow, what got picked up was that bonuses still weighed in at $18.4 billion, which some people still consider to be a lot of money.
Very surprisingly to me, some of those people turn out to be the folks in Washington who are planning to spend $887 Billion with a straight face. (How much money is that? See this brilliant post.) Last Thursday our President called the bonuses “shameful” and that unleashed an avalanche of outrage. The ever-level-headed Maureen Dowd called for a “a special prosecutor or three” in her New York Times column. Even personal finance blog The Digerati Life joined in on the fun.
If you have no idea how Wall Street works, don’t understand how many people work there, and are just generally the jealous type, it is easy to be sucked into this. Heck, it’s kinda fun. But the mundane truth is that the term “bonus” is confusing you. Wall Street bonuses are not extra money passed out at year end on top of regular compensation. They are the primary way people get paid for their labor.
Wall Street firms are very decentralized affairs, really more like vast collections of tiny independent operations that share office space and brand names. Strange as it may seem, the great majority of Wall Street workers made money for their firms last year and rightfully expect something like their usual cut. True, a very small number of employees managed to lose spectacularly large sums of money, enough to outweigh all that the profitable ones brought in. And it is also true that in most cases the firms were not contractually obligated to pay all that they did.
But you can only stiff your employees once, and only then in the process of bankruptcy. Nobody would ever work for you again. Vaporizing the big Wall Street firms is certainly a conceivable option, but I think there is general consensus that we should keep them alive.
And then there is the fact that bonuses are down 44% from 2007, which was down some from 2006. Are the car makers cutting pay 44%? Is anybody ready to suggest that to the UAW and then hint that even at that level it is “shameful”? (I know I’m not. Seriously, fellas, it’s just a blog.)
The financial crisis seems to be clouding all thinking as regards money and Wall Street. For example, my hero John Thain has been getting a lot of grief lately. David Brooks’ column in the Times today jokes that Thain got in trouble because “it is no longer acceptable to spend $35,000 on a commode for a Merrill Lynch washroom.” Which is really funny as long as you think that “commode” means a toilet and not the antique sideboard that he actually bought. (Geez, David, don’t you watch The Daily Show? Jon Stewart showed a picture of the thing last week.)
John Thain took over a brain-dead company in 2007 that, we know now, was circling the drain. He kept a good poker face, even spending lavishly to outfit his new office. He then hoodwinked one of the largest banks in the world into paying $50 billion for the company, which was at least $50 billion more than it was worth. That has got to be one of the greatest feats of salesmanship of all time. I’m not sure I would want to work for Thain, but he can work for me anytime.
A lot of the anger and frustration about Wall Street bonuses and office furnishings stems from the fact that these Wall Street types, who are at least partially responsible for getting us into this mess, are now the beneficiaries of government largess. That’s understandable. Why should these irresponsible pinheads get any of our money? It would be like enacting a subsidy for low-end home buyers or creating another wave of cheap mortgages or even passing a law to stop all foreclosures. All of those things would be just a transfer of wealth from the taxpayers to reward the fools that started this fiasco. Can you imagine the outrage something like that would cause?
I know I can’t.