by Eric Martin
Where have all the cowboys gone? (via Sean Paul Kelly)
For months, Wall Street banks and the troubled automakers feverishly protested that their top executives would flee if they were not lavishly rewarded for their talents. New data, however, suggests the departures were more of a trickle than a flood, Eric Dash reports in The New York Times.
Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.
The relative stability, at least within the executive suite, suggests that a soft job market, corporate loyalty and personal pride helped deter the feared management exodus at the companies hardest hit by the pay rules.
Right. In the end, these execs were willing to stick it out, and work for paltry sums, like $8-9 million a year - even though much of that money is in the form of stock options (gasp).
Their penchant for selfless sacrifice was greatly underestimated by us all. That, and the market for 8 figure-salaried executives just isn't what it used to be - and likely never was.
Which is a nice segue to this excellent piece published by Yves Smith on Naked Capitalism. A taste:
Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.
Reinhold Niebuhr, Moral Man and Immoral Society
A year on from its brush with Armageddon, the financial services industry has resumed its reckless, self-serving ways It isn’t hard to see why this has aroused simmering rage in normally complacent, pro-capitalist Main Street America. The budget commitments to salvaging the financial sector come to nearly $3 trillion, equivalent to more than $20,000 per federal income tax payer. To add insult to injury, the miscreants have also availed themselves of more welfare programs in the form of lending facilities and guarantees, totaling nearly $12 trillion, not all of which will prove to be money well spent.
Wall Street just looted the public on a massive scale. Having found this to be a wondrously lucrative exercise, it looks set to do it all over again.
These people above all were supposed to understand money, the value of it, the risks attendant with it. The industry broadly defined, even including once lowly commercial bank employees, profited handsomely as the debt bubble grew. Compensation per worker in the early 1980s was similar to that of all non-government employees. It started accelerating in 1983, and hit 181 percent of the level of private sector pay by 2007. The rewards at the top were rich indeed. The average employee at Goldman Sachs made $630,000 in 2007. That includes everyone, the receptionists, the guys in the mail room, the back office staff. Eight-figure bonuses for big producers became standard in the last cycle. And if the fourth quarter of 2009 proves as lucrative as the first three, Goldman’s bonuses for the year will exceed bubble-peak levels.
The rationale for the eye-popping rewards was simple. We lived in a Brave New World of finance, where the ability to slice, dice, repackage and sell risk led to better outcomes for all, via cheaper credit and better diversification. We have since learned that this flattering picture was a convenient cover for massive risk-taking and fraud. The industry regularly bundled complicated exposures into products and dumped them onto investors who didn’t understand them. Indeed, it has since become evident that the industry itself didn’t understand them. The supposedly sophisticated risk management techniques didn’t work so well for even the advanced practitioners, as both top investment banks and quant hedge funds hemorrhaged losses. And outside the finance arena, the wreckage is obvious: housing market plunges in the U.S., UK, Ireland, Spain, the Baltics and Australia; a steep decline in trade; a global recession with unemployment in the U.S. and elsewhere hitting highs not seen in more than 25 years, with the most accurate forecasters of the calamity intoning that the downturn will be protracted and the recovery anemic.
With economic casualties all about, thanks to baleful financial “innovations” and reckless trading bets, the tone-deafness of the former Masters of the Universe is striking. Their firms would have been reduced to sheer rubble were it not for the munificence of the taxpayer—or perhaps, more accurately, the haplessness of the official rescuers, who threw money at these players directly and indirectly, through a myriad a programs plus the brute force measure of super low interest rates, with perilous few strings attached.
Yet what is remarkable is that the widespread denunciations of excessive banking industry pay are met with incredulity and outright hostility. It’s one thing to be angry over a reversal in fortune; it’s one of the five stages of grief. But the petulance, the narcissism, the lack of any sense of proportion reveals a deep-seated pathology at work.
Do read the rest.
if only Obama didn't use TARP to bail them out! bad Obama! bad!
Posted by: cleek | March 24, 2010 at 02:51 PM
Well, in protest and as recompense for their appalling treatment at the hands of the market, they are going to join Republican politicians in their quest for the shorter working day -- the whistle now blows at 2:00 pm.
Working men and women await the scussess of this experiment.
Posted by: John Thullen | March 24, 2010 at 03:33 PM
"scussess"?
Posted by: John Thullen | March 24, 2010 at 03:35 PM
I still don't quite understand the outrage over the DeSantis piece in the NYTimes that Yves excerpts but doesn't link to, so I might be getting some of the following details wrong.
Directly from the excerpts he notes "I was in no way involved in—or responsible for—the credit default swap transactions that have hamstrung A.I.G." and that "profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money."
Also, IIRC, his contract with AIG was "if you stay here until X date, we will pay you Y," he had fulfilled his part of the bargain.
And I don't think Yves quite "shred[s] the logic on display" there, or she doesn't understand how large multinational corporations structure the pay of their employees, at least in my experience.
So, while I would probably take issue with some of his language, as Yves's notes, I don't think I'm quite so outraged by the facts behind DeSantis's somewhat overwrought op-ed.
Am I missing something?
Posted by: Ugh | March 24, 2010 at 03:40 PM
I would note that I didn't read the whole piece so I may, in fact, be missing the larger point.
Posted by: Ugh | March 24, 2010 at 03:45 PM
Ugh: I think the general point is that if your firm/corporation/business tanks, employees of the firm/corp/business suffer regardless of individual culpability/involvement.
DeSantis seems to take the point of view that since his particular actions were clean, he should get a massive payout that - for other reasons - the company is in no position to pay out.
Kind of a warped view of the free market.
Posted by: Eric Martin | March 24, 2010 at 03:57 PM
Put somewhat differently: How much would DeSantis be getting in bonus payments if AIG hadn't been bailed out to the tune of many tens of billions of taxpayer cash?
Answer: Nothing.
So, a little gratitude and humility might be in order for the fact that he's getting anything at all, and still has a job.
Posted by: Eric Martin | March 24, 2010 at 04:02 PM
Well, he did suffer as noted in the part Yves excerpts (we can argue over how bad we should feel for him), I guess the question was how much was he going to suffer if, e.g., AIG had declared bankruptcy. But AFAICT, wages owed to employees are pretty high up the list of things that are likely to get paid in bankruptcy court (I think).
And I don't think it is a warped view of the free market, from the employee's perspective, that if the deal you strike is you get paid based on how your business unit does, and some other business unit lost enough money to make the business as a whole unprofitable, that you don't get your bonus that year (maybe you suffer indirectly from that unprofitability if you, e.g., have stock options).
Maybe AIG is a different case because it was so massively underwater it wouldn't have been able to pay him anything, but I think that's far from clear (it's not like AIG had zero assets, for example).
Anyway, it just didn't strike me as an example of some horrible outrage of ungrateful bankerhood as some of the other whiny/sniffy banker stories Yves mentions elsewhere in the piece and that I've previously read.
Posted by: Ugh | March 24, 2010 at 04:09 PM
Ugh, I agree that there were worse examples. I'm not sure how bonus payments work in bankruptcy in terms of priority of creditors.
Posted by: Eric Martin | March 24, 2010 at 04:14 PM
But he would have been out of a job regardless.
Posted by: Eric Martin | March 24, 2010 at 04:16 PM
Though I can see how the better part of valor might have been for him to just keep his head down, collect his money and otherwise STFU (much like, say, Tim Tebow).
Posted by: Ugh | March 24, 2010 at 04:16 PM
I still don't quite understand the outrage over the DeSantis piece in the NYTimes
Eric's covered it pretty well, but I also think this from Yves kinda nails it:
Employees of bankrupt enterprises seldom go about chest-beating that they did a good job, it was the guys down the hall who screwed up, so they therefore still deserve a fat bonus check.
To which I would add, especially if the reason the company continues to exist at all is a public bailout.
And, of course, to me it's something of a moot question. None of those guys should be making that kind of dough.
Why? Because it's not their freaking money.
Put your own money at risk, like the old school investment bankers used to, fine. If the company is profitable, you win. If the company is really, really profitable, you win big.
No worries. It's your money.
Work for a publicly traded company, diffrent story. It's not your money.
Pay me or I'll walk? There's the door.
Posted by: russell | March 24, 2010 at 04:17 PM
Eric:But he would have been out of a job regardless.
With AIG, IIRC his op-ed said that he had plenty of opportunities to go elsewhere (obviously I'm assuming everything he says is true).
Russell - with respect to Yves chest beating comment, I'm not sure it's quite right either. Sure it's not too often you see someone granted op-ed space in the NYTimes to mention how great a job he was doing for bankrupt company X, but at, say, his next job interview? I would think that would be the first thing out of his mouth.
Posted by: Ugh | March 24, 2010 at 04:25 PM
With AIG, IIRC his op-ed said that he had plenty of opportunities to go elsewhere (obviously I'm assuming everything he says is true).
So he says. Though the top execs in the Times piece tended to stay put despite the pay cuts.
Put your own money at risk, like the old school investment bankers used to, fine. If the company is profitable, you win. If the company is really, really profitable, you win big.
Ahhhhh. Tracing the delinking of owership and employees of these banks (and making these banks publicly traded entities) provided the skewed incentives that have led (or contributed) to much mischief.
Posted by: Eric Martin | March 24, 2010 at 04:41 PM
Sure it's not too often you see someone granted op-ed space in the NYTimes to mention how great a job he was doing for bankrupt company X
That is for damned sure.
Look, people who work for the big Wall St banks make stupid money. It's really hard to see any realistic connection between what they do, and the compensation they make.
They work hard, they take calls late at night, the work is stressful and intense.
The same thing can be said for any of a thousand other professions which are not compensated at a level that these guys are. Not by order of magnitude.
The connection between the value of what they do, and the compensation they get, just ain't there. As far as I can tell.
Plus, as noted above, it's not their money. The profit they generate does not belong to them, it belongs to the folks who own the company.
If that mantra applies to a machinist, it applies to an investment banker.
The folks at AIG blew the company up, and damned near took a lot of the rest of the economy with them.
The insane, delusional risk taking that led to the Wall St flameout cost a lot of people their savings, homes, and livelihoods.
Is this necessarily DeSantis' fault? No, it probably isn't. Is he legally entitled to his bonus? Yeah, he probably is.
Is he a clueless self-pitying jerk for not only not getting why this would make people angry, but for b*tching about it in the freaking NYT editorial page?
Yeah, he is.
I have nothing against the guy personally, I hope he has good luck and success in the rest of his career. Mazel tov.
But the dude has a world-historical tin ear.
My two cents.
Posted by: russell | March 24, 2010 at 04:46 PM
Russell - your 2 cents are always appreciated.
Posted by: ugh | March 24, 2010 at 05:52 PM
Russell - your 2 cents are always appreciated...by Jake DeSantis (rim shot)
Thanks everyone. I'll be here all week. Try the veal...
Posted by: Eric Martin | March 24, 2010 at 05:58 PM
Boo.
Posted by: Ugh | March 24, 2010 at 06:00 PM
"Take my bonus... please"
Posted by: russell | March 24, 2010 at 06:08 PM
This is simply not the way things work at any sane company.
Even on a smaller level, usually: our performance at my job is largely measured in terms of downtime, or more specifically the lack thereof--in other words, availability. If we exceed a certain number of minutes of downtime--as a company, even if our individual team was not responsible for the outage--bonuses are reduced or eliminated.
It ain't always fair, but that's how it works.
Posted by: Catsy | March 24, 2010 at 06:37 PM
Loved that piece--it's sort of the two minute version of her book.
Posted by: justinslot | March 24, 2010 at 06:39 PM
Just a few points that I think might be important:
1. He probably would not have been out of a job in a bankruptcy.
If his business unit was profitable then it would have been an asset that the bankruptcy court would have likely sold. This would have been good for the crd=eitors as it migh have provided some amount of money to pay them back.
2. If his pay was a small part of the total revenue of the business unit and it made industry standard returns then he very likely was under compensated by industry standards.
3. Unlike smaller companies, it is quite normal for executives in succesful units to get full bonuses even though the overall company showed a loss in conglomerate organizations. Even when they are all doing things right.
4. It is unlikely that any bankruptcy court would have lowered or delayed his bonus in a pure bankruptcy proceeding with the amount of assets available. Payroll almost always gets paid first.
Posted by: Marty | March 24, 2010 at 09:38 PM
If his business unit was profitable then it would have been an asset that the bankruptcy court would have likely sold.
And the people who actually generated the income would have still had jobs. The top executives might well have gotten contracts for a few months of transition, if that. At least, that's what's happened in the acquisitions I've been part of.
Posted by: Mike Schilling | March 24, 2010 at 10:19 PM
Just a few points that I think might be important
All reasonable points.
As it happens, DeSantis was in Financial Products, which was the black hole that blew the rest of AIG up. He just wasn't involved in the credit swap stuff.
He's legally entitled to his bonus. I'm just not interested in listening to him whine. In print, no less.
The sense of entitlement in the financial sector and C-level management is out of hand. These people need to get a sense of perspective, and they need to develop a sense of responsibility to all of the other people in the world who are affected by their actions.
If they fail to do so, a sense of perspective and a sense of responsibility should be imposed upon them.
Because right now they're a freaking cancer on the economy and on the body politic.
Posted by: russell | March 25, 2010 at 08:54 AM