NY AG: Banks Paid Bonuses That Were Substantially Greater Than The Banks' Net Income
New York Attorney General Andrew Cuomo's report on the bonus structures of the banking industry is out and — oh my— it's damning. The AG says that 3 banks, Goldman Sachs, Morgan Stanley, and JP. Morgan Chase, paid out bonuses that " were substantially greater than the banks' net income."
The report says that combined, these three firms earned $9.6 billion, paid bonuses of nearly $18 billion, and received TARP taxpayer funds worth $45 billion. Why did this happen? Because, according to Cuomo, when times were good the bankers rewarded themselves based on performance. When the economy started to sour — they decoupled the bonus structure from reality and kept rewarding themselves.
From the report:
As one would expect, in describing their compensation programs, most banks emphasize the importance of tying pay to performance. Indeed, one senior bank executive noted recently that individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. As this executive put it, "employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak."
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. 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. Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.
So, how was this allowed to happen? Why did the bankers feel justified in rewarding themselves as the ship sank?
In some senses, large payouts became a cultural expectation at banks and a source of competition among the firms. For example, as Merrill Lynch's performance plummeted, Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do. Accordingly, Merrill paid out close to $16 billion in 2007 while losing more than $7 billion and paid close to $15 billion in 2008 while facing near collapse. Moreover, Merrill's losses in 2007 and 2008 more than erased Merrill's earnings between 2003 and 2006. Clearly, the compensation structures in the boom years did not account for long-term risk, and huge paydays continued while the firm faced extinction.
The AG says that the bankers explained the need to do this by claiming that they had to pay bonuses to individuals working in divisions that were still making money for the firm. The trouble with this rationalization is that banks continued paying bonuses to people in losing divisions.
We recognize, of course, that there can be situations where the distribution of profits to employees who created real profits would be appropriate even though the overall firm may have lost money. This might be the case, for example, where one division of a firm earned large profits but another division lost profits. A principled and consistent approach would, however, balance the need to reward and retain those who created profits with the need for bonuses to reflect the overall performance of the firm. In any event, our investigations have shown numerous instances where large bonuses were paid to individuals in money-losing divisions at firms who saw either substantially reduced profits or losses in 2008.
The entire report can be downloaded from the AG's website, here. (PDF)
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Comments:
Epic, EPIC fail.
Does he list in this report,how much lobbyists and contributions were made to politicians? They all make me sick.
And now that all of these banks are making record profits again...when can taxpayers expect to see their refund checks? Really gotta laugh when banks pull the whole "we need to pay bonuses to keep our good talent". Yawwwn. The same talent that bankrupted your bank, except we bailed you out?
There are still a lot of words about the subject and not nearly enough public hangings.
Just remember that these banks (at least in the case of Chase) were justifying rolling people's checking accounts so they could create more overdrafts with the big check first scheme. Then they refuse to undo any of the overdrafts because they are starving for money and need to pay back TARP. Now we see where that money they are basically stealing from regular people is really going.
It makes me ill. Banks need to be smacked down and regulated.
Why wasn't this study conducted BEFORE paying out TARP funds instead of months after?!?!
If I recall correctly, TARP money was given with no strings attached. If that's the case, why should Andrew Cuomo's office waste a single dime of taxpayer money investigating how they spent it? No crime, either criminal or civil, was committed.
That doesn't mean I agree with what happened. TARP was a debacle from the get-go, and none of these banks should have been propped up. But wasting even more taxpayer money to investigate non-crimes is equally as wasteful.
That's net income, as in after the bonuses are deducted, right?
The sad part is, this should have been obvious to most people. Granted, I didn't think they were paying 200% of their net income out in bonuses, but these guys were responsible for cooking books and managing hedge funds which people kept investing because they were reporting good numbers rather then factual numbers.
Its easy to pay a bonus based on performance in this case because all these accounts looked like the golden egg which would mean they deserve the bonus, but we all know the ugly truth, everything was just over hyped and bloated.
I can guaranty that these same guys, if still employed next year won't have the same bonuses because the system was setup to pay based on account performance and now it won't be nearly as easy to fix numbers when people aren't throwing their money at some guy they just met just because he promises a 100% return in 3 years and a 500% increase in 5 years.
That saying about when the revolution comes the lawyers will be the first ones against the wall....
I think the bankers will be put there WAY ahead of the lawyers.
Because it is exposing something that should be a crime, and by bringing attention to it maybe something can be done. I'm not a fan of Cuomo but this seemed like a worthwhile matter to investigate.
Let me fix your headline:
NY AG: Wants to be NY GOV
@Starfury: see and I was thinking of shooting bankers AT the lawyers, with trebuchets, cannons, rockets, etc.
So, this is where Congress says, "We're just going to take that TARP money back and if you go bankrupt, the overall economy will be better off!" ... right?
Where do I sign up to be CEO or a top exec at a financial company? I can drive a company down the drain as well as the best of them. But I don't play golf, is that a problem?
@Shivved: Because if you can't (deservedly) ruin them in court, ruin them in the court of public opinion by hopefully hammering home the truth hard enough for Americans to remember it for more than 15 minutes and move their money to banks that behave well... local, smaller banks, credit unions, etc. If the big banks lose their easy slush fund of customer deposits, they'll have to do SOMETHING. Either they can run their business more honorably, or they can evaporate.
@drkkgt: Trebuchets, definitely. It might be a little trickier to actually hit the lawyers, but you can have fun trying, and the bankers have WAY longer to think about it as they arc through the air.
@joshuadavis: Well, The money was given to them to Bail them out, so they would not go under and cruch the economy.
If the gov was mislead, and all that was needed was for them not to pay out the huge bonuses not to go under, it could be fraud.
Looking at nerril, They put out 31 billion in bonuses, the total for the 3 banks was 45 Billion. It is very likely that NO BAILOUT WOULD OF BEEN NEEDED of they did not payout the crazy bonuses.
The real crime is the federal government illegally interfering with the private sector.
The Constitution grants them no such authority, and for good reason: because this is what happens when the government interferes with the private sector. Government officials who couldn't run a yard sale orchestrate crises out of stupidity and debunked ideologies, and then place themselves in charge of the recovery effort.
No one should be surprised by this. Forget what the banks may or may not be taking advantage of; your anger should be directed toward your government for being incompetent fools.
@tinmanx: Maybe not, if you meet all the other criteria:
1) Are you white?
2) Are you Republican?
2) Are you oddly tanned?
3) Can you wear golf polo's, even though you do not golf?
4) Do you have loafers with tassels?
5) Are you willing to go to capital hill and lie to Congress a few times per year?
6) Are you devoid of morals or ethics?
@Shivved:
Agreed. This is all utter nonsense. The feds left the door wide open on purpose, and now they can turn around and feign surprise, shock, and disgust... And then take another campaign donation from the banks' CEOs.
@The_Gas_Man: Uhhhh... when did you disconnect from reality? The bonus situation had nothing to do with government involvement. It had to do with the rampant, unchecked greed running about in our economic system. Part of the reason the banks were having problems was schemes JUST LIKE THIS!
@GearheadGeek: One problem with this - Goldman Sachs doesn't rely on us little guys for its profits. NPR had a story on this the other night - Goldman has no incentive to worry about its public standing because its investors are all extremely wealthy people who really don't care as long as Goldman makes them money. That's not the case at all of these banks(I'm looking at you, Chase), but it is part of the problem.
@GearheadGeek: If you heave enough bankers at the lawyers, you're bound to have a few hits! Especially if you group the lawyers together really tightly...
I think he is saying government should have let all these fools fail and end up working in McDonalds rather than end up as overnight millionaires because the gov't bailed them out.
@Shivved: Because as publicly traded companies, and also incidentally companies operating in America they are subject to a whole host of other rules/laws/regulations etc... if not to the govt, then to their shareholders, beyond tarp.
Not that I know, but you'd think that there'd be something illegal with a company with legal responsibilities to their shareholders paying themselves bonuses worth more than the company's profits, no?
@sinfonian94: I'm not so sure you're right. If none of these banks had recieved TARP funds, I highly doubt that they would have been paying the bonuses that they were paying. Hell, I don't think they could have even AFFORDED to pay them.
Too many people still fail to understand what a bonus means in the financial industry, as well as in many other industries.
The problem is the name used. The term "bonus" gives people the impression that it is a gift reward for a special accomplishment, such as exceeding the month's or year's sales quota. And to be sure, a great many bonuses are, or at least have been, paid out for just such purposes. However, a bonus is often used as goal accomplishment incentive. That is, the employee gets paid at the end of a term of work for having merely achieved the expected goal.
One reason the term "bonus" gets stuck here is that the IRS uses that term to classify taxable payments that get paid to employees (and I believe they always have to be exempt employees) for periods of work that exceed the usual monthly or quarterly withholding and reporting cycles.
One of the goals an employer might place on an employee (through a contract, so the employee is fully aware of this) is to stay for the duration of a fixed term, or the completion of a project. Yes, merely staying with the employer is a perfectly valid goal. In many fields, it is expensive to train an employee in the many details of how a company works. Or it takes time for the employee to learn how to function well within the company, such as knowing other people and what they do, and how to negotiate with them (something that is big in the financial industry).
What an employer might well like to do is hold off paying an employee anything at all until a goal is complete. This is easy to understand for project based contracts. The employee that doesn't finish the project shouldn't be paid beyond the portion of the project that is usable for another employee to pick up and continue with.
However, people need a steady monthly income to live on day to day during the employment. In order to even attract employees, the compensation has to be split into an amount suitable for the monthly needs (which can still be large for people who have a mortgage on a two million dollar house), and an incentive amount to be sure the employee finishes a project or finishes out a term (often one to three years). That "bonus" is actually the attractor to bring in the top employees.
I have worked in the computer industry under "bonus" contracts three times. These were not the "Christmas bonuses" handed out at the end of the year to the top 10% or so of employees. This was a bonus specifically contracted to be paid at the end of a term of work. If I finished the work as specified in the contract, I receive the bonus. If not, I don't.
In all three cases, these were projects done under my current employer. The salary I was already receiving was unchanged. What motivated the employer was that the project I was to do was especially critical for the company. In one case, the company even took out "critical employee insurance" on me in case of some event that prevented me from completing the contract (as a different boss so often said "what if you get run over by a beer truck").
In the case of my first bonus contract, which was a new experience for me since my understanding of what a bonus was as wrong as most people still understand it today, I was quoted three bonus amounts for the project based on three points in time to complete the project. Yes, the earlier time was the largest bonus, $15000, which I earned because I did meet the first deadline of 6 months.
The other two bonuses I got were single amounts with a single deadline (one was a 6 month deadline which I finished in 3 weeks ... I should have argued for more for an earlier multiple deadline).
When a company is facing potential failure, people tend to be afraid of working for the company. But in many cases, the right employees can save the company. So why shouldn't at least they be paid handsomely for doing so? Afterall, if the stockholders are going to benefit from certain employees saving the company, those employees should get something big, too.
And this also goes for employees that minimize a company's losses in a bad market period. If a CEO manages to keep the losses at his company lower than all of his competitors when the market for that kind of business is bad, that CEO should be rewarded for this achievement.
But I want to stress again, there are types of contract bonuses that are simply structured payment systems to do things like keep critical employees on the job to the completion of a project, or (and this is big in the finance industry) keep critical employees on the job for the duration of a term that typically runs from one to three years. The law prohibits obligation of employment. A contract bonus is a way for a company that will benefit from an employee staying to share part of that with the employee as compensation.
These end of term or end of project compensations do get tricky in terms of taxes. For example, if you are earning $10K per month, your tax withholding is based on that. The end of term bonus, which you may or may not get, doesn't figure in to that. Then when the bonus is paid, the correct taxes are calculated under what the IRS rules are, and the difference in tax due is withheld from that bonus, and you get the remainder.
That's what's going on in most of these bonus cases we see. When we see politicians jumping on this issue, it's more about politics of dealing with a public that "doesn't get it ... and probably never will", than it is about any law violations. If the bonus is contracted and the contract has long existed and specifies the date to pay out, then it is almost certainly a case like I described.
If people are being over compensated, that's one thing. But a bonus is just part of the compensation, despite the misunderstood term associated with it (but what accounting practices and tax laws require using).
Off with their heads!
Seriously...
"Hey everyone! We're doing so well, and making so much money! There's no possible way this could ever, ever end! You guys are so getting a huge bonus this year. It's just too wonderful that nothing could go wro.......... oh shit."
Compensation for those in the financial industry has just gotten insane. Sure there are some smart people there, but there are many more dopes who have connections that got millions and millions in bonuses. And it's in their interest to keep compensation high, because the execs can then justify their even bigger bonus.
It's really an outrage - too bad nothing will be done about it, because their campaign contributions bought seats for many of those in congress. Really though, it seems wrong that so many people are broke and lost their jobs while these ass hats got huge payouts to screw the rest of us (paid for by the rest of us too - if the bank went under, there was no money for bonuses.)
@Skaperen: Wow. But...I think the bonuses being paid out by the financial firms were not the project-based bonuses you describe above (as in, your project completed on time so here's your check). I think these were initially conceived as performance-based bonuses, where if you do well for your company, you get a cut of the profits, essentially. That's what the AG is investigating - if the bonuses were SUPPOSED to be tied to performance, well, jeez, something is WAY out-of-whack at these firms.
And then there's the fact that these people's salaries were nothing to sneeze at - you casually mentioned $10,000/month, and then a bonus on top of that. Most American don't make anything approaching 6 figures, so the idea that you get a 6-figure salary, and then a bonus on top of that, EVEN THOUGH your company failed - I mean, just, wow.
I think the bonus system has merit, provided the bonuses really are tied to a project completion or your and your company's performance. But that does not appear to be what's happening.
@Skaperen: I don't think most people really are as upset over the word "Bonus", but the size of them.
Even the low paid employees usually make $100k or more. Do they really need to make another $500k or more to be "motivated" to do a good job?
What's disgusting is the amount that's being paid out - more than the entire profits of the company? Sorry, but that's a business that needs to go under - and if that's the rate in the industry, so be it - when banks fail left and right, pay would drop because there would be many more people to do the job that would be willing to work for less - that's how the free market works. But since we propped up the banks, we left the broken system in place.
@highpitch_83: Because Congress just HAD to act quickly and irrationally to save the banks! It was the only way!
If only there was some sort of mechanism where companies who made poor financial decisions were forced to face the consequences for these decisions, and companies who made better decisions could prosper at their expense.
Can anyone tell me, from a functional, day-to-day, pragmatic standpoint, how our capitalist democracy differs from the pre-Enlightenment European feudal system? The more I stare at it, the more it seems like a vastly more complicated, obscured, confusing system that nevertheless results in essentially the same outcome.
I believe so - if you don't realize that you'll be thinking that the banks bonused themselves into a loss, but it's not true - many companies spend more on payroll than their net profit. While I understand bonuses are in addition to payroll, it's still part of compensation.
@tailstoo:
If I'm an investment banker, and my company is only paying me $100K salary and no "bonus", and there is a competing firm that will pay me $100K and a $500K bonus, who do you think I'm going to go work for? If my employer is paying me 1/6 of what a competing firm will pay me, I'm not going to have a lot of motivation to work hard.
@The_Gas_Man: Where does the Constiution give corporations the right to exist? Where does the Constitution say that contracts between private individuals must be enforced? Those are the two main underpinnings of the private section. Please find me the section that explicitly allows this? Note Amendments 9 and 10 don't give this permission explicitly and since you're such a strict constructionist, I that fails too.
@wrjohnston19283: Yes, but when that company offering the $500k bonus goes out of business because they went bankrupt, you could work for $100k at the other bank or $7.25 an hour at McDonalds. Those huge payouts are not sustainable by any means other than government charity.
@Saboth: I'm sure they would have found some way to pay them out even if the gov didn't pour cash on them. I mean, nothing like pillaging a sinking ship on your way out.
The difference would have been they would be looking for work after getting their bonus.
@Skaperen:
That's all well and good, but...if your company cant AFFORD bonuses, then how are these people getting paid. It's nice to say "they earned it". Hell, I earn my pay too, but my company said "no bonuses, no raises" this year. If we were going under, they would say "no jobs" too. I'm sure these guys work hard and all that, but if the money isn't there, it isn't there.
Why is this an issue for anyone other than people working in the bank?
The banks are paying their TARP loans back, in full, well in advance of what was expected, so clearly the bonuses are not affecting their ability to repay the loans.
I think the banks are shooting themselves in the foot with these sort of bonuses, but that's entirely their business. If I was working at one of these banks as a lower, non-bonus paying position, I'd be really upset. But I'm not, so I think they can do whatever they want with their own money. It is, after all, their money. And not "ours".
Something about foxes and henhouses...