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)

The banks declined to comment, but Reuters says sources told them that they've all submitted applications to repay the TARP money.

Earlier Tuesday, JPMorgan Chief Executive James Dimon told shareholders he expects regulators will let a few strong banks repay TARP funds within weeks.

"We believe we can and should be able to repay TARP," Dimon said during remarks at his bank's annual meeting. "We believe the government will allow a few well-capitalized banks to repay TARP in the next couple of weeks."

Banks discuss TARP repayment with U.S.: Fed official [Reuters]
(Photo:epicharmus)

The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms. It was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.

It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act.

Former FDIC chairman William Isaac told Bloomberg:

"The decision marks the end of Wall Street as we have known it. It's too bad.''

Shift for Goldman and Morgan Marks the End of an Era [NYT]
Goldman, Morgan Stanley Bring Down Curtain on an Era (Update3) [Bloomberg]
(AP Photo/Mark Lennihan)

Morgan Stanley Considers Merger With Wachovia [NYT] (Photo: foundphotoslj)