New York Attorney General Andrew Cuomo sent letters Monday to eight of the nation's biggest banks -- which also happen to be eight of the original TARP recipients -- demanding to know why they're giving bonuses and how the firms' bonus structure ties pay to performance.
Wall Street is expected to shower its workers with billions as a reward for all the profits they have made by capitalizing on the Federal Reserve's generous policies, including near-zero interest rates. Thanks to low borrowing costs and Uncle Sam buying mortgage-backed securities, banks have been able to book easy profits by widening the spread between the rate they and their customers borrow. Also, with the government buying these securities, Wall Street has been able to dole out home loans, bank the fees then spread the risks to taxpayers.
"[Wall Street] had a very profitable year," Cuomo said on a conference call with reporters Monday. "But that's not what 10 percent unemployment says...Housing values are down. Housing values are everything to the American economy."
Channeling Wall Street, Cuomo said: "We had a very profitable year." Then, he noted, "Well, it depends on how you define 'we'. Where's the return on the taxpayer's dollar?"
Last year, New York State Comptroller Thomas DiNapoli found that Wall Street firms paid out $18.4 billion in cash bonuses in 2008 -- and that was after the financial system nearly collapsed.
"Compensation had become un-moored from the financial performance of the banks," Cuomo said of the 2008 bonuses. This year it's expected to be even higher, with some predicting bonuses approaching, if not eclipsing, boom-year levels.
When pay is disconnected from long-term performance, researchers and market commentators argue it pose a risk to the financial system. Harvard Law professor Lucian Bebchuk has noted that "one major factor that has induced excessive risk-taking is that firms' standard pay arrangements reward executives for short-term gains even when these gains are subsequently reversed."
Among Bebchuk's recommendations are that "bonuses should not be cashed right away, but placed in a company account for several years and adjusted downward if it turns out that the reasons for the bonus no longer hold up."
Among the 11 questions Cuomo's office is posing to the banks is whether firms have mechanisms in place to claw back bonuses should an employee's bets end up hurting the firm down the road.
READ the full list of questions below:
The Morning Email helps you start your workday with everything you need to know: breaking news, entertainment and a dash of fun. Learn more