Today is the 22nd anniversary of "Black Monday," when the Dow Jones Industrial Average fell 22.6% in one day. Over two decades later, people are waking up to another form of Black Monday -- one where we are asked to make sense of the mind-blowing compensation that Wall Street garners, while Americans are still feeling glum about the economy.
By the way, if you're one of the glum, check out this great segment from Colbert Report -- see if you can spot The Financial Decoder!
At a time when nearly 10% of Americans are out of work, we're learning that several financial firms are on track to reward their employees with record bonuses. Here are the most frequently asked questions that I've fielded on the topic.
How did some of these banks make so much money? You can thank the government. First and foremost, there was TARP funding, which helped avert financial disaster, although it didn't increase bank lending. Banks also had access to cheap government money that allowed them to borrow at bargain rates from Uncle Sam and invest in other areas to earn more money. In addition to cheap money, the surviving financial firms are facing far less competition as their once-rivals either vanished or were absorbed. Finally, like much of corporate America, the banks reduced payroll and cut back on expenses.
Why do they have to pay such massive dollars to the top guys? I don't buy the retention theory, but rely on a simpler idea: compensation is the way to keep score on Wall Street, especially for the CEOs. Other folks who make a lot of money now are doing so because they have contracts in place that entitle them to the money, regardless of the company's performance.
Considering that American taxpayers helped stabilize the financial system and by extension, allowed these companies to earn profits, is there any way to limit compensation? When we bailed out Wall Street, the government put no limits on compensation at the time. That was a massive oversight, but with which we must live now. Pay Czar Kenneth Feinberg can only regulate companies that have received substantial government support, like Fannie, Freddie, Citigroup, Bank of America and AIG.
For the firms that repaid TARP and have turned profits, complaints should come from their shareholders, but on that front, there has been a deafening silence. If shareholders don't like the level of compensation, they can opt to sell their stocks or the mutual funds that hold those stocks. They can also make sure that the boards at these firms, which are often filled with the CEO's pals, are held to more scrutiny.
Do taxpayers get anything out of this? Amazingly, taxpayers have made money from TARP -- a 10.16% total rate of return from those firms that have repaid TARP funds through August, compared to the Dow Jones Industrial Average's total return of 4.82% in the same time frame. Admittedly, we're too early to break out the champagne, but for now, we'll take it. Another way that we sort of participate in the bonus largesse -- Uncle Sam taxes bonus recipients like crazy, which could eventually help out everyone else.