New York Mayor Mike Bloomberg must have slept like a baby on July 14. That day, Goldman Sachs reported second-quarter earnings of $3.44 billion, up 93% from the 2008 total, and also told investors that it had put aside $6.65 billion for compensation during the period. Traders everywhere high-fived each other as the news filtered out: Wall Street is back!
As Chris Dodd and his cronies have massed on the ridge, prepared to mow down the reckless "culture of greed" that got us into this recession mess, few have ventured to champion the industry that increasingly fed the coffers of New York. Privately, though, those responsible for keeping the lights burning on Fifth Avenue and for shoveling up after the mounted police have watched in horror at the meltdown of investment banking profitability. Consider that fully 20% of New York State tax revenues and 12% of the city's income stemmed from the securities industry. Governor Paterson has noted that Wall Street has "bailed us out for a number of years" while state legislators spent beyond their means. Baldly put, New York thrives on a healthy Wall Street.
Not only are banking profits essential to the well being of New York, those pesky bonuses play a vital role as well. Wall Street payouts peaked at more than $30 billion in 2006, generating billions in revenues for New York, New Jersey and - yes! - even Chris Dodd's home state of Connecticut. Not only did those banking employees trundle home with mountains of bacon, but they were joined by legions of hedge fund and private equity types who also cashed in big time in recent years. Last year's drop in banking bonuses cost New York State almost $1 billion in tax revenues, while the city saw $275 million go up in smoke.
New Yorkers' views of Wall Street bonuses separate us from the rest of the country as surely as the Hudson River. Vacancies along Madison Avenue, long lines at Manhattan soup kitchens, axle-threatening potholes, plunging home prices, more than 150,000 lost jobs in New York State, the return of the squeegee-wielders, heightened pandering to foreign tourists who clog our pedestrian walkways - all testify to the damage done to the city by plunging profits at the banks. We need profits - and bonuses- to come back!
Elsewhere, the bonus culture is reviled. Reasonably, taxpayers are horrified to think that their hard-earned dollars are being funneled through to a bunch of bankers whose stupidity plunged the country into a deep financial hole. One blogger recently complained that it was inconceivable that bankers should make millions of dollars considering how little time they spend on the job: "9 to 5 - bankers' hours, right?" (He probably also imagines them wearing green eye shades.)
This discussion is not over. In the headlines recently, has been a controversy over a $100 million bonus, purportedly owed to a Citigroup energy trader, Andrew Hall. Since Citi has not paid back its TARP monies, and since the government will shortly own 34% of the company because of an exchange offer, the administration's pay czar, Ken Feinberg, will doubtless be on the hook to explain why anyone working for the giant bank should be paid so handsomely. If the administration can overturn established bankruptcy procedures at will, as it did in the auto restructurings, then it can certainly prevent Citi from honoring its arrangement with Mr. Hall.
But, perhaps the government should have a little tete-a-tete with Mayor Bloomberg and Governor Paterson. The losses generated by Wall Street last year mean that the giant firms have tax credits which, according to a release from NY State Comptroller Thomas DiNapoli, "will reduce the firms' future tax payments for years to come." In other words, even a rebound in profits on the Street may not yield much income in the near term for hard-pressed New York. That is not the case with bonus payments; Mr. Hall has no such tax credits since he has apparently been raking in enormously high payouts for years. He will duly fork over taxes to New York State, as well as to his home state of Connecticut. Residents, of course, will be an even greater honey pot.
Mayor Bloomberg is not the only party that must be hoping for a revival of Wall Street. New York non-profits and local businesses are suffering. Favorite watering holes like the Four Seasons Restaurant, the New York Public Library, social services agency Partnership With Children, high end Manhattan realtor Stribling & Associates, Saks Fifth Avenue - and many, many more, are rooting for Wall Street bonuses, or they should be. More important, the knuckleheads in Albany who passed a 9% increase in the New York state budget (really- who among us has increased spending this year by 9%?) had better hope that incomes in New York rebound, starting with Wall Street. According to E.J. McMahon of the Manhattan Institute, at the height of the boom, the top 1% of earners in New York paid 41% of all taxes. Boy, do we need those revenues now.
President Obama and many others have railed against Wall Street's sky-high compensation on more than one occasion. Just two days ago the House Financial Services Committee tried to attack overly rich pay by passing legislation calling for shareholder "say-on-pay" and other measures. In a rant against Mr. Hall's bonus, one blogger noted that it would take a minimum wage earner working full-time with no vacations 6,269 years to earn $100 million. (For most online journalists, it would take even longer, but I digress.) Such payouts may be absurd, but taking home a slice of the pie you bake is the way the industry works. For New York, those pies are looking pretty tasty.