Wall Street Bonuses Are an Outrage

Just a mere $18.4 billion in Wall Street bonuses, and suddenly the entire country is like Kansas in the 1890s, raising hell instead of corn, screaming for revenge on money power that has done us so wrong while rewarding itself so generously.

The outburst of populist rage is particularly alarming when we consider how easily such sentiments were managed just a short while ago. Americans have known about mounting inequality and king-sized Wall Street bonuses for years. But we also had an entire genre of journalism dedicated to brushing the problem off.

Recall, for example, the famous essay by David Brooks published in The Atlantic in 2001, in which he declared that, in one representative salt-of-the-earth Republican region, people had "no class resentment or class consciousness"; that complaints about the lopsided distribution of the economy's rewards were something one heard only from people in the wealthy and tasteful reaches of blue America.

Mr. Brooks's argument was powerful not so much because it captured reality, but because, by suggesting that to care about economic inequality was itself an act of snobbery, it ingeniously short-circuited the entire debate. Egalitarianism begins at home, liberal!

Others simply insisted that markets were themselves democracies, that the deeds of business were an expression of the popular will, and that entrepreneurs were leading the only kind of popular uprising that mattered. The rightful home of that uprising was, of course, Wall Street, where rebel bankers were always supposed to be fighting stodgy aristocrat bankers on behalf of the common people.

That's why it once seemed to make so much sense to talk about grandmas in small Illinois towns who were ace stock-pickers, to fantasize about the conflict between man-of-the-people millionaires and horrible, affected Ivy League millionaires, to dream of the day the Dow finally reflected the common people's intelligence and made it to 36,000.

But does it console us any longer to recall that a CEO of Merrill Lynch was once excluded from some mythic Wall Street insiders' club? Can it make any possible difference, in our current predicament, to know that Richard Fuld, who allegedly collected around $480 million from Lehman Brothers in the eight years before its bankruptcy, attended not Harvard but the University of Colorado?

No. We're populists of a more fiery sort now, and the old bromides no longer palliate.

And those who once celebrated the virtues of the common folks want nothing to do with us now. As Mr. Brooks joked in yesterday's New York Times, all the current anger really signifies nothing more than the "resentments" of middle-class Washingtonians who have suddenly found themselves in charge of the world.

Besides, our former friends had their reasons for letting the party go on. If the federal bank bailout were to involve a real crackdown on executive compensation, the Bush administration reportedly feared, it might have driven banks away from taking the deal altogether. Bankers would prefer global disaster to a pay cut, in other words, and this obscene calculation needed to be taken into account. Public outrage was apparently nothing by comparison.

Now the populist shoe is on the other foot, though, and it's the liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn't. Maybe, in its rage for fairness, the public is on to something that the banking industry's remaining defenders need to acknowledge.

It is merely this: That Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe."

At each stage of the disaster, Mr. Black told me -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks. This is not merely because is would make for good PR, but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks, and even, according to Mr. Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continues, it is "essential to redesign and limit executive compensation when regulating failed or failing banks."

Our leaders may not know it yet, but this showdown between rival populisms is in fact a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty?

Let the conservatives' hosannas turn to sneers. The market god has failed.

Thomas Frank's column, The Tilting Yard, appears every Wednesday at OpinionJournal.com

Also in Opinion Journal:

Alan S. Blinder: My Economic Wish List

Harvey Silvergate: The SEC Should Leave Steve Jobs Alone

Comments

[BigJohnfromMN]

I ahad a good frien in High school, who went to work on an assembply line manufacturing windows, one day on a line making a new window, He realised that the window had a design flaw, and water would get in and rot the window. He pulled the cord - stopped the line - and explained his concern. They halted a production run of 5,00 windows.

Turned out he was right and company would have lost 100 of thousands of dollrs on warrranty replacemants.

The company calculated a fair estimate of what it would have cost them and cut him a check for 10 percent (over 85,000 dollars)

Remember he works on the line.

If this company recieved bailout funds... Does he still get the bonus?

[thedesertdweller]

I’m not sure if you actually believe the fantasy world view that your post implies or if you are just naïve. I suppose if I worked for Santa Claus and saved him a few bucks he’d toss a few my way too!!!
But in the real world if your make believe friend really did find a flaw he would be told to keep it quiet and given a pat on the back… at the most. Your made up story that a company would issue a check for 10% of potential savings is nuts. First off it would be an admission of a flaw, which no company would ever do as it opens them up to lawsuits for other problems. Second, no company gives up a dime if it doesn’t have to!
You have bought; hook line and sinker this exaltation of business a religion. If this was the case our entire human history would have taken a different trajectory; from slaves of biblical times to the rise of unions, every inch of progress has been fought for by the blood of our best that had the courage to stand up. What you are is a victim of business propaganda that has made this deal… we will calculate the minimum that we can get away with paying the worker that keeps us out of legal trouble and put all the rest in the pockets of our shareholders and executives.

[thedesertdweller]

It’s still a form of slavery, albeit negotiated.
And it worked for a while because TV’s were cheap and nice cars were sitting in every driveway. But we didn’t pay for these things with a fair pay in relationship to our productivity, we bought all this with debt while the financial Gods confiscated the actual money and gambled it away on a global scale of oil manipulation, currency trading, inflating the stock market, etc. We all have paid for a system that corrupted those in charge by levering the pay structure not to actually building a better widget but to manipulation of the financial system. Anotherwords, the population was distracted just enough to not notice that the majority of the trillions that we all had a hand in producing has been given to a tiny minority who horribly mismanaged it.
You naïve idea of commissions, bonuses, etc. being just rewards for hard work is cute. I’ve been a salesman, ever watch Glen Gary Glenn Ross? That’s not far off from the psychological reality of what your ideology leads to on a widespread basis; it dehumanizes us. My experience has been that even if you if you do a good job many firms will set up a system where you have to jump through many hoops just to get what is legitimately earned.

[thedesertdweller]

It’s not an accident that many companies require that you have to send in this form and that form to collect a commission that that a 1 minute review on a PC could verify. The idea is that enough people will drop the ball and the company will end up not having to pay…
So the idea that your make believe friend got a check for noticing a flaw in a product is…. Make believe! These 20 or 30 something idealistic conservati­ves/libert­arians who make up this stuff are funny!!! What they don't realize is that when you devalue the contribution of the common man in order to reward the immorality and incompetence of the financial Gods you are making a deal with the Devil.
Being a strong man is not admiring these sneaky corrupt abusers of the gilded age or drooling over the crumbs they leave you, it's living life like a Righteous Gangster. What do you think Jesus was? The right wing has highjacked Christianity but Obama is helping to restore it to it's historically correct intention to value all people as children of God, not just the corrupt CEO's that so many right wingers worshipped as false Gods...

[BluestateGuyInTX]

Excuse me but I don't believe a word of this. For two reasons really: 1) I've worked in factories and in real life they would have fired your "friend" for stopping the line. 2) It's a totally transparent "Joe the Plumber" moment. You hypothesize something that is just not credible and then attempt to use it to make your right wing political point.

[BigJohnfromMN]

So if we call them commissions instead of bonuses - are they still and outrage?

If you directly make your company 100 milions of dollars, you can't get a 2 million dollar commission (BONUS) ?

[PetraK]

Executive bonuses in a number of industries have been disapportionate to their contribution for a number of years. Wall Street may top the list, but they are not alone. I might add that the pay received by a number of sports and entertainment stars also seems to be absurd. I recognize that this is a different market with its' own economic drivers, but I sometimes wonder if some of the executive bonuses have seemed warranted in the eyes of the beholder when they compare themselves against a high school grad with excellent hand-to-eye coordination.

The pay-for-performance concept often emphasizes short term goals with little weight toward long term effects. Growth and profit is paramount; investment in the infrastructure of the organization can become an unnecessary expense adversely affecting short term profit. Discipline is ridiculed as "not on board" with the goals and objectives of the organization.

Our tax system rewards this behavior. How we tax incomes over $1M would have an effect on excessive incomes in all areas of our economy.

[plumnelly]

Agree on everything and more!

[nobozos]

It is idiotic to award a guy that throws a pointed ball down green grass millions a year, while compensating the guy trying to find an aids or cancer cure 50 thousand. Or giving a crazed fool like Tom Cruise hundreds of millions for being a lousy actor.

But the truth is, these examples ARE our American value system.

Doesn't it make you proud?

[bayside]

We must remember this 18 billion for wall street exec. while we who are paying the bills lost our incomes.. This is the republican way ..No more two rules, one for rich and one for us. They have assets.

[Robertx5]

Talking about compensation and performance related pay it was interesting to note that Mr Markopolos in his testimony yesterday advised incentivising SEC investigators to pursue high profile cases, which of course will have precisely the wrong end result. The pursuing of a case will be determined by how deep the pockets are of the institution or individual being investigated rather than the underlying malfeasanc­e..The Institution or individual concerned is likely to pay a hefty fine to end the matter quickly rather than risk the time consuming vagaries of the legal system, thus giving a quick ' win ' for the SEC people involved.
It appears that the mindset that has brought us to this sorry position is still alive and well.

[Evelyn]

If a guy walks in the door of a bank with a revolver and loots the place, he is sent to jail. But if he walks into that same bank in a $5000 suit, sits at a desk all day, and loots the bank, we're supposed to worry that if they cut his pay, he might leave and take his talents elsewhere?

[Bluedanube]

Woody Guthrie said "some people will rob you with a six shooter and some people with a fountain pen."

[Cougar90210]

I heard part of a report on NPR today. Robert Seigel was interviewing some "expert" about this issue of limiting executive compensation. The guy blathered on about how the "best and the brightest" (no mention, by the way, of the most ethical or moral) would simply take their talents and offer them to the institutions not affected by the limits, where they would continue to make the millions they are accustomed to making. He went on to rationalize their need for such outsized (at least to someone in my humble position in life) salaries because they have established a lifestyle for themselves and their families that requires this kind of income. Without it (and this was the part that almost brought me to tears) they would not be able to continue living the lifestyle they had established for themselves.
Holy God! This interview so clearly illustrated just how warped and disconnected from any sort of rationality the people who inhabit this world have become. This was not a ranting Rush Limbaugh type. He was merely someone who felt he was explaining to the rest of us (who obviously can't "get it" because we can't possibly understand the pressures of this lifestyle) why it would be so unfair to keep these guys from making their millions - deserved or not. I was left a little breathless.

[whatsthatsound]

Amazing. Workers are being canned all over this country who have become "accustomed to the lifestyle" of eating and having a bed to sleep in. Don't they need to be bailed out, too?

[lovbug]

Let them go for all we care -- good riddance. We're not buying what they're selling -- a bunch of bull pucky. So far the best and brightest have done a lousy job. We the people have drank the kool aid of these investment bankers and CEOs - we've been hood-winked. Let them go elsewhere to some other country and see if they will make a fifth of the money they made in the U.S. - I think Not!

[Bluedanube]

If the banksters are looking for another country where they can have free reign to hatch their criminal schemes they might thing about moving to Zimbabwe.

[jcorrington]

Well said cougar.

[Bluedanube]

Did Robert Seigel of National Propaganda Radio challenge this appologist for incompentence and greed? Highly doubtful. NPR is just another arm of a lazy, corrupt and complicit corporate media the serves as a platform for right wing memes and the status quo.

[ESerafina42]

The problem is that the people who have driven these companies into the ditch are, by definition, NOT the best and the brightest.

[norepublicanleftbehind]

Gee, just $1 BILLION MORE than the ENTIRE AUTO COMPANY LOAN BAILOUT.
If bankers had unions they'ed never get the money.

[ketchupandfries]

Ever the straight shooter and clear thinker, you've scored again, Mr. Frank! Thanks for paying attention and for playing umpire, when others would shrink from doing so. You calls like you seez 'em. Amen!

[StreetBeat]

What's amazes me is that Mr. Frank lives in D.C. and has managed to maintain his good Kansas judgement.

I'd like to expand the number of groups who are longtime members of the "blow sunshine up your own shorts" club. These would include the lobbyists by the thousands whose job has been to spread the good word about the global economy; the lawmakers they influence; the companies these lobbyists represent, selected state and local governments and higher education in general.

Many rushed to get a seat on the elitist bus that drove the global economy. The ponzi scheme started at the top but there were many players along the way who kept the pyramid and the idea of wealth without end, crossing the globe--until the pyramid tumbled.

Even state universities salivated to open branches in exotic, oil-splashed places like Dubai and create student exchange systems that created not one job for the average Joe or Jane in their home states--but exposed university bigwigs to the (formerly) rich and powerful cultures.

Remember President Bush's constituency -- the haves and the have mores?

The irrational exuberance started at the top and was emulated all the way down to local businesses.

I'm am just pleased to see the Wall Street Journal has the guts to employ a commentary writer who refuses to follow the other drones over the cliff of the huge global lie.

[it is me]

Very well said. You mention the greed but you fail to mention one specific group that needs to be included: shareholders. It was always interesting to me, working on Wall Street myself, however, not in any type of position that you describe above, that the idea was that of "creating shareholder value." Well, it was never about creating shareholder value, it was about doing anything humanly possible to beat last year's earnings. No one ever thought or cared about the long term consequences, just the immediate ones and that is what salary and bonus were based on.
Really a shame, but since this whole mess began, honestly, nothing has changed. And, as cynical as I am, nothing is likely to change. The board of directors at these companies take care of each other. This one gets a job for that one and so on, etc. It has always been said that the rich get richer; Wall Street is the perfect example of that. The scariest part of the whole thing is that many people in this country would still be willing to do the same business that got us into this mess if it were to come down to money.

[plumnelly]

yep, insane, greedy bastards!

[mergina]

Wall St. is an outrage. Bankers are an outrage. To hear anyone argue that ALL THAT TALENT is going to walk if they cap their salaries is an outrage. To allow those who got us into this position to continue in their positions is an outrage. The fact that we are still speding billions to be in Iraq is an outrage. The fact that Cheney spoke today is an outrage. THERE IS VERY LITTLE GOING ON THAT HAS TO DO WITH WASHINGTON OR WALL ST. THAT DOES NOT OUTRAGE. WE THE PEOPLE, ARE MAD AS HELL, AND WE'RE NOT GOING TO TAKE IT ANYMORE!!!!!!

[zanzig]

Welcome back Peter Finch, I have missed you.

[katok]

Align compensation to investor's annual and five year results.

My broker lost 50% in 2001, and last year I lost 40% of that. How they consider themselves geniuses worthy of such grandiose compensation is truly outrageous. It took me 25 years to save this money, I am now retired and disabled, and they lost it in 90 days. Some genius. And I the fool, "you can't bail out now, at the bottom?, the market history has never failed to generate 15% return over 30 years" he say's. I wonder how many times in "history" that despite strong economic conditions for a 27 year span, as between 1980 and 2008, the market lost value.

But banks, they are guaranteed a strong ROI on their spreads, and I am bailing them out?

[Gdebs]

I lived my first 10 years during the depression. I have never trusted Wall Street. I finally have some savings in CDs. Doesn't pay much but it is all still there. I hope the state pension funds do not go broke as there would go my teacher's pension.

[Gdebs]

Listen to the guy who testified before the House today about Bernie Madoff. You will never put another dime in Wall Street.

[1liberalconspirator]

You could have done a lot better in terms of a broker. I am sorry for your financial troubles.

[1liberalconspirator]

Too many brokers are just salespeople with enough knowledge to pass the series seven exam.

[gloriousbeing]

Sir/Madam, I am sorry for your loss, but investing is GAMBLING. Sometimes you win, sometimes you lose. Most people invest/gamble to "grow" their money. They want MORE money, and they take their chances. I once had a co-worker ask me who my "financial advisor" was. I told him that I would never PAY someone to tell me what to do with MY money. It is gambling.

[FalconerHK]

Amen, brother. What we need to do (which of course will never happen, considering Wall St. and the ruling class are one and the same) is make banking about as personally enriching as running a government program. What's the salary for a top-level GS-rated government bureaucrat? $120k? Seems like that should be a good living.

The point is this: we don't need friggin' "captains of industry" or typical fail-upwards CEOs running banks. We need competent, skilled administrators who recognize that their responsibility lies in protecting their depositors, not in enriching themselves or their buddies. If you can make even more money smartly investing your depositor's assets, the gain should be THEIRS in the form of higher returns - not yours in the form of a $1.4 million office renovation. You're not risking a damn thing.

Banking needs to STOP BEING A GLAMOUROUS PROFESSION for the ruling class to extract as much cash as possible at others' expense (literally). It needs to be treated as a necessary public service.

[katok]

Falconer - Absolutely correct. No organization can serve two masters. Banks used to be "Conservator's" of their Depositors wealth,and served the Depositors well with low risk management of capital. Today they serve their investors and must take risk to "wow" the markets with their high rate of returns. This is inconsistent with its historical and institutional mission, to safely care for it's Depositors money. Rolling Banks and Investment Houses together creates organizations destined to implode.

[lovbug]

I agree. Nationalize the banks! problem solved!

[DiogenesOfAlaska]

Thanks for taking apart Brooks column from yesterday. Normally it would be distasteful to argue further about its functioning and about the argument from the 2001 Atlantic essay.

But I totally agree that this is truly the core: making it sound like reverse snobbery to criticize the insane bonus culture can't be at the height of conceptual understanding of the problem. It's simplistic, it is ideological and it is itself another form of doubly reversed snobbery.

I was tempted to respond to Brooks' column: would you like some tea? some Boston tea? as in Boston tea party? and would you now please take your coat and take off across the ocean to where-ever it is you don't pay your taxes?

The same pattern of continued misunderstanding of the flawed incentive structures in their creation of risk - instead of being compensation for risks taken - repeats itself after Obama's announcements concerning pay-caps.

It will be worthwhile to have a very close look at who says what in response to this. Because they need to look closely before they sneer: there IS the long-term compensation available in stock.

So here's the litmus test: if it is so degrading and sad, making executives feel so sorry about themselves and about the state of the world to be remunerated ONLY in the form of stock, then can we PLEASE be told what exactly all the entrepreneurial and innovation and best and brightest hogwash is about?

[got2Bkidding]

If you compensate executive with stocks only, guess what's going to happen...

They are going to do everything in their power to inflate the value of that stock. I think that one of the most damaging things that's happened is corporations getting around the 1 million dollar salary limit that was previously imposed by awarding stock options.
Beyond the IPO, sales of stock do not benefit the company. They benefit the stockholder. If a company is run to be profitable then the health of the company as well as the profit potential for stockholders will follow.

By making stock options part of the compensation package we are tempting the executive to cheat. If he were forced to rely solely on his salary he would be more likely to run the company in a more thoughtful manner. If he believes in the company there is nothing that says he can't buy stock in it, at market value.

[DiogenesOfAlaska]

Yes, I agree with your argument in every respect - as a general argument.

It exihibits the sublety in our faith in capitalism. It is difficult to resolve and there's no short-cut answer.

But in the present circumstances, I think it will take a while until benefiting the stockholder of banks will cause damage. Their stock is currently worth zilch.

And nobody is saying that execs don't get paid at all. When making general arguments applying to a total number of a few hundred among the workforce and trying to find out whether they should earn 1.3 times or 13 times or 130 times the president's salary, things are getting difficult. I don't know the answers. But I am certainly not worried that $500000 a year plus stock is going to be a 'disincentive'.