Comments (21)

Jan 23, 2009 - 11:45am
indian-banker, what's your opinion? Comment below:

That's a good article. It's pretty clear that Thain had every intention of screwing Bank of America over but he did deliver to both his shareholders and employees. His shareholders are still screwed though, they receive only 0.89 of a Bank of America share and this news has to have had a negative impact on the share price. He also screwed with the government. Also, I support the article's point which says that people won't leave if they don't get big bonuses. The argument "We're going to lose talent if we don't pay big" is silly in this particular case. Where are they going to go? If they had the chance to jump ship, they would have done it anyways, regardless of the fact that they might get a big payout from Merrill.

Jan 23, 2009 - 12:51pm
drexelalum11, what's your opinion? Comment below:

Well, Merrill is already losing top talent, if BoA doesn't manage to maintain at least a modicum of human capital, its purchase will have been a massive net loss. I mean, their are obviously guys earning money for Merrill, and if the bank doesn't recognize that it will lose them to someone who does. Also, even money losing departments should generally be compensated enough to avoid decimation, or you won't be in a position to profit from the turnaround. Finally, the comparison to the guy who installs seat belts is not that great; if his MPL was so much higher than anyone that of anyone else, shouldn't Toyota or VW steal him away?

Best Response
Jan 23, 2009 - 1:18pm
thedude, what's your opinion? Comment below:
drexelalum11:
Well, Merrill is already losing top talent, if BoA doesn't manage to maintain at least a modicum of human capital, its purchase will have been a massive net loss. I mean, their are obviously guys earning money for Merrill, and if the bank doesn't recognize that it will lose them to someone who does. Also, even money losing departments should generally be compensated enough to avoid decimation, or you won't be in a position to profit from the turnaround. Finally, the comparison to the guy who installs seat belts is not that great; if his MPL was so much higher than anyone that of anyone else, shouldn't Toyota or VW steal him away?

you missed the point. if people are a part of a company that has contributed to the greatest losses ever incurred by any business ever, you don't deserve a bonus; the company doesn't deserve to be around for the turnaround... maintaining talent (prestige) at a company should be the last objective when it comes hat in hand to the government.

It's this superficial sense of entitlement that is crap. Re-Read the Jefferies topic about the kid not getting an offer from an Ivy. If you are part of a company that looses a ridiculous amount of money you should not be paid a bonus. THAT simple.

Jan 23, 2009 - 1:37pm
drexelalum11, what's your opinion? Comment below:
thedude:
you missed the point. if people are a part of a company that has contributed to the greatest losses ever incurred by any business ever, you don't deserve a bonus; the company doesn't deserve to be around for the turnaround... maintaining talent (prestige) at a company should be the last objective when it comes hat in hand to the government.

It's this superficial sense of entitlement that is crap. Re-Read the Jefferies topic about the kid not getting an offer from an Ivy. If you are part of a company that looses a ridiculous amount of money you should not be paid a bonus. THAT simple.

I disagree. I accept that Merrill may deserve to no longer exist, but if it is, it has to be run in a profit maximizing fashion. My point has to do with the wisdom of handing out bonuses. You are right that the government should not be in a position to hand out bonuses to failed businesses (think moral hazard), but the government isn't, BoA is. My assumption is BoA sees the bonuses and resultant talent retention as a profit-maximizing move. If BoA is not allowed to give out bonuses, it will lose additional money on ML. If this amount of foregone revenue as a result of an arbitrary bonuses v base distinction is high enough, BoA is losing too much money from the deal, and the government is going to either going to have to let ML fail or nationalize it, the social costs of which will almost certainly exceed 10bn.

Jan 23, 2009 - 1:49pm
nrc_chicago, what's your opinion? Comment below:

I enjoyed the reference in the article about the guy at GM who installs seat belts and gets laid-off. The difference is that he is paid bi-weekly for his efforts and therefore when laid-off has received all the compensation attributable to his work.

Wall Street bonuses work differently. Take an M&A banker. He closes a deal in February, bringing fees of $5M. That is cash brought into the firm for advisory services rendered to a client, not some exotic asset that could be worthless. The banker however, is still pulling his bi-weekly salary based on $150k a year. He is not paid for his work in bringing in the $5M until his bonus, when he might get $500k for that particular deal. In other words, the bonus is not just a bonus for the M&A banker, it is deferred comp for his work that brought in tangible profits. To zero out his bonus would be equivalent to the GM guy giving back 80% of the comp he had earned over the year.

The source of the huge losses to Wall Street was due primarily to a small segment of the banker population - the mortgage securties underwriters, credit swaps and others who traded on high leverage. These people should definitely not get bonuses, and they probably aren't getting any, that is if they even have jobs anymore. Unfortunately, the damage they caused is so outsized compared to their comp that you can never claw back the difference.

A lot of business lines on Wall Street are very profitable in real ways - Asset Management, advisory work, transaction services, etc. It's just that these profits were overwhelmed by losses from leveraged activities. If you buy my argument that a portion of bonuses should really be considered part of salary, then to eliminate bonuses for the segments that were genuinely profitable is very unfair and could be considered unethical in its own right.

  • 2
Jan 23, 2009 - 3:16pm
drexelalum11, what's your opinion? Comment below:
nrc_chicago:
He is not paid for his work in bringing in the $5M until his bonus, when he might get $500k for that particular deal. In other words, the bonus is not just a bonus for the M&A banker, it is deferred comp for his work that brought in tangible profits. To zero out his bonus would be equivalent to the GM guy giving back 80% of the comp he had earned over the year.

...If you buy my argument that a portion of bonuses should really be considered part of salary, then to eliminate bonuses for the segments that were genuinely profitable is very unfair and could be considered unethical in its own right.

While I agree with your point, be careful about bringing the automakers in to your argument. If you look at GM/Ford/Chrysler, one of the largest problems they are facing is in fact that they deferred compensation - but rather than doing so for a few months, they did so for periods of 20 and 30 years, in the form of pension guarantees. The workers who assembled cars in the 1950s, 60s, and 70s were all very profitable for the auto companies, and earned the money they were guaranteed in pensions. Unfortunately, the auto companies underfunded pension corporations, which raised their actual pension costs, and as a result these workers are now not being compensated for work already performed - similar to a M&A banker not seeing a bonus. I do agree, though, that is unfair and can be considered unethical.

Jan 23, 2009 - 3:06pm
GoodBread, what's your opinion? Comment below:

Very few people actually made any money for the BBs in 2008, regardless of their division. Deals fell through, P&Ls got smoked, assets under management dropped.. If you didn't bring in any money, you don't get paid, period.

As for the human capital argument, a job let alone a bonus is sufficient to keep people to stay put in this economy. Nobody's going to complain for being underpaid and go start a HF in this climate.

Jan 26, 2009 - 12:24pm
thedude, what's your opinion? Comment below:

you are essentially saying "I made money, I deserve to be compensated at the level I earned"

this is flawed on so many fronts...

1) its not like they aren't being compensated, their base salary at the lowest is more than 2.5x the income of the average American.

2) The most important is you are part of a larger company. Ultimately, your ability to make the money you did is ultimately derived from your position within the company. If you disagree then you should have already gone out and started your own shop. screw even considering the fate of the UAW's, what about a mid level executive who runs a profitable area of one of these auto companies. If the big company goes down he will still get canned. Its the way it works.

3) If the company can only avoid bankruptcy through government funds (you probably wouldn't have a job without it) then your claim that you should be compensated now with other taxpayer money in the form of Bonuses, beyond your base salary... It is so beyond any modicum of rational thought for anyone who is not a direct stakeholder...

4) also the idea that the firm needs to maximize "forseen" profitability in the future by paying out bonuses to keep "the best" around, if they are allowed to exist. How about cutting costs to maximize profitability in the present?!?! Its a two edged sword of an argument, and the counter is definite, while yours is hypothetical.

it really makes no sense.

Jan 26, 2009 - 12:33pm
drexelalum11, what's your opinion? Comment below:

Pensions, like bonuses, are a deferred form of compensation. If the corporation for which the work was performed goes insolvent, the government guarantees these pensions and will pay them out of taxpayer money (yes, the PGC is partially paid for by premiums from corporations, but is far from 100% experience rated). How is this scenario any different than government funds covering a bonus?

Arguing that present profitability should be maximized at the expense of future profitability is just not an economically viable rationale, and doing so will prolong and exacerbate this recession, ultimately hurting everyone.

Jan 26, 2009 - 12:57pm
thedude, what's your opinion? Comment below:

have you ever studied economics? if you want to talk macro, please don't try to talk about a corporation cutting costs through the elimination of bonuses, prolonging recessions.

we are talking about a firm and a people, many of whom would not have jobs (or a base salary) if it wasn't for taxpayer money. government has been forced to help them limp along bc they are worried about a widespread panic and raid on banks where the FDIC would be totally fucked. if the us taxpayers are already, allowing you to keep your job, its just dumb greed to claim, oh i need my 6-8 figure bonus on top of it. no matter how you cut it, in a normally operating free market, the profitability of both in the employee and employer are inextricably linked. life isn't fair and this argument to the contrary where your talking about enormous sums of money for the average person footing part of the bill is just greed.

Jan 26, 2009 - 1:08pm
drexelalum11, what's your opinion? Comment below:

...but the incentives at the firm level differ from the incentives at the government level. The government wants to keep the firms solvent, but the rational firm must seek to maximize profits. If firms take short term profits at the expense of long run profits (exactly what caused our current problem btw), you move the macroeconomy in to disequilibrium. The bonus argument is micro btw, and has comparatively little to do with the macroeconomy compared to the costs involved in a run on the banks.

I agree with you that the bonuses are about greed, but greed is the basic foundation of economics, whether academics care to admit it or not. The government should have structured the bailout better, I'll agree with you certainly, but unfortunately politicians are not known for getting things right.

Jan 26, 2009 - 1:55pm
stk123, what's your opinion? Comment below:

What I would like to know is how the author of the article came up with the $15bn that Merrill paid out in bonuses?

In their 2007 annual report Merrill spent $16bn on compensation and benefits (total). If we asume that half of that amount was paid out as bonuses then they paid out $8bn in bonuses in 2007.

Thain said that the bonus pool was lower by 41% this year, which means that they paid out roughly $4-5bn in bonuses this year - NOT $15bn.

I hate the media, they are a bunch of liars! Don't believe in anything you read on yahoo!

Jan 26, 2009 - 8:10pm
nystateofmind, what's your opinion? Comment below:
stk123:
What I would like to know is how the author of the article came up with the $15bn that Merrill paid out in bonuses?

You're a fucking idiot. Who gives a fuck what you read. Bonuses were down 30-40% from prior year, or > 50% from what same level earned prior year. Get back to school you fucking dope.

Jan 27, 2009 - 12:36am
stk123, what's your opinion? Comment below:
nystateofmind:
stk123:
What I would like to know is how the author of the article came up with the $15bn that Merrill paid out in bonuses?

You're a fucking idiot. Who gives a fuck what you read. Bonuses were down 30-40% from prior year, or > 50% from what same level earned prior year. Get back to school you fucking dope.

Hey douchebag,

What I read is the article that thedude posted a link to in his original post in this thread. Half of the article is based on the fact that Merrill took $10 billion in TARP money, and then paid out $15 billion in bonuses, which forced BoA to ask for another $20 billion.

Since Merrill (probably) paid out closer to $4 billion, most of the author's arguments are based on a lie and my question becomes relevant.

...and stop using profanity to take out your anger on random posters (me) on WSO just because you are about to get laid off next week.

Good luck in the unemployment line JACKASS! Karma is a bitch.

Jan 26, 2009 - 3:14pm
xqtrack, what's your opinion? Comment below:

from whta i read bonus at ML only ended up being down 6-7% from 2007. This was the whole problem...Thain had claimed he was going to cut bonuses, and then didn't.

at other banks, you're seeing compensation cuts of 40-50% on bonuses. this seems fair to me.

it's really easy to say nobody should have any bonuses at these banks, but it's just completely crazy to think that you can cut compensation for somebody who was paid 800k last year to 150k this year and not have fallout (people do have mortgages to pay etc).

you're right, the majority of people cannot/will not leave right now. but every MD who is able will jump ship to boutiques/non TARP banks, and take senior teams with them.

the problem with banking is that the senior level of people are really responsible for bringing in the majority of the revenue. the ones who can still leave right now are the ones who still bring in revenue.

and more relevantly, in 2-3 years, when they are able, they sure as hell will leave.

Jan 26, 2009 - 6:01pm
thedude, what's your opinion? Comment below:
xqtrack:

it's really easy to say nobody should have any bonuses at these banks, but it's just completely crazy to think that you can cut compensation for somebody who was paid 800k last year to 150k this year and not have fallout (people do have mortgages to pay etc).

fallout yeah, but thats what happens when companies go belly up. the people who were making half a mil a year suddenly have to find other work real quick or they loose their house. My dad bought the house I grew up in b/c the CFO of a local company couldn't afford it when they went under. It's part of life. The idea that it should be the concern of the US government and the american tax payer that a VP at ML can continue to pay his mortgage on a 4 million dollar apartment in NYC is loony. I think I have argued this enough... and to the other poster, I made no claim about what was micro or macro... however you continue to discuss short term business decisions in a macroeconomic perspective, which sadly, makes you look even more uninformed. anyway, take it easy.

Jan 26, 2009 - 6:18pm
drexelalum11, what's your opinion? Comment below:
thedude:
fallout yeah, but thats what happens when companies go belly up. the people who were making half a mil a year suddenly have to find other work real quick or they loose their house. My dad bought the house I grew up in b/c the CFO of a local company couldn't afford it when they went under. It's part of life. The idea that it should be the concern of the US government and the american tax payer that a VP at ML can continue to pay his mortgage on a 4 million dollar apartment in NYC is loony. I think I have argued this enough... and to the other poster, I made no claim about what was micro or macro... however you continue to discuss short term business decisions in a macroeconomic perspective, which sadly, makes you look even more uninformed. anyway, take it easy.

I wasn't discussing the macros of business operations, I was discussing the fact that aggregated micro choices that move away from equilibrium equate to macro disequilibrium. Specifically, I'd argue that the good will firms engender by treating employees well now equates to an implicit wage premium they enjoy in the future. I'd have to think about the model for a second, but basically aggregating that concept puts the economy in a macroequilibrium that moves the NAIRU in. This is basically seat of my pants stuff, and I do agree with you on most of your points, I just think you're not stating it right. It would make sense for the CFO of any of these banks that fucked up to lose his bonus, his house, and his job, even if he isn't personally responsible; unfortunately, that equates to a demise of that bank, which is what the bailout is trying to avoid. I personally think the government's tendency to pursue short run ineffective solutions has exacerbated moral hazard for quite some time, and this will only continue to do so, but I think that the way incentives are currently structured maintaining full capacity, if that means bonuses, is the rational choice for banks to make

Jan 26, 2009 - 3:24pm
stk123, what's your opinion? Comment below:

I highly doubt the bonus pool was down only 6-7% from 2007, because the amount of employees receiving bonuses is down by more than 6-7% (due to layoffs). And there is NO WAY that employees received (on average) higher bonuses than they did in 2007.

I still think that the 40% figure is closer, but even if the bonus pool did not change from 2007 then it would at best be 1/2 of the $15 billion the author claims.

Jan 27, 2009 - 1:55pm
thedude, what's your opinion? Comment below:

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Oct 18, 2009 - 7:15am
mxc, what's your opinion? Comment below:

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