The Advisors' Blog

– Paul Hodgson, The Corporate Library

Below is something I recently posted on “The Corporate Library” Blog:

Heads I Win, Tails You Lose: The Banks Never Stopped Paying Bonuses

What am I talking about? Surprised that they’ve returned so soon to the bad old ways of short-term bonuses? They never even stopped.

Using powers unavailable to mere researchers, Andrew Cuomo, NYC’s Attorney General has forced the banks to fess up what they did on bonuses last year. Yes, LAST year. AS they were driving the rest of the economy down the pipe. AND as they were asking the government for money – or being forced to accept it.

No Rhyme or Reason – The ‘Heads I win, Tails You Lose’ Bank Bonus Culture (see, you don’t even have to make this up!) is a 22-page report that concludes after months of investigation:

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

The report lists banks paying out more in bonuses than they received in income (Goldman, Morgan Stanley, J.P. Morgan Chase), in some cases with half the TARP funding being paid out in bonuses. Others paid out billions in bonuses while seeing a loss (Citigroup and Merrill Lynch). Bank of America and Citigroup saw performance crippled in 2008, yet compensation expenses stayed at EXACTLY the same level as they had in 2007, one of the best bull years.

O.K. O.K. I’m sorry about all the capital letters, but really, I’m surprised this whole report isn’t printed in UPPER CASE. It’s certainly well calculated to make the blood of any shareholder (or Congressman) boil. The usual excuses for this kind of behavior are offered, in this case by Merrill Lynch executives, that employees in units that performed well should not suffer because of the huge losses engendered by other less successful units.

But somewhere along the line the overall financial health of the whole firm must be taken into account (phew, got through that sentence without any upper case at all).

Johnny and Jane’s Allowances

Let’s try and liken this to family finances to try and bring it down to the level of common sense and reality, rather than the fantasy and lunacy that reigns on Wall Street and in the other banks.

Mom and Dad bring in a good pay packet each week. Johnny and Jane have their list of chores and get their allowances for doing them each week. Let’s see food and lodging as base salary and allowances as bonuses. But then Dad loses his job, has to stay home, and takes over Johnny and Jane’s chores during the week, when they are at school. The dishwasher continues to get stacked, the laundry done, the lawn mowed, the trash put out. Johnny and Jane aren’t doing the chores any more, and the family income is halved so their allowances are cancelled. Fair enough. But then Dad starts going out looking for other work and has to attend interviews, he’s away most of the time, or at home writing applications, working on his resume. Johnny and Jane have to take up the chores again. But do they get their allowances back?

Yeah.

When Dad gets another job.

That’s how real people live.

Let’s push it a step further. There are bills to pay, right? Like debt, like “dividends to shareholders”, what is Mom going to do? Tell the utility company that she can’t afford to pay the electricity bill because Johnny and Jane need their allowances? Tell the bank that she can’t pay the mortgage because Johnny and Jane need their allowances or they’ll GO AND DO THE NEIGHBOR’S CHORES INSTEAD AND GET PAID BY THEM!? That’s a sure fire way to get your house repossessed.

And what if they had mortgage insurance? That’s like Treasury money, yes? But she used it to pay Johnny and Jane their allowances rather than using it to pay the mortgage? Someone’s going to get mad.

If they haven’t already.