All about ideas…

$3.6 billion in bonuses paid in 2008

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Last year, employees of the 9 largest banks took home more than $32.6 billion in bonuses. That breaks down to an average $3.6 billion per each bank to the very same people who took down the economy. Imagine how much they would have made if they hadn’t taken down the economy?

They survived the financial turmoil with taxpayers money, still nine leading US banks shelled out more than $32 billion in bonus to their employees last year, with crisis-ridden Citigroup alone paying $5.3 billion.

Detailing the bonus payments made by the TARP-funded financial institutions in 2008, the latest report from the Office of the New York Attorney General has said that there “is no clear rhyme or reason to the way banks compensate and reward their employees”.

The US government had pumped in billions of dollars into the banks through the Troubled Asset Relief Program (TARP) to help them tide over the worst financial crisis in decades.
The nine banks together paid $32.6 billion in bonus while they received $175 billion worth funds from the US.

The ‘Bank Bonus Report’ by Attorney General Andrew M Cuomo said that even though Citigroup and Merrill Lynch incurred massive losses in 2008, together they paid nearly $9 billion in bonus to the employees.

The Citigroup, led by Indian-origin Vikram Pandit, gave away bonus worth $5.3 billion while Merrill Lynch shelled out $3.6 billion.

Others which paid huge bonus were JPMorgan Chase ($8.69 billion), Goldman Sachs ($4.8 billion), Morgan Stanley ($4.5 billion), Bank of America ($3.3 billion), Wells Fargo ($977.5 million), Bank of New York Mellon ($945 million) and State Street Corp ($469 million).

According to the Wall Street Journal:

Nine banks that received government aid money paid out bonuses of nearly $33 billion last year — including more than $1 million apiece to nearly 5,000 employees — despite huge losses that plunged the U.S. into economic turmoil.

The data, released Thursday by New York Attorney General Andrew Cuomo, provide a rare window into the pay culture of Wall Street, where top employees typically make 90% or more of their compensation in year-end bonuses.

The $32.6 billion in bonuses is one-third larger than California’s budget deficit. Six of the nine banks paid out more in bonuses than they received in profit. One in every 270 employees at the banks received more than $1 million.

I don’t mind people making really good incomes for producing something of value – actually making something that people or businesses need, will make life a bit easier, or solve a problem – but Wall Street incomes are out of line with the rest of U.S. incomes. Worse still, these enormous incomes foster reckless risk-taking – the kind of reckless risk-taking that crashed the economy and required the federal government to bail out the banking industry which still has yet to loosen lending to businesses, particularly to small businesses. Business Week explains,

Banks don’t plan to resume normal lending any time soon, even when economic growth returns. The Federal Reserve’s most recent survey of senior loan officers found that most expect to maintain higher lending standards through the second half of next year. For riskier borrowers—including many small businesses—credit “will remain tighter than average for the foreseeable future,” according to the report. Credit-card lending, once an easy source of unsecured funds, has also been curbed: 58 million cardholders had their limits reduced between April 2008 and April 2009, according to FICO (FICO).


So alternative finance is growing even with credit markets seized up. While some finance companies like CIT have faltered, asset-based lending increased 8% in 2008, according to the Commercial Finance Assn., which represents some 300 asset-based lenders and factors. The group’s CEO, Andrej Suskavcevic, sees continued growth ahead, as private equity groups and hedge funds look for profitable investments in nontraditional lenders. Companies squeezed by banks’ rising credit standards—including distressed firms, startups, or those trying to finance exponential growth—are “perfect clients for asset-based lenders,” he says.

The problem with this alternative, asset backed financing is that it is very expensive, but many businesses are being forced into this financing to stay in business and because they have no alternative.

However, as small businesses struggle to survive and unemployment climbs as a result of the financial debacle caused by unrestrained speculation and risk-taking, Wall Street appears ready to market a new speculative product, similar to the mortgage back securities that caused the current financial crisis.

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

Not too many years ago, the main function of banking – including investment banking – served to help businesses, and thus communities, grow and succeed. But banking now attracts people who invent get-rich-quick financial product schemes for their investors…and themselves.


Written by Valerie Curl

September 7, 2009 at 11:20 AM

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