Frank Calls For Moratorium on Wall Street Bonuses
A: Oh boy. Wall street will soon be officially declared 'DEAD'!
According to Bloomberg, "House's Frank Calls for 'Moratorium' on Wall Street Bonuses":
House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.As a trader, this is a very sad time for me. Granted I never worked with an actual job on wall street, and therefore never got paid any bonus, to see it destroy itself and the nation hurts. Now wall street isn't the only one to blame, but they were in an integral component of the system that allowed credit to go parabolic. To be fair, we must also blame deregulation, ultra low interest rates, way too easy money, fraudulent lending tactics, loose lending standards taking advantage of a fee based securitization credit model (the bundle, slice & dice, and sell model), exotic loan products, flawed rating models, use of complex derivatives to disperse risk and recycle funds, rampant speculation on an illiquid asset class, poor/greedy decisions by buyers to take on too much house, extinction of MEW, use of MEW on consumption, unregulated CDS markets, fractional reserve banking, shady accounting rules, govt subsidized housing plans, use of FNM/FRE to keep rates low as long as possible, and the 'everybody should be able to own a home' concept.
"There should be a moratorium on bonuses," Frank, a Massachusetts Democrat, told reporters yesterday in Washington. "They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus," and if it causes losses "you don't lose anything."
The halt on bonus payments should last "until they can get a better structure without that perverse incentive," he added.
As I said January 2nd in my forward looking piece "Bonuses: It's 2009 That Will Hurt More":
"The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years? "I expect 2009 bonuses to be down 40%-50% minimum. I expect bonuses thereafter (assuming the moratorium has an expiration) to be the exception, not the rule. The game will never be the same.
Posted by uwsider
Wed Oct 22nd, 2008 12:34 PM
With a democratic president and democratic Washington majority, Frank may easily pass this.
I mean, why stop at wall street, doesn't the same argument hold true for other professions. This is heading towards socialism!
Scary times for the American dream (don't ever dare to dream past 250k!)
Posted by Noah
Wed Oct 22nd, 2008 12:39 PM
heading? Seems like we are on the doorstep!
Very scary
Posted by Colgin
Wed Oct 22nd, 2008 12:44 PM
Wow! Clearly there is a major moral hazard problem with the OPM pigmen crowd on Wall Street that needs to be fixed. But even I am against an outright moratorium on all bonuses related to performance. So, who gets all the future profits generated by these firms if they can't distribute it out to the employees generating them?
Posted by brenda
Wed Oct 22nd, 2008 01:16 PM
This is taking the swing the other way way too far. Maybe members of Congress who voted against any and all regulation ought to return their paychecks from the past six years. We've got two games going right now, blame and bail out, and neither is making me feel warm and fuzzy.
Posted by Noah
Wed Oct 22nd, 2008 01:22 PM
I must admit, I took a double take when I first saw the article on Bloomberg.
Posted by Jose R
Wed Oct 22nd, 2008 01:55 PM
"To be fair, we must also blame deregulation, ultra low interest rates, way too easy money, fraudulent lending tactics, loose lending standards taking advantage of a fee based securitization credit model..."
You know, we can all blame the usual suspects, but who exactly lobbied Congress for de-regulation? Who claimed to not need/want government intervention in the markets? Yet, they demanded a bailout without affecting executive compensation?
The mother of all bailouts, and yet some of you now claim "they" have gone too far? Once its directed at bonus pay?
And any and all profits should go to the taxpayer towards the costs of the bailout.
And Noah, as you have stated on this blog, trillions of dollars have been paid out in bonuses and executive pay based on these fraudulent actions.
Why should the taxpayer be the only one to pay a price? There shouldn't be blowback on executive pay when >70% of the taxpayers believe there shouldn't have been a bailout? come on...
Again, privatize the profits, socialize the risk.
Posted by Noah
Wed Oct 22nd, 2008 02:03 PM
Jose you have very valid arguments! It was wall street and the bank executives that lobbied for deregulation. After all, they needed it to put in place their system.
The whole thing sucks and there are victims. We will be paying for this for a long time. Anyone that thinks these bailouts/rescues/investments will make us money is drinking the kool aid! I just dont see it, especially knowing that corruption goes hand in hand with these things.
Posted by chris
Wed Oct 22nd, 2008 02:04 PM
That doesn't worry me. The smart people will simply move their business enitrely offshore.
Posted by Jose R
Wed Oct 22nd, 2008 02:18 PM
chris,
The smart people have already moved their money offshore. I forgot how much, $10trillion have left the US to go offshore, I think? So, why shouldn't they take the next step and leave the US for dead.
Noah,
Regarding corruption. I did not know John Mack was being investigated by the SEC for insider trading. He was trading information to Hedge Funds for positions.
But, the SEC agent that was investigating was fired after he asked to interview Mack and the the case of insider trading was squashed by, I believe, Cox.
And if John Mack was insider trading how many more were? And let's not even start on naked short-selling...
The SEC has a responsibility that all players stay honest. SEC has not done its job, whether through incompetence, malfeasance or out-and-out fraud.
Wall street has not earned anyone's trust.
Posted by chris
Wed Oct 22nd, 2008 02:30 PM
Jose, I was more thinking that successful hedge fund managers will shut down their US-registered LPs and concentrate on managing offshore funds only. That's what George Soros did in the 1970s when there was a risk that performance fees would be banned on US-registered investment vehicles.
As a footnote to this, keep in mind that ERISA capital typically is invested in offshore structures anyway.
Posted by Colgin
Wed Oct 22nd, 2008 02:37 PM
"And any and all profits should go to the taxpayer towards the costs of the bailout."
Jose,
Frank said that the moratorium should apply to all Wall Street firms not just those participating in the bailout. It was really this part that made me ask "so where will that money go?" Certainly there is a legitimate case to make that with respect to those receiving government money that money get repaid prior to new huge bonuses being paid. However, to cap other banks/funds who may not being directly bailed out to subsidize the bailout seems to go a little too far in my opinion.
Posted by Jeff
Wed Oct 22nd, 2008 02:59 PM
Banning bonuses outright would be un-constitutional..."pursuit of happiness" and all that. If there were bans for those banks who take bail money, their best people will just leave to go to surviving hedge funds or boutique I-banks like Lazard, Greenhill, etc. Let's face it though many trading jobs in fixed income are done for anyway, just as a result of deleveraging. The bonuses will never come back because risk of loss will be attached to production of product again and margins will be much lower. To me it's just a sign of the times that Frank can suggest this without being laughed at. Regulation is coming back with a vengeance. Capitalism 2.0 is here, it is going to be very interesting to see how it works. I do have to say that I personally have moved from being a free markets guy to a free markets with guard rails guy having seen what the combo of unfettered markets, globalization, greed and stupidity can do. Let's face it almost no one is worth these bonuses, much of what passes for brilliance on Wall Street is idiosynchratic normativeness (right personality for the times and asset class). The same way Russian mobsters shouldn't be billionaires just because they stole companies that are sitting on lots of natural gas (and severely declining oil reserves).
Posted by Marmotton
Wed Oct 22nd, 2008 03:05 PM
This is such a cheap shot! I don't hear all these baby boomers offering to return the overinflated profits they made selling their houses in the last 15 years!
I think they are the ones you should pony up!
Of course they also do not care about these people who have worked in finance and have been laid off so many times they stopped counting. The first thing you learn in this business is that you need to be rewarded for risk. And what a risky career that is...
If it was not for the bonus, no one would do these jobs with the liability risks they entail, the long hours, and all the rest.
If such a resolution were to pass, New York City would become a ghost town, and New York State would declare bankruptcy. The United States would lose its superpower status. This would be the nail in the coffin.
A strong financial industry is what's making the US such a strong power.
Who needs Bin Laden when Barney Frank can do the job of destroying the US much better?
Posted by Fred
Wed Oct 22nd, 2008 03:40 PM
Everybody, especially Congress, looked the other way on the way up. Many voices expressed concern years before the 2006 vintages made their appearance. The game was rigged but the ultimate linchpin was the permitted hyper-leveraging of FNM and FRE and the unregulated derivatives markets. As for FNM and FRE the blame truly rests in Congress' lap. They are/were the ultimate arbiter of what change could have been made made. The changes would have certainly filtered through the system and things would have slowed down. As for regulating derivatives, does it make you wonder why most of this stuff was domiciled outside of the US? In the case of AIG, Financial Products was originally HQ'd in CT but London made more sense. Why? Crossroads for all that ME money - JMO. The Brits also took a very blind attitude towards the whole thing. Based on what I've heard, AIG is a walking corpse. They cant unload anything that is outside of insurance so all that crazy new biz they got all wrapped up in toast. Barney Frank is an idiot. Congress doesnt need to regulate bonuses - there wont be any for while regardless.
Posted by Noah
Wed Oct 22nd, 2008 03:58 PM
I doubt this will go through. I was in shock when I saw it though. Congress DID look the other way and it just goes to show you that when times are good, and assets are on their way up, how blind the supposed leaders/lawmakers/bosses get.
Its crazy! Fannie/Freddie have been mired in scandals for a long time. If we would put 1/3 of all this money towards health care, or education, or our infrastructure, or energy independence, we would be so much better off. Our system is not only antiquated, but so inefficiently run its scary.
Posted by anonymous
Wed Oct 22nd, 2008 04:08 PM
This bonus moratorium won't fly. But if it does, Wall Street will move to London. You could kiss hundreds of thousands of jobs goodbye.
Posted by brenda
Wed Oct 22nd, 2008 06:48 PM
So, the execs at BONY/Mellon, one of the most conservative shops out there, don't deserve a dime? They were forced to accept the largesse of the US Gov't/Taxpayer. Alot of egregiously awful things were done (and not done) over this wild ride. I am angry, very, and punishment is due. But this is not the way to reform the system. We need to move forward, with care and thought, not knee-jerk reactions and counter-productive fear tactics. If eliminating bonuses would truly create a workable banking system, I'd be all for it. It wasn't the bonus system, it was THIS bonus system (and only for a portion of the employees).
Posted by Noah
Wed Oct 22nd, 2008 06:50 PM
well said Brenda!
Posted by JC
Wed Oct 22nd, 2008 10:35 PM
Why does any employee need a bonus as an incentive? If bonuses were eliminated, companies would simply adjust base pay rates. And if an employee was not satisfied with their base salary, then they should demand a raise, or find a better paying job elsewhere. I don't understand this bonus mentality, since when was a salary an insufficient incentive to work?
Posted by Noah
Thu Oct 23rd, 2008 07:30 AM
JC - I hear you, but there is nothing wrong with bonuses when applied correctly.
In short, bonuses should be based on performance only. DONE! You earn the company 10M, you get a certain bonus. You are the CEO, and your company loses money, underperforms, stock is down 50%, you do not get a bonus. Clearly that is not the case in today's system.
I know on wall street, bonuses are paid by generated revenue, so I think the impetus for Franks call here, was executive based compensation, and not so much employee revenue generated compensation. Who knows.
Posted by Angry Taxpayer
Thu Oct 23rd, 2008 09:21 AM
Brenda,
The execs at BONY/Mellon deserve a dime, but not much more than that. Everyone in the financial services industry has benefited from a mecurial rise that started when the ERISA laws changed 30 years ago.
We are going to back to the days when a job on Wall Street did not pay any better than one in publishing or advertising. Sorry.
AT
Posted by banker boy
Thu Oct 23rd, 2008 09:51 AM
There was some talk about a year ago when things started going off the rails (and not from "socialists") that bonuses should be escrowed and not paid out until the full extent of the transaction is measurable. People were being paid bonuses for short term "profits" which turned out to be not profits at all once the pyramids began collapsing.
Posted by brenda
Thu Oct 23rd, 2008 11:41 AM
banker boy,
I can see why that might be appropriate. I think one of the worst transgressions committed by Wall Street was last year's record bonus pay out. What kind of slap to the face was that? Sheer and utter arrogance, which is why Angry Taxpayer is so angry. I'm there too, but not entirely indiscriminately.
I am someone who has been patiently waiting to purchase for 4 years, and who may have to wait another four because this giant Ponzi scheme first increased prices beyond belief (including prices for things such as rent, vacations, school tuition, etc., not just coops and condos), and then the deleveraging process will take down just about everyone's income (if they keep the job), and the mortgage underwriting standards have become scary strange.
But, I keep saying to myself, at least I HAVE a home, and health insurance, and enough to eat. As angry as I am, their are multitudes who should be alot angrier.