[Corp. Watch] Corporate bonuses: From reward to entitlement

[Corporation Watch]

Bonus Bull

  By Nomi Prins

(Mother Jones, Feb. 17) -- P.T. Barnum may have coined the phrase  
"There's a sucker born every minute," but Wall Street titans have  
leveraged that principle and banked it in the Caymans.

	And don't think that the recent stimulus package provision aimed at  
reining in CEO compensation is going to stop them.

	Recently, President Obama, tapping into a source of public fury,  
decried the "shameful" excesses of Wall Street and proposed capping  
the cash component of executive compensation at $500,000 for those  
running firms set to receive money under the Treasury Department's  
Troubled Asset Relief Program (TARP) and other federal bail-out  
initiatives.

	Treasury Secretary Timothy Geithner also blasted big bonuses when he  
introduced a light-on-details plan for the next phase of the Wall  
Street bail-out.

	And Sen. Christopher Dodd (D-Conn.), chair of the Senate banking  
committee, tucked compensation constraints for the top five senior  
executives and 20 highest paid employees at firms receiving more than  
$500 million in TARP money into the stimulus package.

	(Meanwhile, though, he removed Obama's pay cap idea, opting instead  
to restrain bonus compensation until TARP funds are repaid.)

	But all this is window dressing, for Wall Street will in all  
likelihood still find imaginative ways to hand its execs huge sums of  
money in the years to come.

	Cash typically comprises only a small percentage of an executive's  
compensation package. Thus, it's no hardship for Wall Street execs  
worth millions to forgo a year or two of bonuses to get the government  
off their backs.

	Ask former Treasury Secretary Hank Paulson. In 2005, while serving as  
the CEO of Goldman Sachs, he received just $600,000 in cash -- but $38  
million in other forms of compensation, such as $30.1 million in  
restricted shares and 220,000 stock options.

	(His car and driver cost almost $154,000 that year, a bargain  
compared to Tom Daschle's limo expenses of $182,520.)

	Currently, in the media and parts of the government, a twisted line  
of reasoning persists that warns against attaching too many strings --  
like compensation caps -- to the TARP funds.

	The argument goes that doing so will reduce the talent pool available  
to Wall Street, or make institutions there too nervous to seek  
government assistance when they need it.

	Whatever action the government takes on executive compensation, Wall  
Street is anticipating a low bonus year for 2009, and probably for  
2010 as well.

	First, anyone who can evaluate a decaying asset at all knows that the  
banking system will deteriorate further in the near term. Second,  
banks still owe the money they've borrowed using their inferior assets  
as collateral.

	Yet once all that's out of the way, bonuses will rebound. They always  
do. Over the past three decades, there have been four periods of  
decreased bonuses, which were inevitably followed by increases that  
made up for the declines.

	During the savings and loan crisis of the 1980s and early 1990s, 747  
banks were shuttered, the Federal Savings and Loan Insurance  
Corporation went bust, and the Resolution Trust Corporation swooped in  
to collect bad (mostly real estate) assets.

	Ultimately, this rescue cost the American public half a trillion  
dollars, and Wall Street bonuses were down 21.3 percent in 1988, when  
compared to 1987 levels.

	By 1991, though, bonuses doubled from the previous year. Similarly,  
in 1994, during the Mexican peso crisis, Wall Street bonuses were cut  
15.7 percent, only to bounce back 26.8 percent the following year.

	The pattern repeated in 1998 when, during the Russian debt crisis,  
the Federal Reserve bailed out the hedgefund Long Term Capital  
Management to the tune of $3.65 billion. Wall Street cut bonuses by  
18.8 percent. They jumped 48.5 percent the next year.

	In late 2001 and 2002 came the triple play of the Enron and WorldCom  
scandals, a recession caused by a spate of corporate bankruptcies, and  
a nervous post-9/11 stock market.

	Bonuses dropped 33.5 percent and 25 percent, respectively, during  
those two years. By 2004, they had zoomed back to pre-recession levels.

	Bonuses nearly doubled over the next two years as sub-prime assets,  
collateralized debt obligations, and credit derivatives fueled the  
market. By 2006, a record year for Wall Street profits, bonuses had  
reached new highs.

	Goldman Sachs CEO Lloyd Blankfein, who led the group of supposedly  
contrite CEOs who testified before Rep. Barney Frank's banking  
committee last week, bagged more than $110 million for 2006 and 2007.

	Last year, bonuses shrank by 44 percent, but fell only to 2004 levels  
-- and Wall Street still managed to reward employees with $18.4  
billion in bonuses.

	This despite a complete Wall Street meltdown, the near-fatal  
condition of the country's largest bank (Citigroup), the collapse of  
two major investment banks (Lehman Brothers and Bear Stearns), and the  
immensely reckless merger of Merrill Lynch into a terminal Bank of  
America (BoA).

	In the Merrill Lynch-BoA deal, former Merrill CEO John Thain grabbed  
a $15 million signing bonus and other perks, and he paid $4 billion in  
year-end bonuses to Merrill Lynch employees before the merger went  
through.

	Regardless of the strictures that might be placed on Wall Street  
bonuses in the future, there are multiple ways for corporate leaders  
to get around cash caps by using restricted shares, offshore  
companies, and other devices.

	To ensure that executive compensation is in line with the public  
interest, it ought to be taxed or constrained in every possible form.  
And to stop the Wall Street bleeding from further infecting the entire  
economy, we ought to make banks disclose all their [investments],  
rather than talk about future transparency and "stress testing."

	The next step is to separate firms dealing with public deposits and  
loans from other financial institutions -- and only give the  
traditional banks federal assistance (and make renegotiation of  
residential home loans mandatory).

	It would be like reinstituting the Glass-Steagall Act of 1933, which  
created a wall between banks that collect deposits and make loans and  
those institutions that engage in other, more speculative financial  
endeavors.

	That system worked pretty well until its bipartisan death in 1999  
under then-President Bill Clinton. It could work once again.