President Attacks Wall Street Bonus Practices

Obama deems paying out of billions in compensation "height of irresponsibility"

By James Hyatt

When the president calls your behavior “shameful,” you know you have a problem on your hands.

Wall Street’s hat-in-the-hand clamoring for taxpayer help amid the financial meltdown—while shoveling out billions of dollars on bonuses—has triggered a wave of reaction against the financial industry’s traditional compensation gravy train.

President Barack Obama’s tirade in late January—perhaps the most public scolding of an industry since President Kennedy thumped steel industry executives for raising prices in 1962— was quite remarkable. He said that paying out bonuses “at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don't provide help that the entire system could come down on top of our heads—that is the height of irresponsibility.”

He added: “There will be a time for them to make profits, and there will be time for them to get bonuses—now is not that time.”

Wall Street didn’t help its case by paying out billions in bonuses in a year when the industry loss billions of dollars. The Wall Street Journal reported that “from 2002 to 2008, the five biggest Wall Street securities firms paid an estimated $190 billion in bonuses. Those companies churned out $76 billion in combined profits during the same period. Last year, the companies had a combined net loss of $25.3 billion, yet paid bonuses of roughly $26 billion.”

A number of financial firms, including UBS, have moved to reduce bonuses, and a number say they’re seriously considering changes. Ånd Congress appears likely to impose more restraints on such payments at firms receiving federal financial assistance.

In late January, U.S. Sen. Claire McCaskell of Missouri proposed the Cap Executive Officer Pay Act of 2009, legislation that would limit salary, bonuses and stock options of executives at firms receiving federal bailout aid to the amount paid the president—about $400,000 a year. “They don’t get it,” she said. “These people are idiots.” Companies could resume paying bonuses once they’ve repaid bailout funds, she said.

Former New York Mayor Rudolph Giuliani defended bonuses, arguing the measure would create unemployment and result in less spending in restaurants and department stores.

Earlier this month, former Merrill Lynch chief John Thain was asked to step down from Bank of America amid headlines that Merrill Lunch accelerated payment of $3-4 billions in bonuses in late December, just days before Merrill’s acquisition by Bank of America was to be completed. (The bonuses are being investigated by New York state Attorney General Andrew Cuomo.) Thain said he would repay $1.2 million spent on remodeling his office at Merrill, at a time when the government was paying billions to assist the takeover.

Though Wall Street bonuses are a tempting target amid a recession and financial chaos, addressing the problem isn’t exactly a slam dunk. Some bonuses are contractually promised, and are part of compensation for many employees who aren’t involved in the high-stakes shenanigans that have brought about the current problems. Moreover, some compensation specialists argue, eliminating bonuses will make it difficult to retain the best employees.

On the other hand, much of the current outrage reflects concern that bonus plans seem to have no downside factor built in—higher pay employees get their money whether or not their business does well. Nell Minow, cofounder of the watchdog group Çorporate Library, told the News Hour program Saturday that Wall Streeters “benefited tremendously on the upside by the performance of the overall group in their company, and they’ve got to take the hit on the downside, too. There’s no credibility whatsoever in the program unless it goes down as well as up.”

She again urged a long-standing issue of permitting clawbacks, or recovery of compensation when, it turns out, the pay was based on fraudulent or mistaken numbers. In the past, she added, outrage over corporate pay and bonuses “has been very localized; this time, it appears to be systemic. I’ve really never seen the level of rage and sense of unfairness in response to the bonuses that I’ve seen this year.” As a senator, she noted, President Obama sponsored legislation to give shareholders an advisory vote on pay packages. “I would suspect that as president he will try to promote that again.”

Posted February 2, 2009 in Politics & Legislation