- Wall Street Bonuses May Go Way of Dodo Amid Government Bailouts
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The current system of “asymmetric compensation,” in which people are rewarded when they do well and aren’t required to return the rewards when they lose money, is detrimental to society and needs to change, said Nassim Taleb, professor at New York University and author of “The Black Swan: The Impact of the Highly Improbable,” in an interview.
The worst economic crisis since the Great Depression, a $700 billion taxpayer bailout in the U.S. and the demise of three of the biggest securities firms -- Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. -- didn’t deter investment banks from offering year-end rewards to employees on top of their salaries.
Financial companies in New York City paid cash bonuses of $18.4 billion last year, the sixth-most in history, even as they posted record losses, according to data compiled by the office of state Comptroller Thomas DiNapoli.
Drain the Pool
“We won’t arrive at a situation where there are no bonuses,” Stephen Green, chairman of HSBC Holdings Plc, said at a press conference in Davos today. “There are always parts of companies that are profitable, and if somebody’s been working in a profitable business in a market where bonuses are a normal part of compensation, it’s difficult sometimes to say you won’t have any bonuses in that business.”
NYSE Euronext Chief Executive Officer Duncan Niederauer said today in Davos that “some compensation models need to be completely overhauled.” He added that this would be difficult to legislate and companies will have to take the lead.
“While a number of people clearly do create wealth by brain power, by use of the company’s balance sheet and by other resources, other people have been receiving incentives for basically turning up,” Barclays Plc Chairman Marcus Agius said at the World Economic Forum. “That I don’t think is very smart. An incentive system properly designed and fairly calibrates is absolutely fundamental.”
Subpoena for Thain
Zurich-based UBS cut its 2008 bonus pool by more than 80 percent to less than 2 billion Swiss francs ($1.75 billion) after the company was forced to accept government funds in October. Chief Executive Officer Marcel Rohner, his 11 colleagues on the executive board and Chairman Peter Kurer won’t get any variable pay for last year. www.designwalas.com
Former Lynch CEO John Thain was asked this week by the New York attorney general’s office for information about payouts made before the largest brokerage firm was acquired by Charlotte, North Carolina-based Bank of America. The U.S. Treasury agreed earlier this month to provide $20 billion of capital and $118 billion in asset guarantees to Bank of America, the country’s biggest mortgage lender, to help absorb losses at New York-based Merrill.
Treasury Funds
Wall Street firms need to “show some restraint and show some discipline,” Obama said yesterday, with Treasury Secretary Geithner and Vice President Biden at his side.
Obama’s attack on “shameful” bonuses may lead to new pay limits and management restrictions as the price for companies that seek out government aid. Senator Banking Committee Chairman Dodd went further, vowing to use “every possible legal means to get the money back.”
Dodd, a Connecticut Democrat, plans to summon executives whose companies received taxpayer aid to testify before his committee and explain their bonuses.
“You’re never going to get any support for the continued tough decisions we have to make if this kind of behavior continues,” Dodd said. “We can’t be underwriting to the tune of billions of dollars, whether it was used directly or indirectly. This infuriates the American people.”
The Treasury Department has injected about $200 billion into banks across the country through its Troubled Asset Relief Program. Banks and financial companies have fired 265,000 people since the collapse of the subprime mortgage market triggered the financial crisis.
‘Don’t Fly’
Charles Elson, director of the University of Delaware’s John Weinberg Center for Corporate Governance, said it would be “very difficult” for the Treasury to recoup bonuses.
“Usually these bonuses were contractually made and paid out based on a formula unless you can show bad faith, some intentional misconduct,” Elson said. “These are situations where monies were paid under a contract, and the worst you can accuse these people of is of making very bad decisions.”
People such as Robert Rubin who received more than $100 million while serving as chairman of New York-based Citigroup Inc.’s executive committee, should be punished for their failure to understand the risks their institutions were taking, said Taleb, author of “The Black Swan.” A spokesman for Rubin declined to comment.
“These people make excuses, after the fact, saying that nobody saw it coming and that you couldn’t predict it,” Taleb said in an interview. “That’s no excuse. If you know there are storms, don’t fly. And if you fly, fly with someone who knows about storms.”
Unless Rubin and others are required to return their bonuses or are punished in some other way, Taleb said a regerettable system emerges “where profits are privatized and losses are nationalized.”
TARP Authority
Treasury has the authority under legislation that created the Troubled Asset Relief Program to issue regulations that “claw back” excessive executive compensation, and that may give the administration some authority to go after excessive pay, said Larry Hamermesh, a corporate law professor at Widener University in Wilmington, Delaware.
“It was pretty clear from TARP I that the secretary of the Treasury was supposed to establish a provision for executive claw-back,” Hamermesh said in a phone interview. “How the secretary has implemented that isn’t clear.”
The Treasury could require companies that request additional funds to repay excessive bonuses as a condition of the further financing, Hamermesh said.
“If they come around to ask again, they could say, ‘We’re going to deny it unless they cough up the bonuses,’” he said.
Zimbabwe cholera cases top 60,000
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This figure had been described by the UN's health agency and other agencies as being the "worst case scenario" in the epidemic which broke out in August.
Cholera has now claimed the lives of more than 3,000 people in Zimbabwe.
The epidemic of the disease, which broke out in August 2008, has been fuelled by the collapse of Zimbabwe's water, sanitation and health systemswww.designwalas.com
Many hospitals have shut down and most towns suffer from poor water supply, broken sewers and uncollected waste.
Aid workers fear the rainy season could lead to even more infections as water sources become contaminated.
The UN agency said the outbreak "showed no signs of abating" and called for urgent action from the international community to help tackle the situation.
"We are dealing with an extraordinary public health crisis that requires from us all an extraordinary public health emergency response, and this must happen now before the outbreak causes more needless suffering and death," the WHO's Dr Eric Laroche said.
The epidemic has been exacerbated by the political and economic problems facing Zimbabwe.
Many medical staff have been refusing to work unless they get paid in hard currency, because the value of the Zimbabwean dollar is virtually worthless.
The charity Medecins Sans Frontieres told the BBC last week that the disease was spreading to remote areas, making its containment much harder.
President Robert Mugabe has faced increasing criticism over his country's dire economic and humanitarian plight.
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