Pay curbs a right of ownership
Commentary: Greed is good, but coffee (like bonuses) is for closers
By David Weidner, MarketWatch
Last update: 12:01 a.m. EST Feb. 10, 2009Comments: 54NEW YORK (MarketWatch) -- Funny how, after all the commotion about capping compensation on Wall Street, the argument against curbing big paydays ultimately comes down to this: you'll be sorry.
Actually, we are sorry. We are sorry that we did not rein in the casino culture of Wall Street years ago. We didn't -- and look where we are now.
I hate to break it to the bonus apologists, but scare tactics aren't working. Pay curbs are here for banks big and small. If, as you threaten, we lose the so-called "best people" on Wall Street, then so be it.
If these are the same "best people" that former Merrill Lynch & Co. Chief Executive John Thain talked about in defending the 11th-hour bonus payout he made before his deal wit Bank of America (BAC:bank of america corporation com
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BAC 6.89, +0.75, +12.2%) closed, then what happens without the best people? Does Merrill lose double the near $30 billion it lost last year?
Doesn't Wall Street abide by the rules as laid down by Blake, the sales manager played by Alec Baldwin who ran the monthly sales contest in "Glengarry Glen Ross"? Coffee, like bonuses, is for closers.
The bonus defenders had their magna carta published Saturday in the Wall Street Journal. This tour de force of farce was written by Roy C. Smith, a professor at New York University's Stern School of Business and a former partner at Goldman Sachs Group Inc. (GS:Goldman Sachs Group Inc
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Video: Wall Street, meet the new boss
David Weidner caps the arguments for and against big bonuses and Barack Obama's pay caps, and has a message for Wall Street: Taxpayers own you. (Feb. 9)Now, a little disclosure: I've been calling on Smith for nearly a decade. He has generously educated me on the ways of Wall Street. He is thoughtful and smart. He cuts through the noise to make sense of it all. He's not one of those people who pretend that Wall Street is an altruistic place. He knows how the business works and what motivates its people.
But Smith has it wrong. He's wrong when he claims that a lot of the $18 billion bonus pool is going to bankers at firms that aren't included in the bailout. Smith's old hangout, Goldman, for instance, is on the hook for $10 billion. Morgan Stanley (MS:morgan stanley com new
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MS 23.61, +0.74, +3.2%) has taken the same amount.
Combined, their bonus pools are $25 billion, with the actual payout at about half that amount. Some of that won't go to people in New York, but most will. Suffice it to say, it's a big part of the $18 billion the industry is paying to New York state brokers. Read Smith's essay.
It's also a mistake to say that bonus babies are somehow more valuable because they have risky jobs and could be replaced by someone better. Or, as Smith suggests, we need risk-takers to locate new opportunities, provide innovation and take the risks to lead us out of the economic crisis.
"People who flourish in this environment," Smith wrote, "are those who want to be paid and advanced based on their individual and their team's performance, and are willing to take the risk that they might be displaced by someone better or that mistakes or downturns may cause them to be laid off or their firms to fail."
Unless tenured at a university, we all face the risk of being replaced by someone better. Smith points out that since 1970, 28 major Wall Street firms have failed or been taken up in mergers. Again, that's a pretty small number when compared with the number of newspapers, car companies, restaurant chains or anything else closed or sold in a merger during that time.
Maybe the biggest mistake made by the likes of Smith, Thain, Tiger Management's Julian Robertson or former New York Mayor Rudolph Giuliani, when defending bonuses, is they forget that making the rules about pay is part of the right of ownership and an essential part of capitalism and free markets.
After doling out more than $350 billion to acquire stakes in investment banks and commercial banks, the U.S. government -- you and I, as taxpayers -- definitely own the biggest banks on Main Street and Wall Street.
Put it this way: Citigroup Inc. (C:Citigroup Inc
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C 3.95, +0.04, +1.0%) and Bank of America Corp. (BAC:bank of america corporation com
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BAC 6.89, +0.75, +12.2%) each received $40 billion in cash and more than $360 billion in guarantees. Yet, Citigroup has a market value of only around $22 billion. Bank of America is valued at about $34 billion. Morgan Stanley is worth about $24 billion.
The list goes on, but you get the picture. The government either has effectively bought majority stakes in these companies or put more cash into them than they are worth. If these companies did not want the government exercising its right of ownership, then they should have not accepted the cash and prepared a bankruptcy filing.
It's true firms that haven't taken government cash will have a competitive pay advantage. That's how it should be. Firms that are run right should have an advantage. Why would we reward banks and bankers who got it wrong?
All this nonsense about Americans not understanding compensation on Wall Street is a bunch of elitist posturing. We understand it perfectly well, thank you. We know that even the most troubled of firms will look for ways around the new pay caps. We know that some people will flee for riches at smaller banks or hedge funds. We can live without the high flyers.
We also understand that Goldman is making serious noise about paying back the government early. They've gotten the message. Take responsibility for your business and you can run your business -- and set the pay levels.
Will we be sorry we didn't let Wall Street get drunk on its excess again?
Maybe, but this time at least, we're the ones who'll feel good.
David Weidner covers Wall Street for MarketWatch.
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