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Wall Street Bonuses Still a Problem Without a Solution


Who's responsible for fixing the bonus structure? Andrew Cuomo isn't sure.

New York attorney general Andrew Cuomo is getting what he wants out of his latest report on Wall Street's bonuses: lots of attention. Here's what he's not getting: Props for offering a solution to the problem.

Cuomo's report, aptly titled "No Rhyme or Reason: The Heads I Win, Tails You Lose Bank Bonus Culture," lays out the issue in stark detail. While bank executives have consistently claimed that they reward their employees based on performance, the data consistently proves otherwise. Across the board, at the biggest recipients of taxpayer bailout money, overall compensation remained high even as profits plummeted.

It's certainly a fair argument. No other industry pays its workers quite so handsomely as Wall Street does. At Citigroup (C) and Merrill Lynch, workers made $9 billion in bonuses in 2008, even as the 2 companies lost a combined, jaw-dropping $54 billion. Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan (JPM) all made money during 2008 -- but they paid out more than their net income in bonuses to their employees.

The banks argue that they must reward those employees who do perform well in order to retain them and remain competitive. This is also a fair argument. It may be a bitter pill to swallow, but the black holes that sucked all the money away at many of these banks were opened by just a tiny fraction of the total number of employees.

Should the banker whose client completes a major acquisition in an especially challenging environment not be rewarded if the bank wrote down hundreds of millions on bad assets in the same period? It's tough to argue he shouldn't.

Cuomo acknowledges this in his report, but does little to advance a solution. Banks should restructure their compensation structures to promote long-term growth, he argues. He goes on to say:

"Moreover, if market participants begin following sounder and more principled bonus systems, firms would be less susceptible to the 'poaching' of their employees by other firms offering unreasonably large compensation packages.

"Such poaching has too often resulted in irrational bonus bidding wars that harm the entire industry by forcing firms to continually increase bonus levels and leading to a compensation system that is simply a one-way ratchet up."

It's impossible to imagine a scenario where the banks collectively agree to pay their employees less. Moreover, the banks aren't just susceptible to poaching from other banks -- plenty of talent has recently jumped ship for foreign banks, or for smaller boutique firms, which aren't susceptible to the government pay czar's fancies. And once this slump is over, it's a safe bet that private equity firms, hedge funds, and other money management companies will be prepared to seduce the best of the best.

I'm not sure what the solution is to the ballooning bonuses on Wall Street. Cuomo writes: "[The] private marketplace is, and should be, responsible for setting compensation structures," but he doesn't appear to really believe that.

Perhaps he should let bank shareholders decide what they think of the scandalous bonus data in his report: Shares of Goldman Sachs, Morgan Stanley, Bank of America, and JPMorgan are all flying high today.
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