One day after a report that Wall Street firms paid out an estimated $18.4 billion in bonuses even as the financial industry was imploding and requiring a federal bailout, outrage flowed—from the online grass roots to Washington, D.C.
On Jan. 29, in brief but stern remarks in the Oval Office, President Barack Obama called the bonuses "shameful" and "the height of irresponsibility." Obama, sitting with Treasury Secretary Timothy Geithner, made clear that executive compensation—already expected to be a central focus of the new Congress—would be a key factor in his economic team's proposals to stabilize the financial system and improve regulation in the sector. But "part of what we're going to need is for folks on Wall Street who are asking for help to show some restraint, and show some discipline, and show some sense of responsibility," he said.
On Capitol Hill, Senator Chris Dodd (D-Conn.), chairman of the Senate Banking, Housing & Urban Affairs Committee, said he was demanding that the Treasury Dept. figure out a way to get the money back. "You're never going to get any support for the continued tough decisions we have to make if this kind of behavior continues. So I'm going to look at every possible legal means and otherwise to see that this money gets paid back," said Dodd. "This infuriates the American people, and rightly so."
Sixth-Largest Bonus Pool
The Jan. 28 report on Wall Street bonuses by New York State Comptroller Thomas DiNapoli found that overall bonuses fell 44% in 2008—yet the size of the securities industry bonus pool, estimated at $18.4 billion, was the sixth-highest on record. Employment in the securities industry in New York City declined from 187,800 in October 2007 to 168,600 in December 2008, a 10.2% drop.
DiNapoli noted that the federal Troubled Asset Relief Program (TARP), which poured billions into the firms, kept many of them afloat. While the program restricted the size of bonuses for top-level employees, there was no such restriction for lower-level employees. "Taxpayers have invested billions of dollars to stabilize the nation's bank and financial institutions, and there are plans to make additional investments to shore up the banking system," DiNapoli said in a news release. "There needs to be greater transparency and accountability in the use of these funds."
The report comes at a time when any report of Wall Street excess—whether it's the reported $1.2 million former Merrill Lynch CEO John Thain spent to redecorate his office last year or the $50 million business jet Citigroup (C) had on order until this week—is being used by critics as an example of unfettered greed that the financial collapse has done little to curtail.
Thain Defends the Bonuses
Thain resigned from Merrill acquirer Bank of America (BAC) on Jan. 22 following reports that Merrill paid billions of dollars in bonuses late last year, even as it was about to report a $15 billion fourth-quarter loss and while Bank of America was seeking more federal funds because of the Merrill losses. New York's Attorney General is probing the bonus payments as well as executive compensation practices at firms that received federal funds.
Meanwhile, Thain has offered to reimburse Merrill for the renovation but in a memo to employees defended the bonuses. "Those best people can get jobs other places, they will leave," he said, adding that on "Wall Street, people's salaries tend to be relatively small. And their bonuses are the vast majority of their compensation for the year."
Critics have countered that the brightest minds of Wall Street helped create the crisis that has shaken the economy, and that big layoffs on Wall Street should make it easier to get and keep good people with lower pay.
Top Executives "Disconnected" from Real World
As Washington policymakers are struggling to come up with solutions to the financial crisis, the pay issue is moving to the forefront. Alice Rivlin, a former director of the Congressional Budget Office, told the National Economics Club in Washington that she was surprised by Citigroup's efforts to go ahead with the jet purchase and by Thain's "tin ear for the right thing to do in the circumstances."
Rivlin added: "We have created a culture of people at the top [of companies] who are disconnected from rest of world, people who don't talk to ordinary people. I know some of them, I'm on corporate boards with them. They've somehow got to get reconnected to the real world—and a lot of them will be, because they are losing their jobs."
Meanwhile, the idea of paying bonuses after many firms have collapsed or required bailouts unleashed a torrent of criticism on the Web. As one commenter wrote on the New York Times Web site: "This is hard to believe and impossible to read with equanimity. Wall Street should be hanging [its] head with shame. Instead, it plunges forward with mad self-enrichment at the expense of the rest of the country, even the rest of the world!"