No Rhyme Or Reason

Dear Wall Street: New York AG Andrew Cuomo is appalled by your behavior, which he details in his new report titled, provocatively: "No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture."

What’s so damning about Cuomo’s report is that it goes beyond the well-travelled idea that bonus payouts suffer from an asymmetry, namely that they’re paid out in good times, but that there’s no claw-back later on if things blow up:

…One thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees. In many ways, the past three years have provided a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based. But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.

An analysis of the 2008 bonuses and earnings at the original nine TARP recipients illustrates the point. Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion at each firm. Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received TA~ bailouts totaling $55 billion.

CuomoBonusReportFinal07302009