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Wall Street Bonuses Under Fire
A rare bottle of 1995 Dom Perignon being sold for $14,950 is seen with its case in New York, Wednesday, Dec. 13, 2006. The $15,000 bottle of bubbly is just one example of how record Wall Street bonuses this year can trickle through New York City's economy. (AP Photo/Seth Wenig)

A rare bottle of 1995 Dom Perignon being sold for $14,950 in New York on Dec. 13, 2006. The $15,000 bottle is an example of how record Wall Street bonuses trickled through New York City's economy. (AP)

Ah, late December. For years now, if you were part of America’s financial services industry, this was the time of big, beautiful bonuses.

Gigantic bonuses. Billions in bonuses that built palatial mansions and sucked bright young Americans into Wall Street and numbers crunching. This was compensation so big that it changed the basic distribution of income in this country and built a towering cliff of super-rich money mavens.

And then, the money mavens seemed to drive the whole U.S. economy off a cliff.

Were the incentives wrong? This hour, On Point: Huge pay, huge bonuses, and where they brought us.

Guests:

Louise Story, business reporter for The New York Times. Her big story last week was headlined “On Wall Street, Bonuses, Not Profits, Were Real.” She also reports on how banks are trying to find new ways to handle bonuses.

Lucian Bebchuck, professor of law, economics, and finance and director of the Program on Corporate Governance at Harvard Law School. He’s the author of “Pay without Performance: The Unfulfilled Promise of Executive Compensation.”

Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago Business School.

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  • jeff

    If you add up the bonuses of all these clowns it comes to almost over a third to maybe half of the bailout the government gave them from OUR TAX DOLLARS!.

    Something is very wrong with this picture. From where I sit I think every one of these people should be paying every penny back of this money to us, the tax payers.

    You know people are starting to get pissed off. I know I am. If this keeps up I think there will be a significant rise in civil unrest.

  • Harry

    Just how do hedges that few understand help the economy? Wall Street is necessary for capitalism, but in its current form, I feel it is too much of a big casino, where the traders and managers are the house which as we know, always wins.

    Real wealth is created by those who do the work. Societal gains in wealth and standards of living come from the work of engineers and scientists, not finance managers.

    Footnote: Bernie Madoff. What’s in a name? Bernie Made-Off.

  • Greg

    People today mention “the rich getting richer and the poor getting poorer” as a casual fact. Is it fair to say that the Wall Street bonus scheme is one of the loci of the rich getting richer at the expense of everyone else?

  • PW

    That these bonuses were based on fudged profits that makes any claims of “fair’s fair! these guys worked for it” useless to those who cling to unfettered capitalism.

    I don’t think civil unrest is likely, but I do think the right has been seriously discredited and will pay a long-term political price if — IF — the whole story comes out in terms that everyone understands.

    I kind of enjoy the prospect of hearing the profiteers grinding their teeth on the sidelines as progressives turn America into a country where everyone in the country profits as business grows, and where one’s worth is measured in something more significant than the dollar.

  • jeff

    I don’t think civil unrest is likely…

    You may be right, Americans are very complacent when it comes to holding peoples’ feet to the fire so to speak. We’d rather watch the “Biggest Loser” then deal with being big losers in our economy.

  • Jeanne Kaiser

    Your guest (Steve?) is having a very negative effect on my blood pressure.

    The Wall Street bonus babies drove their institutions into the ground–so by definition they are not “the best and the brightest.” Instead, they are grossly incompetent and their greed knows no bounds.

    I have no trust that these same people have learned their lesson. And in the meantime, they are taking money from the taxpayers — and that means firefighters, school teachers, nurses aids and sanitation workers — who by the way, do their jobs with far more skill and competence than the Wall Street bankers — and never, ever get a bonus.

  • Paco Wové

    I am amazed at how weaselly Kaplan sounds… “Mistakes were made!… but those guys are really really smart! And they deserve all that money!” As if there was a free market in executive talent.

  • Scott

    I love On Point, and they are always discussing the big issues, but am I alone in being disapointed by the guests?

    What I mean is: where are the Leaders? Where are the Senators, Representatives, anybody on the INSIDE?

    It’s easy to ask Jack Beatty what he thinks every five minutes. It would be a LOT more illuminating to ask hard questions of the people who actually could do/have done something to prevent this mess.

    How about asking someone in the incoming Obama Administration about Robert Rubin’s history of supporting the unregulated “shadow banking system,” and how in the heck is this going to be fixed if so many of the same old figures are hanging around, unblemished?

  • Todd

    The fact that the bulk of the American market (financial, auto, mortgage, etc.) is driven by short term returns, and that bonuses are tied to them is the core of the problem with the US economy.

    No one will make prudent long term decisions when their feedback loop is a quarterly report. No auto executive will push for mileage efficiency when they are selling (at a huge margin) SUVs.

    What decisions would CEOs make if their compensation was based on 5 or 10 year returns?

  • PW

    Agree with Scott for the most part and am applauding the caller who asked for a “debunking.” Long overdue.

  • M.A Rodriguez

    Are you using the term Best and the Brightest as David Halberstam did?

    Also, what does going to Harvard or Columbia have to do with really understanding markets and having a sense of responsibility?

  • elizabeth

    Yes, there is tremendous greed on Wall Street, but why is no one talking of the incredible greed of American investors/shareholders who have been thrilled over the past 10 + years to see their investments skyrocket — perhaps at the expense of the workers in companies like Home Depot and Walmart, who are not paid very well because the goal of the corporation, the CEO and the board is for ever higher profits???

    We have homeless people in this country and children who literally are starving. Funny how that has never mattered as long as the more educated and affluent continued to make money, have solid investments and been allowed to do well.

    If executive compensation and bonuses are so out of line, then why, oh why has no one complained during the go-go years?

    What a greedy country we are!

  • Joanna Drzewieniecki

    “Best and brightest”? Hmmm. I suppose that people have very different ideas of what “best” means. Do the “best” people need to have high moral values? Would anyone at all with high moral values becomes a top Wall Street executive? Sounds doubtful to me. Being very ambitious and very moral seems to coincide very rarely. Anyone who can make an argument to the contrary, please do. Best to all.

  • KFBS MBA

    The core of the problem hasn’t been addressed. Pay packages are approved by incestuous boards: “You vote for my bonus and I’ll vote for yours.” Shareholder rights, or the lack there of, is the issue here. If the law required that any decisions that even appear to represent a conflict of interest must pass shareholder approval, many of these problems would go away. This also forces transparency into a system where there is little.

  • http://dispolemic.blogspot.com Stephen Marshall

    1) As when the last caller said, “If a guy like Bill Gates can make billions creating a whole new industry, fine,” but what have the titans of wall street given us? On a continuum, businesses range from those that create wealth, to those that accumulate wealth without adding any value to the community at large. We can ask “Does this business increase the overall wealth and quality of life of its community, or does it impoverish its community?”

    Explicitly criminal enterprises either extract wealth (extortion, “protection”) or thrive by selling a product (drugs) with short term “benefits” to its clients who, however, damage the community by engaging in overtly damaging accumulation – theft, mugging, extortion. Ponzi schemes are illegal, but can be hidden beneath a bed of legal activities. Some other sometimes not legal enterprises (Casinos) are devoted to wealth accumulation at the expense of their customers, and are sometimes legal because the customer is (theoretically) aware of the dangers. Some Wall street enterprises (mortgage securities) extract wealth, but were not illegal because we had not awoken to their damaging effects. “Network marketing” looks a lot like a Ponzi scheme, and has in the past been tightly regulated, even though they do in fact sell products. Pay-day lenders are being carefully scrutinized because of the uncertain balance of values. Banks, because they handle money, have in the past been tightly regulated, because the use of that money can add or subtract value from the community of which it is a part. Other service businesses, like lawyers and plumbers, require a license, to guarantee the quality of the work, but are free to charge what they want to, and spend their money anyway they want to. Other businesses sell or make products, and the public interest resides in the healthfulness of those products, and the effects of its production on the natural environment and the workers who produce them.

    In all of these examples, the great schism is between activity which improves the quality of life and activity which damages the quality of life. The salient question when looking at any economic activity is first “Is this a method of creating new wealth? Or a method of concentrating other people’s wealth?” And second “Does this activity contribute to the general prosperity, or reduce it?” While related, they are not the same question.

    The failure of the market and of the government was to foresee that the Wall Street securities brokers would strike out on both counts, in fact to even ask the questions. Any business devoted to concentrating wealth without providing an obvious public benefit deserves to be regulated *per se*, and any time a new product or enterprise is to be introduced, we have a right to ask how that product or enterprise fares on those questions.

    2) Free market people talk about the market being “self-correcting”, but people behave individualistically. It may be that “the market” has a self-interest in stability and sustainability, but individuals will do what they can get away with to gather in what wealth they can. Free market theorists have failed to note the distinction between the behavior of “the market” (an aggregate behavior conducted in an economic commons) and that of individuals. How, without strict controls, can we expect individual self-interest to align with the interests of the commons?

  • http://dispolemic.blogspot.com Stephen Marshall

    Addendum

    Certainly, NO NEW SECURITY PRODUCT should ever be legal at all until after it has been scrutinized by dispassionate, non-ideological regulators.

  • Joanna Drzewieniecki

    Thank you Stephen. Very well put, very clear. I have copied your comments and sending them to friends!

  • http://dispolemic.blogspot.com Stephen Marshall

    I placed this essay on my blog dispolemic dot blogspot dot com, where I made some improvements.

  • David

    Fox News at noon, The banks are not disclosing where the bailout billions are going. Some banks state that they do not even know where the money is going. Money will one day trickle down to us after all the cream is scouped off the top by the big boys. Guess what? We tax payers once again are giving the CEO’s another raise!
    Yippie Kai Yay!!

  • http://www.lit.org/fritzwilliam Fred W. Bracy

    It’s not about voicing opposing views, Tom. Not at all. It’s about proselytizing–the deliberate dissemination via the public media of fraudulent and harmful material. That’s what another of your guests has done–the “dubious” (I’ll say it loud and clear) Professor Kaplan. Here’s another case of the fox in the hen house–someone who–after “professing” his students and a nation down the garden path and up to the edge of the abyss–has the unmitigated gall to articulate a solution to the problem. Mr. Kaplan has had a lot of company in helping to clog the air waves since the financial crisis began making itself known back in September. They stand out on radio about the same way *living color* stood out in the early days of television with their stuttering “uh-h-h-h’s” and stammering, “ah-h-h’s.”

    Listen to me. They have absolutely nothing to add to the discourse! Self-correcting markets? Laissez-Faire Capitalism? Lifting world populations out of poverty? We have poverty right here in America, and it’s growing, not shrinking. We have infants and children right here in the U.S. who go to bed hungry every night while the top 50 employees at American Business, Inc. cart away a collective $5-or-$10 billion annually. You did not mention this, nor perhaps another dozen reasons why a case could be made for presenting Uncle Sam to the International Tribunal in The Hague to account for humanitarian and androgyny charges.

    Oh, no? You think not? Ask Professor Kaplan to explain to the American people and the rest of the world exactly how the U.S. Government went about COLLAPSING the economy of Haiti with America’s good old, home grown rice export policy. . .like selling the Haitians a new, super-duper rice hybrid variety guaranteed to produce high yields, but without telling them that the crops would require a tripling of the amount of fertilizer usage. Oh, and of course who is going to sell them the fertilizer? And when it turns out that they can’t afford the fertilizer but have no choice but to plant the new hybrid–mainly because their thousands-of-years-old domestic variety has all but died out–their yields are far lower, not higher, and barely sufficient to feed even half the population.

    Ask the good professor to explain away the starvation that has occurred and is still occurring thanks to the stubbornness of farm-state representatives in Washington D.C. and their American farm subsidy policies. He’ll probably insist that this is just the “magic of the markets” exerting itself. Wow. Some magic.

    “Don’t forget about foreign aid,” would be another response by the professor and those of his ilk. “Plus we do other good works as well.” No we don’t. Not without first doing the usual exhaustive cost-benefit analysis. Never mind the fact that we’re talking human starvation here.

    This stuff is all “self-correcting,” I can hear the professor saying. Uh-h, huh–self correcting all right. There’s another way of saying the same thing, professor, and one that’s far more apropos. Repeat after me–”W h a t g o e s a r o u n d c o m e s a r o u n d.”

    As a Chicagoan originally, now living in Southern California, I am truly chagrined that this man could be in any way connected to the venerated University of Chicago brand.

  • jeff

    Why do I get the feeling that we, (the public) are being flim·flamed by the banks, wall street and ‘our government’.

    I don’t know what is going to happen but I see another Great Depression over the horizon.

    Today’s show was a huge disappointment, it would have been good to have had Senator Schumer on so he could explain how his secret meetings with the bankers and wall street CEO’s helped make these deals.

    I would have also like to have heard from Paul Krugman and Robert Reich.

  • http://www.lit.org/fritzwilliam Fred W. Bracy

    One final point. Do the Stephen Kaplans of this world understand what it means, in a macro-economic sense, when someone suggests, rather brazenly, that a certain moneyed group (Wall streeters, corporate big shots and others)have in fact become “victims of their own success”?

  • Rachel

    If you rob someone while holding a gun you get jail time. If you do it while sitting behind a desk wearing a suit and tie you get rewarded. It is starting to make me physically ill that these people are being rewarded for greed and bad decisions. When small businesses make bad decisions they go out of business.

    Another thing that makes me sick and should be illegal is paying CEOs $20 million to leave a company. They are being fired. They shouldn’t be getting anything, but the rich take care of the rich.

    Maybe next we can move on to how colleges pay gross amounts of money for coaches yet the academics make nothing close to that despite the fact that they are the ones preparing students for the working world.

    America is circling the drain and China and India are moving up and ahead while we sit here watching TV and pretending none of this is going on.

  • Carl

    I was just looking at recent data which shows that 34% of all wealth in America is held in only 1% of Americans hands. At what point will the amount of wealth among the rest of us simply not be enough to make the economy run smoothly, and that we need a basic system for income redistribution in order to fix our current economic problems?

  • bryan jenkin

    Many things to say but I’ll limit myself. The one guest who was defender of the market systems was grossly incorrect on several counts. He stated that life expectancy around the world has increased recent years, in his attempt to credit our market systems. In fact life expectancy in almost every African nation has decreased significantly in recent years. This despite enormous wealth generation that has come from African labor and natural resources. Also in America the financial condition of many in the working class has worsened, even often for those whose employers have made gains in both their profits and their productivity. I could go on but in summary the market systems, particularly on the new global level, have not operated by a set of rules which would create a degree of fairness and opportunity for all who participate.If they did then these markets could benefit the vast majority of the worlds people and raise their living conditions, but presently this is far from the case.

  • Bobako

    Bush have a MBA!best and brightest?????

    We need to hear REAL people, not those so-called experts whose job is to colonize( pollute!)the air in order to help shape our opinion.Harvard’s,Yale’s,Princeton’s,ect…are just foot soldiers of the world wealthy 10%, they’re in charge of”manufacturing our consent”.
    We’re screwed folks! They own the airwaves,the newspapers and the government.

  • jeff

    Posted by Carl:
    I was just looking at recent data which shows that 34% of all wealth in America is held in only 1% of Americans hands. At what point will the amount of wealth among the rest of us simply not be enough to make the economy run smoothly, and that we need a basic system for income redistribution in order to fix our current economic problems?

    It’s already happening, your living it now. Do you call what’s been happening right now smooth? It’s a bumpy ride down a rough hill, fasten your seat belts.

    If the equation keeps going up we will have civil unrest, this happened at the end of the 19th century and the early part of the 20th century. This is how unions were born and the 40 hour work week with a day off.

  • David

    According to a IRS report on money received into the treasury from taxpayers. The bottom 40% pay no taxes due to refundable tax credits. The bottom 60% pay less than 1% of tax. The upper 1% who hold 22-34% of the wealth paid 40% of the taxes collected by the IRS. I know friends who gripe about the rich paying no taxes while they pay taxes up to their nose. They paid in 3-4 thousand dollars, but due to tax credits they got back 5-6 thousand. So, in one sense, they paid no taxes at all. I am for a flat tax across the board, everyone pays no one cheats. Our problem is not the wealthy upper 1%, but the unfair competition of nations who pay their workers a slave’s wage to produce the same product we make for a living wage here in America.

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