Daily Lessons from Life 31 July 2009

Today is the end of July 2009. Year 2009 has completed 7/12!! Time to take stock again? Maybe another more month!!

"Fri, Jul 31, 2009 Reuters - Some banks paid bonuses bigger than income

NEW YORK - Bonuses paid to executives at nine banks that received US government bailout money in 2008 were greater than net income at some of the banks, the office of New York Attorney General Andrew Cuomo said on Thursday.

Cuomo, in a report on months of investigation into compensation paid by the banks, said employee pay "has become unmoored from the banks' financial performance."


Representatives of the banks either declined comment on the report or could not comment immediately.

"There is no clear rhyme or reason to the way banks compensate and reward their employees," said the report by Cuomo, New York's top legal officer, who began his probe last October amid taxpayer complaints about Wall Street pay.

He argued that, if firms followed "a more principled" bonus system, they would be less susceptible to poaching of their employees by other firms offering more pay.

"This rationalization of the compensation and bonus system must be accomplished now," said the report, which was sent to US House of Representatives Oversight and Government Reform Committee Chairman Edolphus Towns, a Democrat from New York.

Since nine banks received a total of US$125 billion (S$180.74 billion) last October in taxpayer money under the Troubled Asset Relief Program (TARP) to help them survive the financial crisis, Cuomo has pressed them for details on billions of dollars paid to executives amid huge losses.

The report said bonuses for Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co were "substantially greater" than the banks' net income.

Goldman earned US$2.3 billion, paid out US$4.8 billion in bonuses and received US$10 billion in TARP funding, the report said.

Morgan Stanley earned US$1.7 billion, paid US$4.475 billion in bonuses and received US$10 billion in TARP funding, while JP Morgan Chase earned US$5.6 billion, paid US$8.69 billion in bonuses and received US$25 billion in TARP funding.

Cuomo said his office studied historical financial filings and found that at many banks compensation increased in the 2003-2006 bull market years, but stayed at those levels as the mortgage crisis and recession hit.

"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."

"The repeated explanation from bank executives that bonuses are tied to performance in a manner designed to promote (national economic) growth does not appear to be accurate," Cuomo said.

Much of Cuomo's investigation and publicity had been focused on Merrill Lynch, but Thursday's report covered all nine banks that received initial TARP money. The office has also investigated bonuses paid by giant insurer American International Group Inc, but it was not included here.

It said State Street Corp's State Street Bank and Bank of New York Mellon Corp "paid bonuses that were more in line with their net income, which is certainly what one would expect in a difficult year like 2008."

State Street earned US$1.8 billion, paid bonuses totaling about US$470 million and received US$2 billion in TARP funding. Bank of New York Mellon earned US$1.4 billion, paid out US$945,000 and received US$3 billion from TARP."

A rather long quotation and I don't apologized for it. Reason: It is important to see how the NY AG reported his finding on the 'logic-defying' bonus system of Wall Streets banks led and managed by highly intelligent and rich people!

Lessons for me are:

1. money is NEVER enough if we go by the purest of capitalis system mantra. Why were there these discrepancies of bonuses being MORE than the total profit reported by the bank? Simple. The bonuses are paid to individual or departments that MADE the more money for himself or his department! If other parts of the banks are losing money THAT is NOT their concerns! THEY MUST be paid for making MONEY!!;

2. when the last 2 earning reports from Goldman Sach and other banks exceeded the 'Streets' estimates, the main contributors were from 'trading profit'! You see, trading profit is basically 'I win You lose' among the market participants. Higher risk taking yield high return if you get it right! The traders expect to be paid big bucks as they are taking big risk to make that money! If they get it wrong, they will be out of a job though no one mentioned that they will get out with a huge pay too! Just that their egos get bruised and dented!! And they DO NOT like it!! My quesiton is: what will happen in the next quarter if people start to trade caustiously against these 'star' players? Is it sustainable and repeatable?;

3. Cuomo used the words: "a more pinciplined'bonus system. Yes. To be 'principled' is to be rigid and open to big risk in a highly dynamic and flexible world! It used to be a good virtue but not to be 'principled' is a BAD THING! Or is it? This is a choice 7e Leaders have to consciously decide for themselves and the orgainzation and people they are leading. Food of labour has to be shared equally among all contributors though the weightage can be debated and decided in a collective manner;

4. an extra point I want to raise is: be honest and ACKNOWLEDGED that without the government bailout, the game would have been over long ago. These 'profits' were built on the back of trillions of government bailout. If the objective is to encourage how to explore the loopholes of society, then I say no more. But if it is to tell ourselves we need to be honest and face the consequence of our excesses then listen to this: the trillions of dollar need to be paid back somehow. Using it to pay billions of bonuses do not seemed to be the right way!

May the bankers who get billions sleep peacefully without any guilty feeling!