The bogus side of bonus culture
By Julian Delasantellis
In the 1987 movie Wall Street, union leader Carl Fox (Martin Sheen) sees
through the nefarious machinations of evil corporate raider Gordon Gekko
(Michael Douglas) in a way that even his own son Bud ( Charlie Sheen),
starstruck by ambition and the wealth and luxury of Gekko's lifestyle, cannot.
At a meeting where Gekko offers a corporate buyout that would supposedly save
Carl Fox's floundering airline, all but Carl are taken in by Gekko's supposed
beneficence.
"There came into Egypt a Pharaoh who did not know," Carl warns from the Book of
Exodus. "The rich been doing it to the poor since the beginning of time. The
only difference between the pyramids
and the Empire State Building is the Egyptians didn't allow unions."
But these days, it seems that the eternal arms race between history's rich and
poor has taken another notch upward. Yes, the poor now have unions (what's left
of them in the United States or the government lackey unions of China), but
what the rich have now is dynamic data-mining credit-scoring software.
In two recent Asia Times Online articles (Paid
up card carriers feel the pain, from July 11, 2008, and
When the pawnshop has it all from January 7, 2009), I noted that many
Americans are now personally experiencing the deleveraging plague when they get
a letter from their credit card companies informing them that their card
spending limits are being sharply cut back. In a January 30 article on the New
York Times website, it was noted that the elves at the American Express
workshop had developed an interesting new twist on who's being projected to be
naughty, and who's projected to be nice.
What the company is doing is finding imaginative and creative justifications on
why it was cutting back customer's credit.
Maybe it was just that a cardholder, even if he had a perfect on-time repayment
history, was living in a zip code with an above average number of home
foreclosures.
Other times, it was, well, maybe you just weren't associating with the right,
you know, American Express kind of people. It laid out this logic in letters
that infuriated many of the cardholders who received them.
"Other customers who have used their card at establishments where you recently
shopped," one of those letters said, "have a poor repayment history with
American Express."
Who were the establishments that were being flagged with the computer's scarlet
letter? The article doesn't say. In the case of American Express, the company,
while claiming that it never utilized the practice, is now promising that it
will stop doing it.
But in the case of CompuCredit, a Georgia-based company that describes itself
as "a provider of various credit and related financial services and products to
or associated with the financially underserved consumer credit market", aka a
loanshark, after it was investigated by the US Federal Trade Commission, it was
discovered that it looked askance, and would penalize its customers for
patronizing "marriage counselors, tire retreading and repair shops, bars and
nightclubs, pool halls, pawnshops and massage parlors".
In the 1960s, BBC New York correspondent Alistair Cooke once said that his
experience with America could be neatly summarized by a sign he saw outside a
rundown establishment on a dusty highway on the outskirts of Las Vegas which
read "NAKED PIZZA LUNCH".
But America in 2009 is a society far more rent by class and status than that
seen by Cooke 50 years ago. I can barely think of any current phenomenon that
better describes the zeitgeist of this time than this, in essence, where we see
that big finance capital has gone out of its way to task and fund big science
to marry satellite geo-mapping technology with hugely powerful data-mining
supercomputer mainframes so that working class folks who need to get their
tires retreaded can be more thoroughly and comprehensively screwed.
So there it is, if you're late with a $50 credit card payment, miss a $500 auto
loan payment, or a $1,000 mortgage payment, you're thrown headlong into the
land of the forever lost, where those poor souls without credit live out there
tortured, forsaken lives. What if you lose one trillion dollars, which is only
expected to be but a down payment on the more than two trillion more you are
expected to lose in the next few years?
Well, don't you follow the news? You get, with significant assistance from the
US Government, $18.4 billion in corporate bonuses.
For US President Barack Obama, it's the winter of love between him and the
Republican minority in Congress who despise him, but, as regards to those in
the financial services industry, no quarter or mercy is being offered.
Last week, Obama angrily denounced the $18.4 billion in bonuses currently being
paid out by the US financial services industry: "At a time when most of these
institutions were teetering on collapse and they are asking for taxpayers to
help sustain them, and when taxpayers find themselves in the difficult position
that if they don't provide help that the entire system could come down on top
of our heads - that is the height of irresponsibility. There will be a time for
them to make profits, and there will be time for them to get bonuses - now is
not that time."
Missouri Senator Claire McCaskill, whose 2006 election to the Senate as a
Democrat from what was then a fairly reliable "red" Republican state proves
that she knows well how to play the populist card, went further. She proposed
the "Cap Executive Officer Pay Act of 2009", which would limit total executive
compensation at financial firms receiving federal bailout assistance such as
the Troubled Asset Relief Program (TARP) to what the President earns - $400,000
a year.
Perhaps seized by the spirit of one of her predecessors as Missouri senator,
Harry "Give 'em Hell" Truman who later served as president from 1945 to 1952,
she unloaded with both barrels on the Senate floor: "These financial
institutions on the brink of extinction come to the American taxpayer for
hundreds and billions of dollars at the very same time they think they're going
to buy a $50 million corporate jet. They're going to pay out $18 billion in
bonuses. They paid an average of $2.6 million to every executive at the first
116 banks that got taxpayer money under TARP. They don't get it. These people
are idiots. You can't use taxpayer money to pay out $18 billion in bonuses.
What planet are these people on? What could they be thinking about?”
I'll leave the astronomical inquiry to others, but I know exactly what they
were thinking and it's the same thing all the rest of us think every day. We do
today, with perhaps a few variations on the margin, exactly what we did
yesterday, and the day before that. For so long have the captains and titans of
US finance been so lauded and lionized in the popular press, with the
extravagances of their pay packets and the lifestyle these silk satchels
financed - so eyed and envied - that eventually they must have forgotten that
there was an implied assumption that they had to actually do something, provide
some social benefit, in order to earn it.
As Washington barked at Wall Street, Wall Street growled back. Former New York
City mayor Rudy Guiliani, The Street's favorite conservative-for-hire, and the
man who expected to be president but not for the inconvenience that the voters
were given a say in the matter, defended fat financial sector bonuses when he
observed "Those bonuses, if they are reversed, are going to cause unemployment
in New York." This from the man who cut city payrolls by 20,000 jobs and threw
out another 340,000 of public assistance roles. "It means less spending in
restaurants, less spending in department stores, so everything has an impact,"
Guiliani said.
In the New York Times, one unnamed investment banker was indignant at the
outrageous slings and arrows of offense being launched at his profession:
"People come here because they want to work hard and get paid a lot for working
hard."
If this gentleman really thinks that investment banking is such hard work,
perhaps he should get off the brutal finance treadmill and seek easier
employment in one of the many fine and respectable manual labor avocations. The
opportunities are endless. As Judge Elihu Smails advised in the 1980s classic Caddyshack,
"Well, the world needs ditch diggers, too."
The bonus culture on Wall Street has developed in order to serve the uniquely
American belief that all you need to create a just society is for all its
citizens to always have ready and widely available opportunities for rapid
social advancement through unending, no-holds-barred competition.
The practice of a year-end bonus started innocuously enough. The Christmas
goose that Ebenezer Scrooge gave to the Cratchit family after his experience
with the Christmas ghosts was one example.
Around the turn of the century, the bonus tradition morphed from fresh fowl to
something a lot more fungible - cash. Year-end bonuses of up to 5% of total
compensation became common.
But on Wall Street, the present flap over bonuses is over sums a lot greater
than just 5% of salary. Over time, for the vast majority of senior investment
house personnel, and for a whole lot of middle management workers as well,
bonuses and stock options granted as bonuses, became the overwhelming portion
of their total pay, sometimes up to or exceeding 80% of total salary.
This pay structure - a small, or non-existent base salary supplanted by
commissions - is common in the real estate or used car sales industry. But
sophisticated and cosmopolitan Wall Street, its members welcomed with open
doors and open arms in every finance ministry and non-governmental
organizations in the world, would be aghast to find its masters of the universe
savants compared to those such as the struggling, downwardly mobile realtors of
David Mamet's Glengarry Glen Ross. These unfortunates, in a sales
contest to see who can sell the most number of questionable home lots, were
offered incentives of a Cadillac as first prize, a set of steak knives as
second prize, and unemployment as a third prize.
But that is exactly the situation on Wall Street. Base salaries are, by the
normal standards of mere mortals very high, frequently in the $300,000-$500,000
a year range. Still, it is almost unheard of for a Wall Street banker to
actually live on such a pitiful renumerance; you're not going to be able to
finance the shiny Piaget on your wrist or the curvy mistress put up in the
$12,000-a-month Upper East side love nest on just base salary. These good
things in life, now and since the fall of man out of the Garden of Eden, are in
scarcer supply than there is demand for. The Wall Street bonus culture, which
in and of itself acts to spur the demand that inflates the prices for the
aforementioned goodies, continually spurs the brokers appetites and palettes
for all of life's tasty goodies. It keeps the bankers' hands always fully
outstretched for the brass, or more likely, the platinum ring.
This, of course, only reflects what has become the core contemporary American
ethic - that communal sympathies are a fraud, that a ruthless, Darwinian
competition is a cradle-to-grave condition of existence that orders and
improves the American way of life in everything from which tots get into the
best kindergartens to who gets the best ventilator at the best hospice, and at
every life event along the way.
If the only measure of a person's social utility on earth is his company's
latest quarterly profit report, and how that profit report hopefully translated
into higher stock prices, than, perhaps it can be said that, up until recently,
Wall Street did "deserve" its bonuses. For over 20 years now, The Street has
been the point of the spear in the battle that transformed America from a place
where things got made to a place where paper, especially rectangular green
paper with pictures of prominent US personages on it, got shuffled.
Last year, it was reported that there were more financial engineers,
manipulators of money, employed in America than there were actual physical
engineers. No wonder the nation's physical infrastructure is in such deplorable
shape. At its height in 2007, almost one-fourth of the total profits of
America's S&P 500 companies were earned in the financial sector.
It was in the last twenty years that the financial sector finally came upon a
more modern variant of the old alchemists' trick from the Sorcerer's Apprentice
- not to make gold from dross, but to make money out of thin air - or
"leverage". While average citizens were always carefully warned to "use credit
wisely" and to "never borrow more than one can pay back", the financial
sector's genius was to do just the opposite. They borrowed and leveraged and
then borrowed some more, and until the music stopped with the volcanic eruption
of Mount Cramer in the Summer of 2007. Oh, how it was grand.
In case you haven't noticed, things are a bit different now.
In the past 18 months, the entire leveraged edifice has collapsed, is now
collapsing, and looks set to collapse ever further. Over one trillion dollars
of mortgage-backed and mortgage-related securities have had to be "written
down" by the banks-in the final analysis. What that means is that the banks
were unable to exchange the funny money of the mortgage debt at anything near
what they wanted to value it at.
The argument that the bonuses enhance shareholder value would probably not be
very well received with actual financial sector shareholders, not with share
prices in the financial sector down 90% or more from their highs - assuming the
shares still have a value as something other than e-Bay financial memorabilia.
But has this inconvenient truth spoiled the bonus party? Not really. At $18.4
billion bonuses have only fallen back to 2004 levels, back when the leverage
machine was very definitely still firing on all cylinders.
The public relations juggernaut has been working overtime defending the recent
bonuses. Just imagine how many underemployed recent English literature MAs you
can hire to write press releases for $18 billion. First, it is said that the
banks are forced to pay high salaries to keep the top talent. One wonders that,
if $18 billion buys you a one trillion dollar loss, you can just imagine the
oceans of red ink that would have accrued had the banks gone bargain basement
with just $9 billion of bonuses, or maybe no bonuses at all. Along a similar
vein is the banks' argument that, without high compensation, they'll lose the
talent to other industries.
I can just see it now, as Mr Wall Street Superstar interviews with "other
industries".
"Tell me, Mr Wall Street Superstar," asks the hiring officer for Other
Industries. "Were there any problems or difficulties with your previous
employment that influenced your decision to leave?"
"No, everything was fine - except for the one trillion dollars I lost."
This is all like an ancient custom that has gone on so long that those who
respect it have come to forget what once was its underlying rationalization.
The tradition of the Wall Street financial, indeed, of all of America's
commercial and industrial, elite, living lives so far removed and above those
of the common populace has become so ingrained that, at least among those who
savored its sweetness, it is expected to continue notwithstanding the fact that
its supposed rationale has evaporated.
All those glossy "money-porn" magazine covers, like those showing Wall Street
in love and at war, canoodling with some starlet while captaining the Perini
Navi sloop along the Sound, or surveying the trading floor with their strong,
surgically enhanced jawline, have gone to their head. They actually believe
they deserved all that purple prose they paid for, when in actuality they were
all just monkeys in a cage, furiously whaling away on the bar that said
"leverage" to get another treat.
But, even as things seem the bleakest for the poor, oppressed masses, there is
a new ray of hope. A new superhero takes flight to avenge these outrageous
calumnies and restore a righteous justice to the people. His name is ...
clawback.
An emerging theory of law has it that, if it can be proven that some profit or
gain has accrued to a party through some manner of deliberate deception or
fraud, the government and/or private victims can seek to seize, to claw back,
the ill gotten gains through the courts.
The theory recently got dusted off when some theorized that if any of those who
sold and cashed out of the Madoff Ponzi scheme before it collapsed had known of
its existence, and maybe even if they had not, they could be held liable and
forced to disgorge their profits in an effort to at least try to make the
victims whole. (I wrote about the Madoff scandal in my Asia Times Online
article Madoff
and the folly of blind faith, December 23, 2008.)
Where and when would this concept be more applicable than here and now? For
what has the past decade or more been but a deliberate deception and fraud, as
Wall Street tried to pull the wool over the world's eyes by claiming that the
wealth it was creating was real when, in actuality, it was nothing but the most
ephemeral chimera of all time, with the whole rotten, lying edifice now
collapsing into nothing with but the most gentle of zephyrs blowing through the
edifices of the unfinished condominiums of South Florida?
Not long ago, my credit card company denied me the use of my card when I tried
to use it to purchase a fried chicken dinner at a Seattle establishment so
renowned for this unique American delicacy that Oprah Winfrey has said that
it's her personal favorite.
"No, sir, no!" came the emphatic denials from the Mumbai call center. "We do
not racially profile. No, sir, no!"
Wouldn't it be great if, following the revolution that Obama promised but is
now deferring in the name of bipartisanship, and after the successful storming
of the South Dakota Bastille where the credit card computer mainframes are
housed, the people, not the elite, controlled these ultimate centers of power?
We could deny all charges for $12,000 Hugo Boss suits, $5,000 bottles of
Perrier-Jouet, $60 million for the odd Gulfstream G550.
From our current ongoing maladies and misfortunes, we know well full who makes
those types of purchases. You know, the wrong kind of people.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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