Wall Street Banks argue for Bonus Compensation Billions after losing Trillions

Wall Street bank executives are under fire for their ridiculous compensation packages in advance of annual bonuses that will be announced and awarded next month. So far, pundits have offered three arguments for not limiting Wall Street bonus compensation. First, they say that “government should not interfere with private enterprise,” which is a premise I normally wholeheartedly endorse. However, since the Great Depression, the global banking industry has had a strong if not incestuous regulatory relationship with government. The failure of Bear Stearns and Lehman Brothers and the subsequent actions of government to prevent the failure of probably all the rest of the world’s major banks and financial institutions are the very reason they still exist to allow their leaders to haggle today about how high their paychecks should be. Moreover, the reason the banks are recovering so quickly is primarily because the government is lending them money virtually interest free that they can reinvest at much higher returns. Not only don’t citizens enjoy such investment favor, but between TARP and low bank rates, we as taxpayers and bank depositors are paying to fix the banking system.

The second reason offered is that “it is difficult if not impossible to structure compensation so as to mitigate bank failure risk” and glib advocates of that perspective will point out that the obvious alignment of interest between the crew and passengers of the Titanic wasn’t enough to keep that ship from sinking. However, common sense and various studies indicate that long term non-cash compensation structures such as the awarding of restricted stock, especially with claw-back provisions, offer clear incentives for superior management performance.

Lastly, pundits arguing the bank executives’ cause say that “limiting bonuses will cause an exodus of talent from the top banks,” which would be laughable if it wasn’t so desperate and pathetic a statement. Isn’t the so-called “top talent” at banks at least partially if not primarily responsible for the financial debacle of the past few years? If they truly want to be paid for the value they create, they should receive a bill for the damage they have done to our economy and financial system, instead of receiving a bonus. So far the cost of the global financial crisis has been estimated north of $12 trillion, the equivalent of one-fifth of global economic output, and nearly $3,000 for every person on the planet! By that measure one could easily argue that top bank talent is being overpaid, whatever their rate of compensation.

Besides, with the failure of so many major financial institutions, clearly the supply of “top talent” exceeds the current demand for their services, as the number of top-tier banks has shrunk considerably in recent years. The competition from all those unemployed Wall Streeters should drive down the price of “top bank talent” for many years to come.