Sometimes a single number—in this case, $2.901 billion—can speak volumes about what is really happening on Wall Street these days.
Two billion, nine-hundred million dollars is the amount of money the mighty Goldman Sachs accrued in the third quarter of 2008 for “compensation and benefits” to potentially be paid out in the form of bonuses to the firm’s 30,000 or so employees sometime in December. The third-quarter accrual represents a whopping 50% decline from the $5.9 billion accrual for the third-quarter of 2007. For the nine months so far this year, Goldman has accrued $11.4 billion for bonuses, down one-third from $16.9 billion accrued for nine months in 2007. Last year, Goldman paid out a record $20.2 billion in “compensation and benefits” and it is more than a little obvious that this year the payout will be down significantly, with something in the 40% range looking likely.
Despite the bailout, there is still an army of overpaid troops out there.
And, as usual, as goes Goldman Sachs, so goes what’s left of Wall Street. For those bankers and traders lucky—or unlucky—enough to still have jobs on Wall Street by the time December rolls around, the annual bonus season will be no fun. One of the truisms of Wall Street has always been that investment banking was enjoyable one day a year—payday—but that was before 2008 rewrote the history book. Now, investment banking may be nothing more than pure misery.
The ramifications of the decline in Wall Street compensation are obvious to both the Mayor of New York City and the Governor of New York State, both of whose governments depend heavily on the revenue generated by Wall Street compensation. Their austerity programs are already being developed. While there is no question that the consequences of lower compensation on Wall Street will be significant for state and local governments and for those talented people who once upon a time sought out careers on Wall Street because of its promise of instant riches, there still is no clear picture yet on what the Wall Street compensation structure will look like in the new world order.
What is clear, though, is that the system is in need of serious reform, and that this is the perfect moment to seize that opportunity. The British seem to understand the time is ripe. When Prime Minister Gordon Brown announced his £500 billion bailout proposal last week, he took the opportunity to skewer the Wall Street compensation system. “I'm angry,” he said. “I'm angry at irresponsible behavior. Our economy is built around people who work hard, who show effort, who take responsible decisions, and where there is excessive and irresponsible risk-taking, that has got to be punished. The day of big bonuses is over. As part of this deal we'll have to reach an agreement with banks over executive remuneration. Where these guys have taken excessive risks, that is completely unacceptable.”
In this country, the same message is not getting through. As part of the $700 billion bailout plan—which is quickly morphing into an equity investment fund—Congress and the Treasury flicked at the problem of Wall Street compensation by attempting to limit the pay received by the top five executive officers of a firm. There was also some amorphous language about barring incentives for “unnecessary and excessive risks” whatever that means. But there is a whole army of overpaid troops out there.
Let’s be clear, bankers and traders on Wall Street do only what the compensation system on Wall Street tells them to do. For example, if their employers pay them excessively for manufacturing and warehousing mortgage-backed securities regardless of the consequences, it can be no surprise that that is what they do. Ditto for underwriting risky junk-bonds, Internet IPOs, emerging telecom debt and LBO debt.
To be sure, the events of the past two years on Wall Street will mean vastly lower bonuses across the board but the opportunity has never been better to redesign the entire compensation structure from one that encourages taking risks with other people’s money to one that holds people accountable for their behavior and rewards prudence.