Rules of the Jungle

The government is finally cracking down on Wall Street's pay practices. Kenneth Feinberg, the pay czar, delivered word that wards of the state—Citi, Bank of America, AIG, among them—must slash pay for top-earning executives. The Federal Reserve followed suit with a promise to review compensation packages at banks it regulates. (Click here to follow Daniel Gross)

Excessive executive compensation at financial-services companies is dead!

Long live excessive compensation at financial-services companies!

Companies that liberated themselves from the shackles of the TARP are feasting on low interest rates and other government efforts to prop up markets—and they're partying like it's 2007. Goldman Sachs is setting aside nearly $20 billion in compensation for employees this year—most of it in bonuses. Morgan Stanley set aside $5 billion for bonuses in the third quarter alone. Elizabeth Warren, who chairs the congressional panel overseeing the TARP, is aghast. "I don't understand that they don't think the world has changed in fundamental ways," she says. Asked earlier this year about the prospect of megabonuses at bailed-out Wall Street firms, President Obama said, "I'd like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses."

Shame? Self-awareness? Remorse? Come on, these are bankers we're talking about.

President Obama graduated from Harvard Law School, where Warren is on the faculty. But they'd have a better understanding of Wall Street had they spent time in Harvard's anthropology department. That's because bankers must be evaluated the way Margaret Mead approached Samoans—as an insular tribe with its own mores, as a society in which long-accepted conventions might strike outsiders as bizarre.

Just as Tiger Woods was placed on this earth to whack the dickens out of dimpled balls, Wall Streeters were placed on this planet to dispense and receive bonuses. Sure, firms trumpet their values and missions. Goldman has 14 business principles, many of which could apply to a preschool. ("We stress creativity and imagination.") But betting on the direction of currencies and enriching the already rich is not a particularly edifying pursuit. Bankers toil like maniacs not because they like working in creative teams but because they like getting paid. Throughout December, tense dramas play out in office suites in Greenwich, Conn., and Manhattan as bonuses are negotiated. Traders and bankers plead their cases, threaten to leave, profess undying loyalty, and complain of betrayal. Imagine a telenovela by David Mamet—an all-male cast cursing passionately.

At most companies, bonuses are paid out of profits. No end-of-year profits, no bonuses. But on the island nation of Wall Street, they're paid out of revenues. Since the 1980s, notes Brad Hintz, an analyst at Sanford C. Bernstein, it's been the standard for half of revenues to be devoted to compensation. So long as these outfits were private partnerships, that practice didn't really matter to the rest of us. But since the 1990s, when investment banks went public, compensation has evolved into a zero-sum game between employees and shareholders. Guess who lost?

In normal industries, discretionary compensation would decline when companies suffer losses and their stocks crater. But most Wall Street firms still paid out bonuses in 2008, as shareholders and taxpayers suffered. Just as chickens can run around with their heads cut off, financial firms can pay bonuses even when they've essentially failed (AIG) or clocked massive losses (Merrill Lynch).

This year compensation will again eat up something close to a majority of Wall Street's revenues. And while Goldman and Morgan Stanley have paid back their bailout funds, other large bonus dispensers still owe large sums of money to the public. Every dollar they pay out in compensation is one fewer they have to pay back the taxpayer. Wall Street's structure may have changed a great deal in the past year, but its culture has proved remarkably resistant to change. The devastating earthquake of September 2008 didn't alter this custom. And neither will the public opprobrium, the disapproval of President Obama, or the threat of Federal Reserve oversight. Come December and January, we will continue to be shocked by the level of bonuses—and Wall Street will continue to be shocked that we're shocked.