Wall Street Gives Itself a Pay Raise with little Backlash

 Wall Street gave itself another raise this year to the tune of $144 billion in compensation and benefits, according to a newly released study conducted by the Wall Street Journal.  Although the increase is small, only 4 percent over 2009, the action speaks volumes when the unemployment rate is teetering around 10 percent for the nation and almost reaching depression era levels in some states.

This is not news. Compensation for the financial sector has been widely debated over the last decade, more so in recent years as the economy halted along with job growth.  While not solely responsible for the U.S. economic downfall, Wall Street did play a big part fueling the housing market bubble selling securitized loans like they were hotdogs at a ballpark.

Pretty much all of the investment banks that took bailout money paid their debt with interest however.  So why not give raises to employees?  The firms are profitable and should reap the benefits, right? 

It’s hard to criticize any company for rewarding employees. Deserved or not, bonus and compensation increases on Wall Street are frowned upon by those on “main street” just like when politicians decide to boost their annual incomes. To be fair, Wall Street itself has tried to circumvent any perception backlash by reducing bonuses.  How all of this plays out is still questionable.

Wall Street is up over the last two years as stocks continue to rebound.   This runs counter to the economy’s turnaround, although some studies suggest that the recession has been over since last June.  Jobs and the economy are the top issues facing Americans today and there are more than 11 million people out of work.  Wall Street giving pay raises at a time when the country is in economic turmoil seems like a public relations nightmare, especially since the American taxpayer footed the bailout tab. 

Public recoil has been minimal.  People may be too busy finding jobs or focusing on the midterm elections to pay any attention to Wall Street bonues.   Whatever the reason, nothing really can be done about pay raises unless change is made at the shareholder level. Until then, Wall Street’s image will be about profit, which is not necessarily a bad thing.

Wall Street Repays the Taxpayer with Layoffs and Record Bonuses

Pay Czar Kenneth Feinberg

Pay Czar Kenneth Feinberg

There’s little doubt in anyone’s mind that the American taxpayer saved Wall Street.  Only several months ago the Dow Jones Industrial Average was teetering around 6500 points, well below its October 9, 2007 record high of 14,164. The mood was grim and the outlook was bleak.

The $700 billion set aside for the U.S. Treasury to buy troubled  assets and make capital injections hadn’t fully made its way to Wall Street at the time, but helped the federal government steer the economy in a positive direction.   Large banks and leading investment firms last year took tens of billions of dollars in TARP money to help ease the credit crunch driven by the subprime mortgage crisis.  J.P. Morgan Chase, Morgan Stanley and Goldman Sachs in particular, collectively received $45 billion. 

Whether these three companies needed financial assistance from the federal government remains unclear.  Wall Street however, was in a panic and in danger of imploding.  Layoffs followed.  Goldman Sachs announced a 10% workforce cut, while Morgan Stanley slashed 10% from its institutional securities group and 9% from its asset-management group.  J.P. Morgan Chase cut its investment banking department, and fired 10,000 of the 14,000 Bear Stearns employees and another 9,200 Washington Mutual employees.

Now much leaner, and all of the TARP money repaid, these same three companies recently reported record third quarters in 2009.  With big profits come record bonuses.  Morgan Stanley set aside $11 billion in bonuses and compensation thus far, while Goldman Sachs and J.P. Morgan Chase executives are expected to clear more than $20 billion each by the end of the year.  

These enormous Wall Street payouts seem to come as a slap in the face to Main Street and the rest of the country, when hundreds of thousands of jobs are lost each month, producing the biggest employment decline since the Great Depression.   

There is some hope however.  Pay czar Kenneth Feinberg announced aggressive compensation reductions for executives of the seven companies that received bailout assistance.  While this may appear to be good news, it doesn’t require other firms  following suit.  Wall Street nonetheless is restructuring its bonus system, although many industry watchers feel it hasn’t gone far enough.  

Where is the outrage?  Did firms like Goldman Sachs benefit from taxpayer assistance?  How can these companies still reel in record profits when so many people are out of work?  Didn’t this type of pay culture cause America’s financial crisis in the first place?

These are just a few of the many unanswered questions surrounding Wall Street.  The fact is Wall Street is not only to blame for the current economic downfall.  Main Street consumers played a big part in it too, buying homes they could not afford. 

But the average American doesn’t receive a $400,000 bonus at the end of the year, which will be the average payment this year for a Goldman Sachs employee, not including salary.   Nothing will change, at least for now.  Investment firms will continue to rake in big bonuses.  Perhaps Wall Street needs to do a better job of communicating its pay structure.  If not, public outrage will continue to mount, unless the economy turns around even faster, and citizens start seeing their 401Ks rise, and Wall Street goes gangbusters again as it did in 2007.

Obama’s Speech on Financial Reform hit its Mark, Albeit Grudgingly

President Obama Speaking at Federal Hall on Wall Street

President Obama Speaking at Federal Hall on Wall Street

President Obama today delivered sort of a lecture on financial reform to a mixed Wall Street crowd of fund managers, elected officials and business advocacy groups. The president’s remarks were made on the one-year anniversary of the Lehman Bothers collapse at Federal Hall in New York City.

There’s no doubt that much has changed since last September. At the time, several of the world’s largest and oldest financial institutions had fallen, either bankrupt, bought or bailed out. Credit markets froze and panic ensued as five trillion dollars of household wealth evaporated. America truly was on the verge of a financial collapse, at least in sentiment.

These days there is a light at the end of the proverbial tunnel. Much of the TARP money borrowed by banks has been repaid at a profit to the American taxpayer, and the Dow Jones Industrial Index is on an upswing from its historic lows earlier this year. So why risk recovery with reform?

Strike while the iron is hot. Few would disagree that the country needs financial reform. The same goes for healthcare. Greed not only by Wall Street, but Main Street too, is at the root of this current financial crisis. The only way for a full recovery is through reform.

President Obama’s tough talk warning the financial community that the days of “reckless behavior and unchecked excess” are over comes at a pivotal time during the nation’s history. Most Americans (70%) lack confidence that the federal government has taken safeguards to prevent another financial industry meltdown. The president instead invited Wall Street to join in a wide scale effort to dramatically change the rules and regulatory structure of the financial industry.

Whether Wall Street will help reform itself remains to be seen. Change is inevitable however. The financial markets must restructure its current environment or face another collapse. This is the simple truth we learned from the real estate and technology bubbles. The real challenge will come when a turnaround is imminent, profits are up and the money starts to roll again on Wall Street.