Why Wall Street bonuses are necessary

Businessman with $100 bills in suit jacket pocket.

Robert Teitelman


Kai Ryssdal: Wall Street's bonus situation is somewhere between an embarrassment of riches and a looming public relations disaster. Over the next week or so we are going to learn exactly how big some of those bonuses are going be. As well as all kinds of explanations about why they are really and truly necessary. We thought we'd spend some time today exploring that side of the argument. Bob Teitelman is the editor in chief of The Deal, that's a magazine and a Web site about Wall Street. Bob, it's good to have you with us.

Bob Teitelman: Great to be here.

Ryssdal: The president's spokesman, Robert Gibbs, came out and said once again today, that it's the White House's belief that the banks just don't get it about the bonuses. That there's this fundamental disconnect between what happens on Wall Street and the entire rest of the economy. Do you buy that?

Teitelman: I buy that in that there is a disconnect there. What I don't buy is that the issue has been so oversimplified over time and reduced to a sort of cartoon opposition of Wall Street and Main Street. That's what I don't buy. There is a disconnect because obviously the rest of the country doesn't think Wall Street should get bonuses and folks on Wall Street believe that they should, so there is a disconnect.

Ryssdal: Well, I don't know if I can say this on this program, but go ahead and complicate it for us. What part is the rest of the country missing?

Teitelman: There's a lot of places for these folks to go if they don't get the money they claim they deserve at the big banks. And you can take that any way you want in terms of whether they deserve it or not. But there's a lot of places for them to go. There's thousands of hedge funds, there's hundreds of private equity firms out there that are not at this point under any kind of regulatory oversight from the government.

Ryssdal: Let me ask you this, though, and it can roughly be condensed down into the so what question. It's bad for Lloyd Blankfein and Goldman Sachs if his bankers go somewhere else, but what difference does that really make for the rest of us?

Teitelman: Two of the big issues involving the bonus argument is one, the too big to fail problem, which is that there are some banks that are too big to fail. And two, that finance is too large for the economy, that we have an over-mighty finance establishment. This does not solve either one of those problems. You just shift the talent, you shift it away from regulation in a sense.

Ryssdal: You'll grant that the amounts involved are troubling.

Teitelman: Yes. Yes. They're troubling. Historically, they're troubling. Yes. But that's not the issue that I'm really dealing with here.

Ryssdal: What about the objection from taxpayers that say, listen, there wouldn't be a Wall Street if we hadn't ponied up $700 billion 18 months ago.

Teitelman: You know, if you're going to regulate something like bonuses, you're going to have to regulate them everywhere. You're not going to be able to let anybody get away. It's a little like the health care industry, where you get a partial form of regulation. And whenever you get a partial form of regulation, you get a sort of call shift that goes somewhere else. It goes to the place where it's not regulated. Then the question becomes do you really want to regulate pay across the board, in a million different places, because it's a much more difficult issue. And I'm not sure that people have considered that yet.

Ryssdal: When you talk to the folks you know on Wall Street, I mean, put me inside their heads. Do they get the public-perception disconnect?

Teitelman: Some of them don't. Some of them do, obviously. But I have spoken to some of them that I have been surprised at how blind they are to the unhappiness out there.

Ryssdal: Bob Teitelman, he's the editor in chief of The Deal. Bob, thanks a lot.

Teitelman: Great. Thank you.

Robert Teitelman

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Bob writes:
Last week I spoke briefly to radio's Marketplace about a short piece I wrote on Wall Street bonuses. From the beginning I felt that Marketplace was trying to get me to say that bonuses were simply too large and that Wall Street "didn't get it." I resisted; the interviewer persisted. And so it went. Then, early this week, the perfectly pleasant interviewer, Kai Ryssdal, brought up the conversation in a short piece on listener letters, saying that I had argued that we had no choice but to give bonuses ("a necessary evil") to Wall Street, because if we didn't, everyone would head off to private equity and hedge funds.

See Bob's response on The Deal.com

There's a theme in our responses to Teitelman's comments:
1) If those lining up for bonuses are so smart, how did their institutions get into such financial trouble?
2) If the hedge funds really wanted them, they would have hired them away long ago.
3) This bonus stuff is an artificial need supported by comments from people like Teitelman. Pull the plug and I suspect few will move and if some do, there are talented folks below them that can step up.

It's a shame that we as Marketplace listeners, are so riled up by this. We're supposed to know better, to buy and hold, to be in indexes, and to ignore this noise.

The chase for the person who you believe can help you bring in that extra quarter-point of returns fuels this competitive craze. We clamor for their heads when they let us down, but we're usually in line for wanting part of the gains, too.

This never-ending pursuit of the next big bonus, as 'top talent' floats from one big shop to the next, is just as tiresome to see in business as it is in sports.

Wow, I got chatty. All I meant to say was Mr. Teitelmen's logic is flawed.

He says that the market dictates what these men of talent get paid. OK, limit the compensation and let them leave. If the market is suddenly flooded with all of these highly talented people, compensation should go down due to the glut of talent. Mr. Teitelman, your argument needs to work both ways. Even if these guys are half as talented as they think they are, the market still runs on supply and demand, right?

Kai, I'll give you the benefit of the doubt on this interview. My guess is that Kai perceived Mr. Teitelman's case for bonuses as being very weak. Had I been conducting the interview, I would have been jumping on nearly every sentence that Mr. Teitelman uttered and it would have resulted in a lot of bickering and sounded like a Fox News interview. As it was, I sat in my car in the driveway, screaming at my radio. Sometimes when hosts conduct interviews with truly, out of touch people, they need to let them ramble. Regardless of what Kai may think of the--bonuses for failures--issue, he was letting Mr. Teitelman give us a window into the mindset of some very, "disconnected," people. Kai could have challenged Mr. Teitelman more, but I think we all benefited by hearing that these folks believe they deserve to be obscenely compensated, even when they failed and needed welfare to keep their businesses afloat. Now we know the kind of people with whom we are dealing. I don't know what to think of Mr. Teitelman. To me, he sounded like the kid on the high school debate team who had to defend the position, "Why Pol Pot was a good person."

Mr. Teitelman makes the point that these guys, who are making big bonuses because we--the taxpayers--bailed them out, have lots of opportunity. That is great. Let them go. What is happening here is they are threatening to go somewhere else. They don't want to go. If the wanted to go, they would just go. Maybe they don't want to go because the, "thousands of hedge funds, ... hundreds of private equity firms out there," that did not need welfare to stay afloat may not want them. Or, if they will hire them, may pay them exactly what they are worth.
Here is the problem. If you look at the Fortune 500 companies, figure there are an average of 10 directors on each board, that means there should be around 5000, different people who sit on the boards of these companies. However, I believe that I heard that on Talk of the Nation, that the total number of people sitting on the boards of the F-500 was an alarmingly small number because most of the boards overlap. In other words, the CEO or board member of one company may sit on the board of another company or companies. (Does anyone know this number? I would love to know.) If you say, so what, think about this: Suppose your local school board was made up of teachers, janitors, and staff members of surrounding school districts. And imagine the surrounding school district boards were similar in make up. Now, when it comes to contract negotiations, you would have a situation of, you scratch my back--I'll scratch yours. I support teachers, staff and in particular, janitors, but this would not be a healthy situation. Does this sound familiar?

Bottom line: These companies and their executives believe in private profit, public risk. Mr. Teitelman, you are defending people who not only think the law (or at least morality) does not them, they don't think the rules of a free market apply to them. I wonder if they think the rules of physics applies to them?

Tom Schutt

P.S. Not only are these folks using your tax dollars to pay themselves bonuses, they are using your tax dollars to lobby congress to help them get away with it.

There are two key questions that go unanswered (Kai needs to do a better job):

1) Do these folks at Goldman have such unique talents that they *can not* be replaced? What is the incremental loss of replacing a guy who makes $10M bonus with a guy who doesn't quite command as much? Are these companies run to optimize costs and net profits or are they run like a old-boys-network? I think there is an analogy to be made between these bonuses and country club memberships. These memberships are expensive because they are Exclusive - not because they offer so much better facilities than another golf course down the road.
2) Are these companies serving shareholders if 75% of the profits are paid-off as compensation to employees? Unfortunately, rights of regular shareholder (supposedly those that own the company) are quite limited in regards to compensation. I believe the solution involves giving shareholders more rights.

So many holes in the logic here. RE: limiting bonuses affecting every one else's bonus - If you restrict bonuses on companies that got a government bailout then 99% of us will not be affected RE: they'll go to hedge funds if they don't get bonuses - He's assuming that the hedge funds have positions for all the people that he claims will leave. And for the ones that do go, good riddance. If they insist on their bonuses in hedge funds despite colossal failures the investors will pull the plug very quickly. Let's face it. Justifying the bonuses is impossible. All they can say is that they really want it and therefore should get it.

<Finally, I think Robert Teitelman and Wall Street miss the point: you cannot reward risk taking when the person taking the risk is risking NOTHING. On Main Street, if a business owner wants to take a high risk on his business, he will lose his house, his marriage, and everything he owns. For a trader on Wall Street, taking a $50 Million risk to earn a $10 Million bonus while playing with other people's money is not the same thing at all>
Thank you, Sam!!! That is the part they don't WANT to get, because to do so would expose the craven greed of their position. This isn't about investing - it's about gambling. And it wrecked not only THEIR house of cards, but very substantial buildings on Main St. The difference is, the men who ran the games didn't feel the pain - we did and do.

The only argument ever advanced to justify the outrageous bonuses on Wall Street is that if they didn't pay these bonuses, the talent will go elsewhere. Assuming that the quality of talent is as they claim (though, let's face it, talented physics majors will actually end up doing physics), the argument as a whole is a shill. If Wall Street didn't pay outrageous bonuses, where is this so-called "talent" going to go? Take a look around; there aren't exactly great paying jobs falling off trees anymore. Every other profession is getting squeezed. The only response that Robert Teitelman can muster is that these "talented" people will go to hedge funds. There are two problems with that response: 1) he assumes there are enough jobs in hedge funds to absorb this horde of people, and 2) that the hedge funds haven't already attracted and recruited all the talent they want. Given that on a per capita basis hedge funds out perform Wall Street on earnings, I don't think they have any problems attracting the right "talent".

Finally, I think Robert Teitelman and Wall Street miss the point: you cannot reward risk taking when the person taking the risk is risking NOTHING. On Main Street, if a business owner wants to take a high risk on his business, he will lose his house, his marriage, and everything he owns. For a trader on Wall Street, taking a $50 Million risk to earn a $10 Million bonus while playing with other people's money is not the same thing at all; the worst that happens to the trader is that he doesn't earn his bonus, not lose his entire life. That kind of risk should have been allocated to the firms themselves, but they shirked it off onto tax payers. So, the disconnect is not that Main Street doesn't understand why Wall Street pays big bonuses; the disconnect is that Wall Street doesn't understand why their big bonuses are inequitable, undeserved, and serve no function than self-serving greed of the status quo.

To some degree they can't be replaced, but I think that has more to do with the hazing requirements than a true meritocracy.

If you haven't seen Warren Buffet's biography, check out his take on the Salomon brothers disaster. One employee became infuriated with the lopsided meritocracy where one department got a huge bonus increase according to their merits but then the guys that weren't delivering had to get bonus increases as well. The disgruntled employee then rigged the bond trading and nearly caused a financial market crash.

I have no problem with seeing people get rewarded for performance, but I think a lot of the time it appears the Nicolas Cages are getting paid five times the Morgan Freemans.


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