Thursday, October 30, 2008

Wall Street Compensation

Since the start of 2002, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have paid a total of $312 billion in compensation and benefits. Bonuses generally account for about 60% of total Wall Street compensation, meaning that the five firms paid out an estimated $187 billion in bonuses.

The tried-and-true compensation model has come under fire since the Treasury Department announced plans to inject capital into financial institutions. Goldman, Morgan Stanley and Merrill are among the initial nine companies getting a combined $125 billion in government capital, fueling worries that taxpayer funds will be used to essentially subsidize Wall Street bonuses.

In 2002, Morgan Stanley started at 55, it's now at 16. $40 billion of shareholder wealth gone. Merrill Lynch started at 52, it's now at 17, $50 billion of shareholder wealth gone. Bear Stearns lost bondholders and shareholders at least another $50 billion! We don't even know yet how much Lehman Brothers cost shareholders and bondholders, but the safest bet is that it cost them more than the previous three. Now we are up to $300 billion. And then comes "Government Sachs" whose story isn't yet written. They just were more skillful at pretending they had better risk control than the others. Their stock price is the same as it was in 2002.

But in 2002, Goldman Sachs didn't have $60 billion of Level 3 assets, of dubious distinction. What's that haircut on these or the haircut of their derivatives? So these firms, lost every penny that they took in compensation, but the money they took, they took from the shareholders or the bondholders of the companies. Now they want to take yours!

These firms are now worried about compensation? Where's the clawback for the previous years? They think they need to pay their "talent" or else they will find work elsewhere? Where? At a hedge fund that just blew up? Let them go. They don't need to be paid to stay.

These firms have been stealing money for the past six years. Now they think nothing of stealing taxpayer money for their bonus pool!

Because they think the $312 billion wasn't enough!

It reminds me of two wise guys out on the street. They went to the guy in the hardware store, and told the owner they were getting 10% juice on his money. He then gave them 10 grand. They came back the next week, and said, they were now getting 15% juice. He then gave them 20 grand. The next week, they said that the action was so hot, that they were now getting 30% juice, so he gave them another 20 grand. The next week, they told him of all the money he was making, and the hardware store owner said he didn't want to lay out any more money, but he just wanted to collect his juice. The wise guys said that they would come back with his pay, but first one of them starting looking around for paint. The other wise guy looked at the other and said, "What are you getting paint for?" And he whispered back to him, with colorful expletives, that he was going to go and paint his room, because he wasn't coming back here anymore. They walked out with the two cans of paint, yelling at the front door, that "they'll get him for the paint when they come back."

You steal on the street, and you're a criminal. You steal on Wall Street, and they write you up in the Wall Street Journal.

But Wall Street wraps up their theft with the help of prospectuses, structured products, derivatives and lawyers with help from their friends in politics and the press to spin their story.

But they are no different than the guys walking out of the hardware store with two cans of paint.

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