[Marxism] Anybody need a new target for some shoes?
giobon at comcast.net
Thu Dec 18 14:37:36 MST 2008
This really made me sick.
Bonnie Weinstein, socialistviewpoint.org
On Wall Street, Bonuses, Not Profits, Were Real
By LOUISE STORY
December 18, 2008
“As a result of the extraordinary growth at Merrill during my tenure
as C.E.O., the board saw fit to increase my compensation each year.”
— E. Stanley O’Neal, the former chief executive of Merrill Lynch,
For Dow Kim, 2006 was a very good year. While his salary at Merrill
Lynch was $350,000, his total compensation was 100 times that — $35
The difference between the two amounts was his bonus, a rich reward
for the robust earnings made by the traders he oversaw in Merrill’s
Mr. Kim’s colleagues, not only at his level, but far down the ranks,
also pocketed large paychecks. In all, Merrill handed out $5 billion
to $6 billion in bonuses that year. A 20-something analyst with a
base salary of $130,000 collected a bonus of $250,000. And a 30-
something trader with a $180,000 salary got $5 million.
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to
be a mirage. The company has since lost three times that amount,
largely because the mortgage investments that supposedly had powered
some of those profits plunged in value.
Unlike the earnings, however, the bonuses have not been reversed.
As regulators and shareholders sift through the rubble of the
financial crisis, questions are being asked about what role lavish
bonuses played in the debacle. Scrutiny over pay is intensifying as
banks like Merrill prepare to dole out bonuses even after they have
had to be propped up with billions of dollars of taxpayers’ money.
While bonuses are expected to be half of what they were a year ago,
some bankers could still collect millions of dollars.
Critics say bonuses never should have been so big in the first place,
because they were based on ephemeral earnings. These people contend
that Wall Street’s pay structure, in which bonuses are based on short-
term profits, encouraged employees to act like gamblers at a casino —
and let them collect their winnings while the roulette wheel was
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a
professor at Harvard Law School and an expert on compensation. “The
whole organization was responding to distorted incentives.”
Even Wall Streeters concede they were dazzled by the money. To earn
bigger bonuses, many traders ignored or played down the risks they
took until their bonuses were paid. Their bosses often turned a blind
eye because it was in their interest as well.
“That’s a call that senior management or risk management should
question, but of course their pay was tied to it too,” said Brian
Lin, a former mortgage trader at Merrill Lynch.
The highest-ranking executives at four firms have agreed under
pressure to go without their bonuses, including John A. Thain, who
initially wanted a bonus this year since he joined Merrill Lynch as
chief executive after its ill-fated mortgage bets were made. And four
former executives at one hard-hit bank, UBS of Switzerland, recently
volunteered to return some of the bonuses they were paid before the
financial crisis. But few think others on Wall Street will follow
For now, most banks are looking forward rather than backward. Morgan
Stanley and UBS are attaching new strings to bonuses, allowing them
to pull back part of workers’ payouts if they turn out to have been
based on illusory profits. Those policies, had they been in place in
recent years, might have clawed back hundreds of millions of dollars
of compensation paid out in 2006 to employees at all levels,
including senior executives who are still at those banks.
A Bonus Bonanza
For Wall Street, much of this decade represented a new Gilded Age.
Salaries were merely play money — a pittance compared to bonuses.
Bonus season became an annual celebration of the riches to be had in
the markets. That was especially so in the New York area, where
nearly $1 out of every $4 that companies paid employees last year
went to someone in the financial industry. Bankers celebrated with
five-figure dinners, vied to outspend each other at charity auctions
and spent their newfound fortunes on new homes, cars and art.
The bonanza redefined success for an entire generation. Graduates of
top universities sought their fortunes in banking, rather than in
careers like medicine, engineering or teaching. Wall Street worked
its rookies hard, but it held out the promise of rich rewards. In
college dorms, tales of 30-year-olds pulling down $5 million a year
While top executives received the biggest bonuses, what is striking
is how many employees throughout the ranks took home large paychecks.
On Wall Street, the first goal was to make “a buck” — a million
dollars. More than 100 people in Merrill’s bond unit alone broke the
million-dollar mark in 2006. Goldman Sachs paid more than $20 million
apiece to more than 50 people that year, according to a person
familiar with the matter. Goldman declined to comment.
Pay was tied to profit, and profit to the easy, borrowed money that
could be invested in markets like mortgage securities. As the
financial industry’s role in the economy grew, workers’ pay
ballooned, leaping sixfold since 1975, nearly twice as much as the
increase in pay for the average American worker.
“The financial services industry was in a bubble," said Mark Zandi,
chief economist at Moody’s Economy.com. “The industry got a bigger
share of the economic pie.”
A Money Machine
Dow Kim stepped into this milieu in the mid-1980s, fresh from the
Wharton School at the University of Pennsylvania. Born in Seoul and
raised there and in Singapore, Mr. Kim moved to the United States at
16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in
an industry of workaholics, he seemed to rise through the ranks by
sheer will. After a stint trading bonds in Tokyo, he moved to New
York to oversee Merrill’s fixed-income business in 2001. Two years
later, he became co-president.
Even as tremors began to reverberate through the housing market and
his own company, Mr. Kim exuded optimism.
After several of his key deputies left the firm in the summer of
2006, he appointed a former colleague from Asia, Osman Semerci, as
his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio
and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million
home, as well as oceanfront property in Mantoloking, a wealthy
enclave in New Jersey, according to county records.
Merrill and the executives in this article declined to comment or say
whether they would return past bonuses. Mr. Mallach did not return
Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill
entered a new phase in its mortgage buildup. That September, the bank
spent $1.3 billion to buy the First Franklin Financial Corporation, a
mortgage lender in California, in part so it could bundle its
mortgages into lucrative bonds.
Yet Mr. Kim was growing restless. That same month, he told E. Stanley
O’Neal, Merrill’s chief executive, that he was considering starting
his own hedge fund. His traders were stunned. But Mr. O’Neal
persuaded Mr. Kim to stay, assuring him that the future was bright
for Merrill’s mortgage business, and, by extension, for Mr. Kim.
Mr. Kim stepped to the lectern on the bond trading floor and told his
anxious traders that he was not going anywhere, and that business was
looking up, according to four former employees who were there. The
traders erupted in applause.
“No one wanted to stop this thing,” said former mortgage analyst at
Merrill. “It was a machine, and we all knew it was going to be a
very, very good year.”
Merrill Lynch celebrated its success even before the year was over.
In November, the company hosted a three-day golf tournament at Pebble
Mr. Kim, an avid golfer, played alongside William H. Gross, a founder
of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two
Bear Stearns hedge funds whose subsequent collapse in 2007 would send
shock waves through the financial world.
“There didn’t seem to be an end in sight,” said a person who attended
Back in New York, Mr. Kim’s team was eagerly bundling risky home
mortgages into bonds. One of the last deals they put together that
year was called “Costa Bella,” or beautiful coast — a name that
recalls Pebble Beach. The $500 million bundle of loans, a type of
investment known as a collateralized debt obligation, was managed by
Mr. Gross’s Pimco.
Merrill Lynch collected about $5 million in fees for concocting Costa
Bella, which included mortgages originated by First Franklin.
But Costa Bella, like so many other C.D.O.’s, was filled with loans
that borrowers could not repay. Initially part of it was rated AAA,
but Costa Bella is now deeply troubled. The losses on the investment
far exceed the money Merrill collected for putting the deal together.
So Much for So Few
By the time Costa Bella ran into trouble, the Merrill bankers who had
devised it had collected their bonuses for 2006. Mr. Kim’s fixed-
income unit generated more than half of Merrill’s revenue that year,
according to people with direct knowledge of the matter. As a reward,
Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to
$6 billion bonus pool to the 2,000 professionals in the division.
Mr. O’Neal himself was paid $46 million, according to Equilar, an
executive compensation research firm and data provider in California.
Mr. Kim received $35 million. About 57 percent of their pay was in
stock, which would lose much of its value over the next two years,
but even the cash portions of their bonus were generous: $18.5
million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to
Mr. Kim and his deputies were given wide discretion about how to dole
out their pot of money. Mr. Semerci was among the highest earners in
2006, at more than $20 million. Below him, Mr. Mallach and Mr.
Lattanzio each earned more than $10 million. They were among just
over 100 people who accounted for some $500 million of the pool,
according to people with direct knowledge of the matter.
After that blowout, Merrill pushed even deeper into the mortgage
business, despite growing signs that the housing bubble was starting
to burst. That decision proved disastrous. As the problems in the
subprime mortgage market exploded into a full-blown crisis, the value
of Merrill’s investments plummeted. The firm has since written down
its investments by more than $54 billion, selling some of them for
pennies on the dollar.
Mr. Lin, the former Merrill trader, arrived late to the party. He was
one of the last people hired onto Merrill’s mortgage desk, in the
summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he
joined the firm. Mr. Lin would not disclose his bonus, but such
payouts were often in the seven figures.
Mr. Lin said he quickly noticed that traders across Wall Street were
reluctant to admit what now seems so obvious: Their mortgage
investments were worth far less than they had thought.
“It’s always human nature,” said Mr. Lin, who lost his job at Merrill
last summer and now works at RRMS Advisors, a consulting firm that
advises investors in troubled mortgage investments. “You want to pull
for the market to do well because you’re vested.”
But critics question why Wall Street embraced the risky deals even as
the housing and mortgage markets began to weaken.
“What happened to their investments was of no interest to them,
because they would already be paid,” said Paul Hodgson, senior
research associate at the Corporate Library, a shareholder activist
group. Some Wall Street executives argue that paying a larger portion
of bonuses in the form of stock, rather than in cash, might keep
employees from making short-sighted decision. But Mr. Hodgson
contended that would not go far enough, in part because the cash
rewards alone were so high. Mr. Kim, for example, was paid a total of
$116.6 million in cash and stock from 2001 to 2007. Of that, $55
million was in cash, according to Equilar.
Leaving the Scene
As the damage at Merrill became clear in 2007, Mr. Kim, his deputies
and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund,
but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a
hedge fund in London.
All three departed without collecting bonuses in 2007. Mr. O’Neal,
however, got even richer by leaving Merrill Lynch. He was awarded an
exit package worth $161 million.
Clawing back the 2006 bonuses at Merrill would not come close to
making up for the company’s losses, which exceed all the profits that
the firm earned over the previous 20 years. This fall, the once-proud
firm was sold to Bank of America, ending its 94-year history as an
Mr. Bebchuk of Harvard Law School said investment banks like Merrill
were brought to their knees because their employees chased after the
rich rewards that executives promised them.
“They were trying to get as much of this or that paper, they were
doing it with excitement and vigor, and that was because they knew
they would be making huge amounts of money by the end of the year,”
Ben White contributed reporting.
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