[Marxism] Anybody need a new target for some shoes?

Bonnie Weinstein giobon at comcast.net
Thu Dec 18 14:37:36 MST 2008

This really made me sick.


Bonnie Weinstein, socialistviewpoint.org

The Reckoning
On Wall Street, Bonuses, Not Profits, Were Real
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,  
March 2008

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  
mortgage business.

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  
still spinning.

“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  
that lead.

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  
were legion.

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  
telephone calls.

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  
Beach, Calif.

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  
the tournament.

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  
independent firm.

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,”  
he said.

Ben White contributed reporting.

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