Home > Personal Finance > Chestnuts, Jack Frost and Wall Street’s Spring Bonuses

Comments 0 Comments

As we ring out what has been a pretty lousy year for most of us, Wall Streeters are all aglow—thoughts turning to sugar-plum fairies dancing in their brains, bearing bundles of spring bonuses—while stepping around agitated demonstrators who Occupy but a tiny part of their head space.

While Wall Street bonuses may be down somewhat this year, the billion-dollar payday for America’s 1% is seen as an insult to most Americans who still feel the sting of their tax dollars lining the pockets of the very people who created, or at least mightily contributed to, the 2008 meltdown.

Perhaps in this season’s spirit of giving, in an effort to change the dynamic, we might create a new paradigm which puts the welfare of Main Street in the middle of the bonus equation rather than keeping it as little more than a Park Avenue holiday party punchline.

For example, since the bailout, while Fannie Mae and Freddie Mac combined lost over $121 billion, and received about $94 billion MORE in taxpayer “bailout” funding, their top six executives received $35 million in compensation, most of it in the form of bonuses. Fannie’s CEO alone received more than $9 million over the past two years.

The House Financial Services Committee recently approved a bill by a 52 to 4 vote that would limit executive pay at Fannie and Freddie. It’s about damn time. But wait, there’s more.

Gigantic bonuses that quickly follow taxpayer bailouts are not only bad PR, they are emblematic of the mentality that gave rise to Occupy Wall Street. We would be well advised not underestimate the backlash, which picked up steam this week in federal court as well as in Zuccotti park a few blocks away. A Federal District Court judge in New York vacated a proposed settlement between the Securities and Exchange Commission and Citigroup that involved a mortgage securitization in 2007. The Court said that the settlement, which of course permitted Citigroup to neither admit nor deny any wrongdoing, was “neither fair, nor adequate, nor in the public interest.”

Irrespective of the legal niceties involved, in his ruling the judge managed to aptly summarize the feeling of so many Americans that while Wall Street has not really paid for the havoc it contributed to, it’s still getting paid very well—that’s why it’s not fair. Big bonuses are the insult added to the injury.

The answer isn’t as simple as ending the bonus system or shutting down Wall Street. Unfortunately, as economic disparity increases and the only responses from Wall Street are more whistling in the dark and business as usual, scrapping the whole system will continue to be the knee-jerk response from Main Street.

The answer, however, may lie in simple customer—and consumer—advocacy. The tradition of large bonuses on Wall Street isn’t the problem. People get bonuses when they have a good year—and they should. The issue is the definition of a “good year.”

For the most part, these bonuses are entirely dependent on how much money the firm makes and how much money the individual in question contributed to the firm’s bottom line. The MBA who comes up with the riskiest credit default swap generates huge fees that benefit the firm, but might well destroy its customers. In fact, it may harm many individual consumers who would otherwise seem to be unconnected to high finance, as we saw with mortgage-backed securities that contributed to the current housing and foreclosure crises.

Some simple (yet radical) rethinking of Wall Street compensation could fix this. Create new math that awards bonuses based upon a combination of how much money the firm makes as well as how well the firm’s customers have done. This would probably require the pro-ration of bonuses which would then accumulate over a period of two or three years.

The old conventional wisdom is that good people have to be well compensated or they will leave, but perhaps they won’t walk so fast if their bonus is in part stretched out over the length of an employment contract.

While we’re talking about changing the paradigm, how about requiring the investment banks that create exotics and derivatives to participate in the huge risks associated with them, and if and when they fail, penalizing them economically?

It’s time the Street imposed some discipline on its own. By requiring firms to keep a meaningful piece of the risk that they package and sell to investors, the creation of new financial exotics and derivatives would magically be transformed in the public eye from “exotic swindles” to the evolved forms of investment for institutions that they were meant to be.

Wall Street is a place of complex rules—rules that involve the creation of new products, rules that regulate financial activity, and rules that determine both the size of a bonus, and to whom it goes. Maybe the suggestions above would make those rules even more complex (maybe not), but they surely will make them more fair.

Perhaps we should all be reminded of something once said by Senator Jefferson C. Smith: “I wouldn’t give you two cents for all your fancy rules if, behind them, they didn’t have a little bit of plain, ordinary, everyday kindness and a little looking out for the other fella, too.”

Image: shine_blitz_on, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team