The fat cats were supposed to get their comeuppance.
After Wall Street's most prominent firms — by their own admission — helped cause the 2008 financial meltdown and got bailed out by the government, they were supposed to stop handing out million-dollar bonuses to their employees. No one was supposed to get seven- and eight-figure rewards, not after the Great Recession left one in 10 Americans unemployed. Not after President Barack Obama — who on Thursday called such pay "obscene" — had promised to clamp down on lavish bonuses.
It turns out little actually changed.
Americans will see that starting Friday when JPMorgan Chase & Co. releases its 2009 financial results. The other big banks will follow. The messages will be the same: compensation is at near-record levels.
The form of the pay is changing. Instead of cash, bonuses will be paid mostly in stock that can't be redeemed for years. But the numbers are still staggering. Together, the six biggest U.S. banks are on pace to pay $150 billion in total compensation for 2009, slightly less than the record $164 billion in 2007 before the financial crisis struck, according to the New York state comptroller's office.
How this happened is complicated, like most things involving Wall Street and Washington. It involves a remarkable financial turnaround by the banks, but one that was fueled by the federal bailout. It shows the power of the financial lobby. And it highlights the age-old debate about how much U.S. companies need to pay to retain talented bankers and traders.
Scott Talbott of the Financial Services Roundtable says keeping those workers from going to overseas firms is critical.
"The market will find a way to pay these people what they're worth," says Talbott, who is chief lobbyist for the industry group representing some of the largest financial firms. "This is not a giant talent pool. There's only a few people who can catch a touchdown in the Super Bowl."
But others aren't so sure most Americans buy that. Says Douglas Elliott, a fellow at the Brookings Institution and a former investment banker, referring to the government's bailout money: "The way the general public sees it is that we wrote a $700 billion check to the banks, and they got to burn through it as they pleased."
Here's a look at how the clamor for reform ended up the way so many previous efforts did — with the triumph, for now, of Wall Street's bonus culture. And a look at what may lay ahead.
— The bailout
The government played a big role in the compensation bonanza by bailing the banks out.
In the days after the financial meltdown, banks were given access to cheap government loans and other federal subsidies. Since the banks weren't required to put that money toward lending to businesses and consumers, they could use it as they pleased.
Many bet on risky securities that paid off when the financial markets surged. The result: Big profits and big bonuses because pay on Wall Street is tied to performance.
Profit at Goldman Sachs Group Inc. nearly doubled to $8.4 billion during the first nine months of 2009 from the previous year's level, and analysts expect its full year profits to top $10 billion.
Goldman set aside $16.71 billion from January through September for compensation, which includes salaries, bonuses and associated costs such as benefits and payroll taxes. That puts it on pace to meet the record $20.2 billion in compensation costs it had for all of 2007.
Should Goldman's annual compensation go that high, it would work out to more than $600,000 each for its 31,700 employees. It won't be distributed that equally, of course. The best performers and executives stand to earn millions.
"What we've allowed is for the banks to be nursed back to help with various forms of assistance provided by the government, but they haven't been required to change their ways," said Rep. Brad Miller, a Democrat from North Carolina.
The nation's biggest banks all took money from the $700 billion Troubled Asset Relief Program. Some needed it to survive, while others were pressured by federal officials to take it. Regardless, the banks weren't restricted in how they had to spend the bailout funds.
They did face limits on compensation, including for bonuses. But that only lasted for as long as they held the bailout funds, which gave them an incentive to pay the TARP back fast. That happened by June. In total, the banks took $245 billion from the TARP, and have already paid back $162 billion.
Appearing Wednesday before a congressional panel probing the financial crisis, several Wall Street chiefs, including Goldman CEO Lloyd Blankfein, acknowledged that taxpayer help likely prevented the industry's collapse.
—Wall Street's lobbying machine
Bonus outrage and the momentum to do something about it peaked last February when crippled insurer American International Group Inc. moved to pay $165 million in bonuses to hundreds of employees in the same financial unit that brought down the company. Treasury Secretary Timothy Geithner called Wall Street pay "out of whack" and vowed to rein in the practice.
The fact it didn't happen speaks to the industry's powerful lobbying machine, which is spending millions to fight a raft of financial reform measures, including proposals to tax or limit lavish pay packages.
During the past decade, no industry has spent more lobbying dollars than Wall Street and its related offshoots.
From 1998 to 2009, the so-called FIRE lobby — or finance, insurance and real estate — spent $3.8 billion promoting its interests in Washington, according to the Center for Responsive Politics. By comparison, the energy and defense industries spent $2.6 billion and $1.08 billion, respectively, during the same time.
Meanwhile, Wall Street's generosity to political candidates ramped up even as the industry began careening toward collapse in 2008. Financial firms contributed a record $476 million in the last election cycle. That's more than double the No. 2 donor, the health care industry, which gave $166 million, even as Congress began to debate landmark health care legislation.
The most lavish Wall Street donor during the last election: Goldman Sachs, which gave $5.8 million, followed by Citigroup Inc. and JPMorgan Chase. All three banks gave more heavily to Democratic candidates, reflecting the shifting power in Washington.
"The bank influence in Washington is shocking," said Ira Rheingold, executive director of the Washington-based National Association for Consumer Advocates. "They still spread a lot of money around here, and it appears nothing has really changed."
Financial lobbyists say the industry has taken many steps to curb excessive pay, including adopting "clawback" provisions to recover undeserved pay and shifting more money into deferred stock instead of cash.
— What's next
Washington is now scrambling to get something done to temper the populist anger. The financial lobby still could block those efforts.
The Obama administration is proposing a 10-year tax on the country's largest banks to cover a projected $117 billion shortfall in the government's bailout fund.
The Federal Reserve is reviewing a plan that would give it more oversight on compensation by reviewing pay practices at thousands of banks. The central bank would be able to veto plans it found encourage excessive risk-taking by executives, traders or loan officers.
The Federal Deposit Insurance Corp., which regulates most of the nation's banks, is seeking public input on a plan that would tie the fees that banks pay for deposit insurance to how much a company's compensation plan encourages workers to take risks in order to achieve higher returns.
A few in Congress want to go further. Rep. Dennis Kucinich, D-Ohio, on Tuesday introduced legislation to impose a 75 percent bonus tax on what he sees as windfall profits earned from massive taxpayer support of the financial services industry.
Britain and France recently announced plans for a similar tax. Few expect the measure to be adopted in the U.S., although Kucinich is betting that the public's "pent-up frustration" could build momentum to pass his legislation.
"What you're seeing is a public-be-damned attitude from the banks," Kucinich said. "They're rolling in dough while the taxpayer has to sacrifice."
"That's an outrage," he added. "It's like, welcome to the new gilded era."
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