Citigroup Inc., Merrill Lynch & Co. and seven other U.S. banks paid $32.6 billion in bonuses in 2008 while receiving $175 billion in taxpayer funds, according to a report by New York Attorney General Andrew Cuomo.
Cuomo analyzed 2008 bonuses at nine banks that received Trouble Asset Relief Program financing from the U.S. government. New York-based Citigroup and Merrill, which has since been taken over by Bank of America Corp., received TARP funding totaling $55 billion, Cuomo said.
“When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well,” Cuomo’s office said in the 22-page report. “When the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.”
The study, called “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture,” comes as Congress and the Securities and Exchange Commission examine whether to limit the compensation paid to top corporate executives.
“One senior bank executive noted recently that individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm,” according to the Cuomo report.
Upside, Downside
“As this executive put it, ‘employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.” But despite such claims, one thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees,” the report said.
Wall Street firms’ pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. paid out a total of $18 billion in bonuses in 2008 while receiving a combined total of $45 billion in taxpayer dollars through TARP. Together, the three firms earned $9.6 billion last year, Cuomo said.
Top Recipients
The top 200 bonus recipients at JPMorgan Chase & Co. received $1.12 billion last year, while the top 200 at Goldman received $995 million. At Merrill the top 149 received $858 million and at Morgan Stanley, the top 101 received $577 million. Those 650 people received a combined $3.55 billion, or an average of $5.46 million.
JPMorgan Chase had 1,626 employees who received a bonus of least $1 million last year, more than any other Wall Street firm, according to the report. Goldman Sachs had 953 employees who received $1 million or more in bonuses, while Citigroup Inc. had 738, Merrill Lynch & Co., 696, and Morgan Stanley, 428. Bank of America Corp. had 172, while Wells Fargo & Co. had 62.
Kristin Lemkau, a spokeswoman for JPMorgan Chase, Mark Lake, a spokesman at Morgan Stanley, Jeep Bryant, a spokesman for Bank of New York Mellon, and Michael DuVally, a spokesman at Goldman Sachs, all in New York, declined to comment. Carolyn Cichon, a spokeswoman for State Street, and Citigroup spokesman Stephen Cohen didn’t immediately return a call for comment.
Pay for Performance
Melissa Murray, a spokeswoman for Wells Fargo, declined comment on the report itself. She said the company has a “pay- for-performance” culture where staff are compensated on individual and business performance. “We implemented a say on pay policy this year and our shareholders approved the compensation of the Company’s named executives,” she said.
Citigroup and Merrill Lynch suffered losses of more than $27 billion at each firm, the report said. Yet Citigroup paid out $5.33 billion and Merrill $3.6 billion in bonuses.
“We have put forth guidelines to better link pay to long term performance and effective risk management,” said Travis Larson, a spokesman for the Washington-based Securities Industry and Financial Markets Association. “That includes the ability to recover bonuses from employees if those bonuses turn out later to be improper.” The industry association put out its guidelines in June and member firms are working to incorporate them, he said.
Wall Street Pay
The report shows the more bonus-laden compensation styles of the four major Wall Street banks compared with retail banks such as Wells Fargo & Co. and Bank of America that employ far more people whose main compensation is typically salaries.
Bonuses averaged $160,420 for Goldman Sachs’s 30,067 employees, compared with $13,580 at Bank of America, employer of 243,000 people, the report said. Bonuses averaged $95,286 per employee at Morgan Stanley, $61,017 at Merrill Lynch and $38,642 at JPMorgan Chase & Co., which operates large retail and investment banking units.
At Wells Fargo, the fourth largest bank holding company after acquiring Wachovia Corp. last year, bonuses averaged $3,479 for the company’s 281,000 workers, according to the report.
Goldman produced the most in earnings per employee -- $77,228. In contrast, Merrill had the worst revenue performance, losing $467,797 per employee in 2008 while handing out an average bonus of $61,017, the third highest payout, the report said.
“The data that the attorney general has extracted is far more granular and detailed than anything that we might get from financial filings from these firms, so it’s extremely interesting in that respect,” said Paul Hodgson, a senior research associate for executive compensation at The Corporate Library in Portland, Maine. “The SEC may have a stronger platform to argue for disclosure of compensation for employees that earn in excess of a certain amount.”
TARP Pay-Back
Goldman and Morgan Stanley, credit-card lender American Express and custody banks State Street Corp., Bank of New York Mellon Corp. and Northern Trust Corp. paid back a combined $30 billion in TARP funds on June 17, in a step toward eliminating government restrictions on lending and compensation. JPMorgan Chase paid back $25 billion.
The U.S. House Financial Services Committee, led by Massachusetts Democrat Barney Frank, approved legislation two days ago that would let regulators ban incentive pay at banks and give shareholders a vote on bonuses in response to public outrage over Wall Street pay.
Egregious Behavior
The bill, which needs approval from the House and Senate, would allow banking agencies and the Securities and Exchange Commission to bar compensation practices that push financial companies to take “inappropriate risks.”
Frank said today in a telephone interview that the House tomorrow will consider his legislation to allow shareholders to hold an annual, non-binding vote on executive pay and require regulators to set pay restrictions that prevent excessive risk taking.
“Attorney General Cuomo’s report on executive pay at companies receiving taxpayer bailouts is shocking and appalling,” said House Committee on Oversight and Government Reform Chairman Edolphus Towns, a Democrat from New York. “Companies that only months ago were facing bankruptcy and sought the help of the Federal government are now paying out billions in compensation -- and in some cases without reimbursing taxpayers. This egregious behavior proves that Wall Street still doesn’t get that times have changed and the old way of paying executives is long gone.”
Part of Their Lives
Towns said in a letter to Cuomo that he would hold a hearing after the August recess to examine the Obama administration’s reforms in pay practices at companies that received TARP funds.
In October, industry veterans including John Gutfreund, president of New York-based Gutfreund & Co. and the former chief executive officer of Salomon Brothers Inc., said Wall Street would insist on paying bonuses in the face of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry.
Odds that Wall Street will forgo the payouts are “slim to none,” Gutfreund said in October. “They’re going to have to be a little bit sensitive because politicians, whether they like it or not, are part of their lives now.”
To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net.
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