Wall Street Payouts and Pitchfork Populism
I know it’s not helpful to have knee-jerk reactions to Wall Street pay, given that compensation is often more complicated than portrayed, but there’s no subtlety here: Bailed-out financial firms are on track to pay their employees as much, or more, than they were rewarded with during the pre-crisis days, The Washington Post reports.
Here are the numbers:
So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year.
Not surprisingly, this development has sparked plenty of outrage:
The increase in set-asides for employee pay has raised the ire of Washington, where lawmakers denounced financial leaders for returning to old habits and vowed to enact measures governing executive compensation.
“It strengthens our commitment to getting legislation passed,” Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview Wednesday, adding that a committee vote on a bill to increase oversight of Wall Street pay has been scheduled for Tuesday. “The amounts are troubling.”
Troubling is one way to put it. There are two big problems with Wall Street compensation that looks out of line with the nation’s grim fiscal reality. First, unemployment keeps rising and the prospect of a jobless recovery appears more likely every month. If ever there were a recipe for Main Street resentment, this would be it: jobless Americans watching the traders and executives they blame for the crisis raking in huge paychecks. No nuance here.
Second, as Clusterstock points out, when Goldman Sachs reports blowout numbers, as it just did — a record $3.4 billion quarterly profit — and Morgan Stanley records a $1.2 billion loss, analysts tell Morgan Stanley to take more risk.
It’s all clear. The fear is not insolvency. That’s long gone. The fear is not capturing enough upside.
At Time, Justin Fox explains that there are more substantive reasons to criticize Goldman or JPMorgan Chase than just the profits:
The teams at Goldman Sachs and JPMorgan Chase avoided giant missteps in the lead-up to last fall’s panic and are now wresting market share from wounded competitors and raking in billions. They’ve already paid back the bailout funds they got in October, which means they’re exempt from compensation limits and can disburse their gains to employees in the form of titanic end-of-year bonuses. That’s how capitalism is supposed to work, right?
Well, yeah, except that Goldman and JPMorgan played right along with many of the Wall Street practices that led to the crisis. They fought regulation — of derivatives, for instance — that might have prevented it. And their big profits can be traced not only to skill but also to the government’s decision last fall to bail out the financial sector just as the troubles that toppled Lehman Brothers and WaMu and forced Bear Stearns, Merrill Lynch and Wachovia into shotgun marriages began to endanger Goldman and (to a lesser extent) JPMorgan. “No one should be confused about the extent to which the public sector has provided a foundation for financial recovery,” White House economic czar Larry Summers said after Goldman and JPMorgan reported their stellar second-quarter earnings.
Now the question, as Fox notes, is whether Goldman and JPMorgan will repeat their past practices and put their highly compensated employees to work once again, fending off financial regulation from Washington.
Should that occur, it would provide the fuel for the return of pitchfork populism, even beyond huge profits and excessive compensation. The backlash won’t be subtle. And should bailed out banks leverage their taxpayer dollars to sway Washington in their favor, it won’t be the wrong approach, either.