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.
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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?
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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."
Adam Levin is Chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.