Bailed-Out Banks Dole Out Bonuses

Despite monumental losses, several bailed-out banks give out season bonuses.

December 19, 2008, 5:17 PM

Dec. 19, 2008— -- When the nation's chief financial officers begged Congress for $700 billion of taxpayer money, they said it was about saving banks. They didn't say anything about saving bonuses.

Despite monumental losses, some Wall Street firms will still be giving out big bonuses this year -- even firms that were bailed out by the government.

Goldman Sachs, which accepted $10 billion in government money, and lost $2.1 billion last quarter, announced Tuesday that it handed out $10.93 billion in benefits, bonuses, and compensation for the year.

Goldman Sachs noted that the figure is down 46 percent from a year ago and that seven of its senior executives are forgoing bonuses this season.

"Bonuses across Goldman Sachs will be down significantly this year," a bank representative told ABC News. The spokesman refused to disclose the size of the bonus pool or how much of the compensation fund of $10.93 billion was planned for bonuses, but some employees are reportedly being given more than $200,000 in cash.

Morgan Stanley is in the same boat, having received $10 billion in government money. Their bonus pool this season is around $2 billion, according to a report in the New York Times. That figure is down 50 percent from last year.

Many people wonder why the banks' bonus pools would even be $1 this year.

"The banks are broke. They shouldn't be paying out bonuses this year," said Peter Morici, economist and business professor at the University of Maryland. "They're begging at the Treasury door. I don't understand why a waitress in Indiana should send her money to fund a million-dollar bonus on Wall Street."

"It looks like Goldman Sachs is treating this as business as usual," said compensation expert James Reda. "They are taking our taxpayer money. They should be able to account for that money."

Banking insiders argue that bonuses are part of their business model -- an accepted part of basic compensation and a key to the banks' viability.

"Why be pennywise and pound foolish. You want your good people, you want them motivated. And that is why they are paying bonuses," said Steve Kaplan, professor of finance at the University of Chicago.

Bailed-Out Banks Mum on Public Funds

Banks that were rescued with billions of dollars in public funds have, in most cases, refused to provide specifics about how they have used or intend to use the money.

ABC News asked 16 of the banks that have received money from the Treasury Department's $700 billion Trouble Asset Relief Program the same two questions: How has your financial institution used the money, and how much has your financial institution allocated to bonuses and incentives this year?

To read the banks' responses, click here.

"We do not break down the components of compensation; however, most of that number was not bonuses," the Goldman Sachs spokesman said, adding, "TARP money is not being paid to employee compensation. It's been and will continue to be used to facilitate client activity in the capital markets."

But Congress was told the banks needed the money for survival. If they had not survived, would they be paying bonuses?

"What's missing from this report is the exact amount of bonuses that were paid," Reda said. "They're hiding the ball."

Fred Cannon, chief equity strategist with Keefe Bruyette & Woods, an investment bank that specializes exclusively in financial services, said, "It is difficult to say what the TARP funds are directly used for. In terms of compensation, while TARP funds may not directly pay for compensation, the funds do provide additional overall cash to the companies."

Only One Bank Cited a Loan It Made

Of the 16 banks that were contacted by ABC News and asked how they were spending the hundreds of billions of taxpayer dollars, only one bank pointed to a specific loan that it made with the cash. That was a $17 billion loan that Morgan Stanley helped to make (with partners Bank of America and Citigroup) to Verizon Wireless.

Morgan Stanley, which received $10 billion from TARP, released its quarterly finances Wednesday. The bank announced a dramatic and larger-than-predicted $2.37 billion quarterly loss but an overall year-end profit of $1.59 billion. That was down 49 percent from last year. The bank's stock price dropped 72 percent this year.

In response to an ABC News e-mail request, Morgan Stanley spokesman Mark Lake confirmed that bonuses are down "approximately 50 percent."

Apart from the Verizon loan cited by Morgan Stanley, the banks declined to detail how they were using the federal funds.

"TARP money doesn't go into bonuses," Lake said in an e-mail to ABC News.

Wells Fargo said that of the $25 billion it received, it "cannot provide any forward-looking guidance on lending for this quarter [and] intend[s] to use the Capital Purchase Program funds to make more loans to credit-worthy customers."

More typical was the generic response by the Bank of New York Mellon, which said of the fortune it had banked in public moneys: "Using the $3 billion to provide liquidity to the credit markets."

Congress and fiscal watchdogs have been frustrated and upset that the banks do not have to account for the way they are spending these publicly financed bonanzas.

The U.S. Treasury has spent or committed $335 billion of the $700 billion in the TARP fund in an attempt to get banks back in the lending business and to unfreeze the nation's credit markets.

Last week Congress was angered to learn that giant insurance company American International Group, which received $150 billion in TARP cash to stay afloat, was paying more than $100 million in "retention bonuses" to 168 employees.

That revelation prompted Rep. Elijah Cummings, D-Md., to complain, "It's absolutely and incredibly wrong that we don't have more transparency."

All the Banks That Got TARP Cash Indicate They Are Paying Bonuses

While several banks said that its top executives would skip bonuses this year or its compensation pool was smaller this year than in past years, all indicated that some end-of-year compensation was in the works.

When asked how much the banks were paying out in bonuses and whether TARP funds would be used to finance them, most of the banks did not make such a declaration.

"Incentive compensation not yet allocated," was as far as JP Morgan Chase, which received $25 billion from TARP, would go.

Bank of America, which got $15 billion from TARP, said only, "Have reduced the incentive targets by more than half. Final awards have not been determined."

State Street Bank ruled out using TARP to reward its top officers.

"Will not use any of the proceeds from the TARP Capital Purchase Program to fund our bonus pool or executive compensation," the bank insisted.

Cannon said the banks are being very conservative with their money.

After reviewing the statements the banks provided to ABC News he said, "The banks are expressing good intention in line with the good intention of the program. However, the answers from the bank belie the current challenge; the economy is deteriorating rapidly and making good loans, with strong underwriting into an economy that is falling apart is very difficult."

ABC News' MaryKate Burke contributed to this report.

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