Before the infamous Wall Street collapse a few years ago, bankers were pulling in record income. Goldman’s CEO Lloyd Blankfein received a stunning $67.9 million bonus in 2007. Naturally, it would have been impolite to ask him and the rest of the bankers to pay back the big bucks generated from bogus business.
As we wrap up 2012, there’s a lot of worry on Wall Street because the job cuts have continued (30,000 this year, according to Bloomberg), and the pay is reportedly half of what it used to be. As tough as that may sound for most of us, few appreciate how much the bankers were and still are making.
There are a few industries where pay is considerably higher than anywhere else, and banks are at the top – even higher than the fat paychecks in Big Pharma. Generating $400,000 or $500,000 per year is solid, but nothing special for modern bankers. The “London Whale” who lost billions for JP Morgan was certainly making at least seven figures, but there are plenty more making much more in the industry.
What is a generally positive development is that shareholders are now doing a “Wall Street” to Wall Street. They are demanding cuts by the banks and more rewards for buying their stock. Tired of low returns, shareholders want their pound of flesh from Wall Street, and to a degree, they’re getting it. Bloomberg:
Citigroup, the third-biggest U.S. bank by assets, climbed 4.8 percent in the two days after its board ousted Chief Executive Officer Vikram Pandit, 55. Earlier this year, shareholders cast a non-binding vote rejecting Pandit’s compensation package. The stock also jumped 6.3 percent when his replacement, Michael Corbat, 52, said the New York-based bank would cut 11,000 jobs.
After Switzerland’s UBS said it would jettison most of its fixed-income business and cut as many as 10,000 jobs, the Zurich-based bank’s stock price climbed above book value for the first time in 15 months. Many of its rivals, including JPMorgan and Goldman Sachs, haven’t traded above that level all year. Book value is an estimate of how much the bank’s assets would be worth minus all of its liabilities.
Even after gains this year, shares of the nine banks still trade at depressed levels as investors question their ability to boost profits. Total return to shareholders, which includes price gains as well as dividends, has been negative since the end of 2008 at Charlotte, North Carolina-based Bank of America, Citigroup and Credit Suisse. Only Barclays has beaten the S&P 500 Index (SPX) in that period.
Just as those on Wall Street rewarded companies like GE during the Jack Welch years for chopping the workforce, investors are now rewarding banks that chop their workforce. It’s an important change and one that has stuck in my mind for a while. The compensation percentages at the big banks still makes up a very high percentage of overall revenue, typically in the mid to high 30’s as a percentage of net revenue.
While investors are forcing Wall Street to chop costs like other industries, Wall Street is still looking at a better bonus season than last year, though overall pay may decline.
Even if the total pay levels were flat, it still is highly unfair to everyone else who is being asked to keep paying for the mistakes of the Republicans and George Bush. The rumor is a tax increase for those above $400,000 per year in exchange for modifications to Social Security which hurt the middle class.
The class warfare by The 1% continues and the reform, while more obvious this year, still doesn’t go far enough. Just as it’s unsustainable for Wall Street to punish investors by paying such high levels of compensation, asking the middle class to fund foreign wars (both financially and with bodies) and irresponsible tax cuts is not sustainable. At one point, the political class needs to step it up and force those responsible to pay for their mistakes.