Shameless Greed Global Rage at Bankers' Bonus Excesses

By SPIEGEL Staff

Part 5: 'I Hate Investment Banking'


In the world of investment banking, everything revolved around the bonus. The base salary, which could easily amount to $150,000 (€115,000) even for newcomers, was treated as little more than compensation for expenses. The true pay for an 80-hour week, for giving up one's personal life and living a life of nerve-wracking stress was the bonus, which could be five or 10 times as much as the base salary. The bonus paid for the luxury, for the Ferraris, the villas and an assortment of excesses.

In the past few years, luxurious condominium buildings have shot up all across Manhattan, futuristic glass towers with small apartments selling for the "starter" price of $2-3 million (€1.5-2.3 million). Their owners were junior traders, most of them Harvard or Princeton graduates in the early- to mid-20s who had found jobs with hedge funds.

Their bosses bought apartments in the most desirable spots along Central Park, where penthouse apartments sold for upwards of $70 million (€54 million). In what is probably the world's most expensive condominium building, a new, neoclassical structure worth a total of $2 billion (€1.5 billion), people like Goldman Sachs CEO Lloyd Blankfein and Citigroup patriarch Sandy Weill live under the same roof with actor Denzel Washington -- who had to make do with an apartment on a lower floor.

Even a Hollywood star can seem downright poor when measured against the earnings of some investment bankers. Year after year, enormous sums of money were being extracted from companies in the form of bonuses.

The bonus mania being pursued by the banks and their employee was so obscene that in December 2006, the climax of the boom, the CEO of Goldman Sachs, Lloyd Blankfein, became concerned about his company's image and urged his employees to practice moderation. "As stewards of the firm's reputation, I ask each of you to remember that our actions -- inside and outside of the office -- reflect on Goldman Sachs," he told employees in a voice mail message. "Even a perception of arrogance hurts all of us."

At the same time, Blankfein was collecting an unbelievable personal bonus of $53 million (€41 million), in addition to his annual salary of $220,000 (€169,000).

Goldman Sachs reported record earnings in 2007. The company expressed its appreciation by paying its employees a total of $18 billion (€13.8 billion) -- an average of $623,000 (€479,000) for each employee. Blankfein earned close to $70 million (€54 million).

In 2007, Lehman Brothers also celebrated the joys of making money and rewarded its employees by paying them $9.5 billion (€7.3 billion), $800 million (€615 million) more than in the previous year.

Not to be undone, Morgan Stanley, despite setbacks resulting from the beginnings of the banking crisis, paid $16.5 billion (€12.7 billion) in bonuses, an 18 percent increase over the previous year. CEO John Mack, who took home $40 million (€31 million) in 2006, had to make do with a modest $800,000 (€615,000) in 2007.

That year, Merrill Lynch CEO Stan O'Neal was sent home -- with a $161 million (€124 million) severance payment. His successor, John Thain, was paid $83 million (€64 million) in his first year on the job.

In 2007, Wall Street paid out more than $30 billion (€23 billion) and London's City €12 billion ($15.6 billion) in bonuses. Was there a financial crisis on the horizon? Perhaps, but the executives kept their cool. Even though his bank was in trouble, James Cayne, the then-CEO of Bear Stearns, remained calm as a cucumber. When his bank reported billions in losses, he was attending a 12-day bridge tournament in Nashville, and he was irritated at having to break it off and hurry back to New York. In the end, he quickly sold off his own Bear Stearns shares for well over $60 million (€46 million), before his life's work fell apart. Half of the money was just enough to buy two apartments in the converted Plaza Hotel on Fifth Avenue, one for his wife and one for himself.

The financial crisis hit Wall Street with full force in 2008, when Lehman Brothers and other big names disappeared. Unmoved, the bankers who had brought on the disaster paid themselves $18.4 billion (€14.2 billion) -- the sixth-largest bonus amount ever paid. In December 2008, the Associated Press reported that $1.6 billion (€1.23 billion) of the money that US taxpayers coughed up to bail out their banks ended up in the pockets of top executives.

Merrill Lynch, sold with an injection of about $230 billion (€177 billion) in government funds, still paid bonuses to its top performers. It quickly decided to pay bonuses worth $3.6 billion (€2.8 billion) early, in December, just before the shareholders approved the sale of Merrill Lynch to Bank of America.

Today the banking industry's reputation is ruined. T-shirts featuring the slogan "I Hate Investment Banking" are currently selling like hotcakes in New York. For years, the Wall Street banks could attract the best and brightest of any university's graduates, but those students will likely look elsewhere in the future. After all, the government now determines what bankers earn -- at least at those banks which are taking money from the government. And that number is growing.

The new bailout plan for the financial industry unveiled by Treasury Secretary Geithner last week expressly put a cap on executive compensation. In the future, banks that accept public funds will not be permitted to pay their senior executives more than $500,000 (€385,000) in annual compensation, bonuses included. Executives in those banks will not be permitted to cash in their stock options until the government's money has been repaid. Even such customary perks as the use of company jets will be subject to radical restrictions.

At the same time, President Obama tried to make it clear that he has no intention of shaking the country's cultural roots. "This is America. We don't disparage wealth," Obama said. "We don't begrudge anybody for achieving success, and we certainly believe that success should be rewarded. But what gets people upset, and rightfully so, are executives being rewarded for failure."

Sources in Washington way that some of Obama's top advisers would have preferred to take things a step further. There was apparently a lengthy debate before Treasury Secretary Geithner managed to prevail over proponents of even tighter restrictions on banker compensation. One proposal under discussion was not only to impose salary limits on executives, but on all bank employees.

For Wall Street, on the other hand, even the watered-down rules go too far. In a recent essay for the Wall Street Journal entitled "Greed is Good," Roy C. Smith, a finance professor at New York University's Stern School of Business and a former Goldman Sachs partner, wrote that bonuses are "an important and necessary part of the fast-moving, high-pressure industry." Wall Street employees "flourish with strong performance incentives," he wrote.

Gordon Brown's close ties to the country's financial elite are probably one of the reasons why the British prime minister has been reserved on the question of bonuses. The government plans to limit such payments to 25,000 pounds ($35,500) for this year. The rest can be paid out in stock, which cannot be sold until all government money has been repaid. Under the program, this would also apply to private banks that take advantage of the government's insurance coverage for bad risks in the future.

With the approval of the next budget in late April, Brown wants to see new laws enacted to ensure that the way bankers are paid is changed. "We are leading the world in sweeping away the old short-term bonus culture of the past and replacing it with a determination that there are no rewards for failure and rewards only for long-term success," he said.

Germany Cracks Down

Even before the current crisis, the German government had long attempted to bring about regulation of excessive salaries, settlements and bonuses. A joint working group representing both parties in the grand coalition government agreed on a number of new rules on Jan. 29. The issues that remained unresolved will be debated on March 4 in the coalition committee.

For instance, the CDU, led by its financial expert Otto Bernhardt, opposed an SPD proposal to limit the full tax-deductibility of executive settlement payments to €1 million ($1.3 million). Under the proposal, only 50 percent of anything above the €1 million ceiling would be tax-deductible.

The conservatives also rejected an SPD proposal to require executives to manage their businesses partly in the interests of their employees and of Germany as a whole.

Justice Minister Zypries, who suspects that there are ideological motives behind the CDU's opposition to the idea, wants clarification from the top. The chancellor, Zypries said, must take a clear stance on the issue.

"At the coalition committee meeting in early March, we will make it clear that we must act," Merkel's challenger Steinmeier said. "The Christian Democrats are still blocking many sensible proposals, but we will judge them by their words and speeches."

The members of the grand coalition do agree, however, that some laws, especially the Stock Corporation Act, need to be tightened. For instance, they want to see a definition formulated on what exactly "suitable" compensation of executives is, as already provided under the Stock Corporation Act today. In the future, they want this suitability to be tied to the performance of the executives, the situation of the company and ordinary compensation. In that case, when a company is doing poorly the supervisory board could easily reduce executive pay without further ado.

In addition, the supervisory board would provide executives with longer-term incentives, based on compensation rules, to curb the practice, widespread among executives, of orienting stock prices and earnings-related decisions toward key dates relevant to bonus payments. In the future, executives would be able to redeem their stock options only after four years, instead of the current two years. In addition, supervisory board members who approve unsuitably high compensation could be held personally liable for damages in the future.

The banks have now recognized that it was precisely the short-term incentives that led to disaster. Many now plan to revise their bonus systems and orient them toward long-term goals. "We are in the process of very carefully considering how salary and incentive systems should look in the future," says Commerzbank CEO Martin Blessing.

He doesn't have much room to maneuver, however. Berlin intends to send two senior officials to represent the federal government on the bank's supervisory board, and they will be paying close attention.

For Deutsche Bank CEO Ackermann, however, this presents an opportunity. "All the banks that can make it without government assistance are happy," he says -- because they can continue to pay salaries and bonuses well above the $500,000 limit Obama imposed on their American competitors.

"The talented ones would be happy to work for us," says the Deutsche Bank chief executive. After all, he says, it's a "people business."

BEAT BALZLI, MARKUS DETTMER, FRANK HORNIG, THOMAS HÜETLIN, ARMIN MAHLER, CHRISTOPH PAULY, WOLFGANG REUTER, MARCEL ROSENBACH, MICHAELA SCHIEßL, THOMAS SCHULZ

Translated from the German by Christopher Sultan

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