Shameless Greed Global Rage at Bankers' Bonus Excesses

Banks around the world may have made huge losses and be reliant on state bailouts to survive, but they're still paying out huge bonuses to their top staff. The popular outcry against the greed is growing -- but few bankers are willing to go without the cash.
Von SPIEGEL Staff

Investment banker Stefan Jentzsch was far away, recovering from the exertions of the previous year on a yacht somewhere in the Caribbean, when the banks almost collapsed -- and his world fell apart.

The past has since caught up with him back at home, where his name is in the papers almost every day. Jentzsch, 48, has suddenly gained notoriety as the man who was still raking in millions after his bank had lost billions, and as the man who is responsible for bonus payments that amounted to €400 million ($520 million) -- costs that German taxpayers will now have to bear.

Jentzsch was the head of Dresdner Kleinwort, an investment bank that was never terribly successful and, in fact, did particularly poorly last year. For the first nine months of 2008, it registered a loss of €2.2 billion ($2.86 billion). The bank's loss for the entire year will be significantly higher, because the decline only accelerated in the fourth quarter. Dresdner Bank, Kleinwort's parent company, ran into financial difficulties and was acquired by rival Commerzbank, which had its own problems and had to be bailed out twice by the government.

By that time, Jentzsch had already said his goodbyes and had taken with him a severance payment of about €8 million ($10.4 million), a golden handshake that was completely legal and to which he was entitled. He is also entitled to a bonus worth an unknown amount. But now that he has become a household name, Jentzsch claims that he no longer wants the bonus.

When Jentzsch was still at the helm of Dresdner Kleinwort, he made sure that its then-owner, insurance giant Allianz, guaranteed its investment bankers bonus payments for 2008 totaling €400 million ($520 million).

The bonuses are now due, even though the government has since acquired 25 percent of Commerzbank  and has had to spend €18.2 billion ($23.7 billion) bailing out the bank, an amount that could still end up not being enough.

Jentzsch has become the face of public outrage over bankers who destroyed billions and ruined the economy, all the while taking steps to ensure that they were sitting pretty -- bankers who have unloaded the disastrous results of their actions on the public's doorsteps but are doing nothing to help alleviate the problems. In fact, some are even reaching into the government's pockets.

There are many people like Jentzsch nowadays, all over the world. Every country has its own Jentzsch, and citizens everywhere have been overcome with anger and helpless fury . The bonus payments are an especially sore point. Though small compared with the total extent of the damage caused by investment bankers, which numbers in the trillions, they exemplify the greed and shamelessness of a profession once seen as part of society's elite.

"The common good depends on a certain level of moderation in the individual," says German Interior Minister Wolfgang Schäuble, a member of the conservative Christian Democratic Union (CDU). "Such excesses are the expression of a loss of connection with reality, and they threaten the basic consensus of our society."

Social Democratic Party (SPD) chancellor candidate Frank-Walter Steinmeier agrees: "I keep being shocked by the loss of any sense of reality and the cynicism of some leading executives. Executives are role models -- in both good and bad aspects."

Rarely has public outrage been so unanimous, reaching from the citizen on the street into the cabinet, from Chancellor Angela Merkel  to US President Barack Obama.

"It is incomprehensible that banks helped out by the state in many cases pay out huge sums in bonuses," says Merkel. Executive bonuses will also be a subject of discussion at the G-20 summit in London in early April. "Overall the bonus system must be linked to the truly sustainable success of the banks in an internationally more transparent way."

The subject of bonuses has given a new impetus to the discussion of executive salaries and compensation that has long worried the politicians in the two parties that make up Berlin's grand coalition government, the SPD and the CDU. Federal Justice Minister Brigitte Zypries, who earns a net monthly salary of about €8,000 ($10,400) and, as the daughter of a pharmacy owner, tends to favor the pro-business wing of the SPD, wants to see more "social responsibility" and the "awareness of an honorable businessperson" among Germany's business elite.

Zypries said she is astonished that "bonuses are paid essentially as part of fixed salaries, and they are even earned when a company is on the brink of bankruptcy."

Labor Minister Olaf Scholz has been traveling around Germany for weeks, meeting with company executives and urging them not to lay off employees despite the crisis and declining orders and sales. Scholz too finds executive greed hard to believe, saying that in firms "where employees are accepting reduced working hours and wages, generous bonuses cannot be paid."

For Consumer Protection Minister Ilse Aigner, the bonus payments represent one of the triggers of the crisis. "When bank customers must accept losses, those responsible for the losses should not be rewarded," says Aigner, a member of the conservative Christian Social Union (CSU).

The grand coalition has rarely been this united. Bankers have now gambled away any moral capital they may once have had, so much so that some now refer to members of the profession as "banksters" -- gangsters in pinstriped suits. They were once known in German as Bankiers and were considered the gentlemen of the business world. Then Germans began using the English word "banker," which sounded more modern. But as the name changed, so did the profession's self-image. The new bankers emulated their Anglo-American role models, the luminaries of Wall Street.

Banks shifted their focus to making profits instead of supplying credit to the economy. As returns rose, so did the risks. Avoiding those very risks had been the profession's supreme objective in the age of the gentlemen bankers.

But in the age of investment bankers, a new rule applied: the bigger the risks, the better. Risk seemed manageable, thanks to sophisticated products and mathematical models. But the complexity of those models only gave the illusion of security.

Didn't anyone ever step back and ask themselves whether this brave new world where there were no real risks could even be possible? Or were such questions simply suppressed because an honest answer would have jeopardized the bankers' own lifestyle?

For a long time, everyone benefited from the system, including investors both large and small. But most of all the investment bankers themselves profited. With the help of increasingly absurd salary- and bonus systems, they managed to funnel 50 percent of all profits into their pockets. The sums involved ran into billions.

What began as a perfectly sensible way to share profits developed more and more into a system of unrestrained greed.

The Illusion of Value

When Henry Paulson resigned from his job as CEO of the investment bank Goldman Sachs in June 2006 to serve as the US treasury secretary, he received a generous bonus of $18.7 million (€14.4 million). He was also permitted to sell his accumulated Goldman stock, worth $480 million (€369 million), earlier than had originally been stipulated.

Half a billion dollars, for one person, earned in only a few years -- what kind of work could be worth that much money?

None, not even honest work. But the activities of investment bankers had nothing to do with honest work, because the value that they created was merely an illusion. It was achieved on the basis of risks that would eventually bring down the entire system.

It is an irony of history that it was Henry "Hank" Paulson who, as treasury secretary of the United States, was called upon to fix the problems that members of his own profession created in the first place. Following the bankruptcy of Lehman Brothers, one investment bank after another began to falter, and they were forced to flee into mergers or modify their business models and accept government money.

Paulson drummed up $700 billion (€538 billion) to avert the worst, but it wasn't enough. Now his successor, Timothy Geithner, plans to invest another $2 trillion (€1.5 trillion) in the ailing financial system -- money that the government doesn't have. No one knows whether it will help prevent the economic collapse of the country and the global economy. And no one knows how the government will ever be able to pay off the debt it must now take on.

The situation in Great Britain and Germany is not all that different. The governments there are approving bailout packages for previously unheard of sums, and they are investing in banks, some of which are being more or less nationalized.

The coalition government in Berlin has even drafted a law that would allow the country to expropriate shareholders of Hypo Real Estate.  The crisis-ridden Munich-based mortgage lender is constantly requiring new government loan guarantees and aid and has already received €102 billion ($131 billion) from the state.

Even if the governments manage to avert the worst and stabilize the banks, the world economy is experiencing its worst crisis since the Great Depression of the 1930s.  All of this is the consequence of a system that investment bankers invented, and from which they have benefited the most.

But the bankers deny their own culpability and refuse to do anything to atone for their sins. Even though many banks would have gone under without government help, it has only occurred to a very few bankers that they should pay back their bonuses, which are based, after all, on illusionary results.

Last November, German President Horst Köhler gave bank executives a piece of his mind. In a speech at the European Banking Congress in Frankfurt, he called upon the assembled members of the banking elite to go without their bonuses and use the money to help those affected most by the crisis instead.

"Those in your industry who made a lot of money as a result of the developments of the last few years could send a special message of solidarity by contributing to a fund," Köhler said at the time. Last week, he reiterated his proposal and noted how disappointed he was to see that not one bank executive had taken him up on his idea.

There are many, on the other hand, who are doing their utmost to hang on to their cash.

In the summer of 2007, IKB, a bank that lent money primarily to small and medium-sized businesses, was the first German bank to be hit by the financial storm. The provincial bankers had gambled in the US mortgage market, and IKB was only saved with the help of a bailout package paid for by banks and the government. After that, almost the entire management had to go.

The new management had IKB's balance sheet recalculated for the critical period 2006-2007. Suddenly the bottom line was much worse than before. The logical consequence was to demand repayment of bonuses that had already been paid out. But the then-chairman, Stefan Ortseifen, sued the bank over his dismissal and refused to repay €805,000 ($1,046,000) in performance-based bonuses. Joachim Neupel, another former member of the executive board, also refuses to relinquish his €451,000 ($586,000) bonus, which was to be deducted from his pension. A court in Düsseldorf ruled in Neupel's favor.

While Neupel and Ortseifen have challenged their employers' demands for repayment of bonuses, other former colleagues are more understanding. At the end of last year, Volker Doberanzke and Markus Guthoff each returned about €500,000 ($650,000) to IKB -- naturally without acknowledging any guilt whatsoever.

In Switzerland, Peter Wuffli, the former CEO of UBS, returned €8 million ($10.4 million), and in late November former UBS president Marcel Ospel and two other senior executives agreed to waive their claims to payments totaling €22 million.

But what is this compared with the sums these bankers earned throughout their careers, and compared with the massive loss of more than €12 billion ($15.6 billion) that the bank made last year? The Swiss government was also forced to step in, and yet the bank, to the dismay of citizens and politicians, is paying out €1.4 billion ($1.8 billion) in bonuses for 2008.

"One can only distribute what one has earned," says Martin Blessing, the CEO of the now partially government-owned Commerzbank. "Companies that lost money should not be handing out bonuses."

A bonus, Blessing said in a speech to owners of small and medium-sized businesses, is "a supplementary payment that is based primarily on a company's overall economic success, and secondarily on personal performance -- in that order."

This sounds obvious enough, and yet it isn't, especially not in Blessing's case. Dresdner Kleinwort's 5,500 investment bankers received a commitment from their old employer, and now they are waiting for their last, big check.

The investment bankers at Dresdner Bank are not amused by the fact that Commerzbank is now reexamining each employment contract, partly in response to pressure from the federal government. "Allianz promised us a bonus pool. This was included in the purchase price for Dresdner Bank," says one senior manager.

The executive personally expects a bonus worth millions, because business, he says, was not all that bad in his division. If he does not receive the bonus, he plans to sue. His former co-workers are also gearing up for litigation, and he predicts that the labor courts will be flooded with "hundreds of cases."

Most investment bankers have little left to lose. According to one human resources consultant, 88 of the bank's 90 stock analysts in London were let go last week. Commerzbank plans to slash a total of 1,300 jobs in Dresdner's investment banking division. The bankers, for their part, acknowledge the brutality of the business with a shrug of the shoulders. Nevertheless, they insist on the pay to which they believe they are entitled. Even those who have already lost their jobs are still waiting for their bonus letters, which usually consist of a single sentence and a number.

At Deutsche Bank, most of the letters have already been distributed, as part of a ritual that takes place every year. The department manager summons each individual trader into his small glass box next to the trading room and hands over an envelope. Anyone who does not receive a bonus basically knows that he should start looking for a new job.

Instead of the €400 million ($520 million) distributed at Dresdner Kleinwort, Deutsche Bank handed out €3.5 billion ($2.7 billion) to its investment bankers. From secretaries to derivatives specialists, employees received an average of €234,085 ($180,065) each. This amount also includes base salaries, which often make up only 10 to 20 percent of total compensation at the upper levels of management.

Is €234,085 a lot of money or a little? It depends on one's point of view. In the previous year, the average at Deutsche Bank was €413,204 ($317,849). Investment bankers are not unaffected by a drop of more than 40 percent.

On the other hand, Deutsche Bank's investment bankers were responsible for a pretax loss of €7.4 billion ($9.6 billion). CEO Josef Ackermann owes it to his more stabile business units, like the consumer-banking division, that the overall loss was limited to €3.9 billion ($5.1 billion).

Top Deutsche Bank executives like Anshu Jain or Michael Cohrs, who can earn up to €20 million ($26 million) in a good year, are going without their bonuses this year. "Many others didn't receive a bonus either," says Ackermann. Traders who speculated with the bank's capital in stock markets or with structured loans went home empty-handed this time. The stars, some of whom earned more than Ackermann in past years, are now leaving the bank.

Other investment bankers continued to make a killing. Those who traded in German government bonds were able to earn a lot of money. Liquid securities like government bonds were in demand, as were smart traders with contacts. Hardly anyone seemed to care that the securities trading business managed by Jain was incurring high losses.

Deutsche Bank can do as it pleases, especially since it has not applied for government bailout money. Nevertheless, it relies indirectly on the fact that governments around the world have used trillions in public funds to protect the financial system from total collapse -- otherwise Deutsche Bank would no longer exist. Besides, Deutsche Bank was one of the major players in the market for the highly speculative transactions that ultimately triggered the financial crisis.

Sorry Seems to Be the Hardest Word

People like Boaz Weinstein, 35, helped to shape the bank's image. The New York-based banker is a talented chess player and a gifted gambler. Late at night, when the screens in the trading room went dark, he and his boys played poker. Whoever put a $100 bill on the table could be in the game.

Weinstein started working for Deutsche Bank at the age of 24 as a specialist for credit insurance, and at 27 he became one of the youngest directors Deutsche Bank had ever had. The market in credit derivatives, or CDS, was young and exciting, and hardly anyone in faraway Frankfurt understood it. It sounded like insurance. Weinstein used mathematical formulas to map out risk. Everything seemed great.

Because business was going so well, the bank kept funneling more and more capital to its star trader. It also took on risk of its own; after all, the dull business of consumer banking was something any neighborhood savings bank could do.

Deutsche Bank's dealers were entrusted with funds running into tens of billions to go on gambling sprees in the world's markets. Their orders comprised up to 20 percent of the bank's securities business.

Weinstein was one of the best. He raked in enormous profits for the bank and, of course, for himself. Investment bankers expect half of the profits they make to end up in their own bank accounts. According to the Wall Street Journal, Weinstein was earning about $40 million in annual pay for himself.

Last year, Weinstein was promoted to co-head of global credit trading at Deutsche Bank. When the global financial system collapsed in mid-September, it turned out that his bets were not quite as safe as he had expected. His department incurred losses estimated at $1.8 billion (€1.38 billion). The bank's risk managers are still in the process of liquidating his trading positions, some of which were for very long terms.

He will not be getting a bonus this year. But the news is not exactly disastrous for Weinstein, who left Deutsche Bank a few days ago to set up a hedge fund together with 15 other traders. The bank has even considered investing seed capital in the new fund.

For talented traders, Deutsche Bank represents the best of all worlds. The best of them were able to speculate with the bank's capital and maximum their incomes. The more risk they were able to take on, the higher the potential return. Until the system collapsed, that is.

None of the big banks is completely innocent. But who is willing to take the blame? How can the industry regain the trust it gambled away if it does not accept responsibility?

'A Reversal of Robin Hood'

When top banking executives were summoned before the British parliament's finance committee last week, they repeatedly used the little word "sorry." Their PR consultants had done their homework. But the executives still insisted that the crisis has nothing to do with the bonus culture and over-inflated salaries.

In fact, the opposite was the case, said Andy Hornby, the former CEO of the bank HBOS, who claimed to have lost a lot of money himself. He received his bonuses in the form of stock options, and their value plummeted when the bank ran into difficulties. HBOS has since been taken over by another bank, LloydsTSB. The government owns 43 percent of the new entity.

Former Deputy Prime Minister John Prescott is leading the crusade against bonus payments by those banks that had to be rescued with billions in taxpayer money. "Using the contracts argument is absolutely nonsense," he said recently. "These contracts would have been worthless without the government. Without the government, these bankers would have been on the dole. We are seeing a reversal of Robin Hood -- rob the poor to pay the rich." Last week Prescott submitted to the House of Commons a petition with almost 30,000 signatures as part of his initiative to protest against the high payments.

In London's financial district, 3.6 billion pounds ($5.1 billion) in bonuses are scheduled to be paid out soon for the disastrous year of 2008. As large as this sum is, it is still only 40 percent of the total bonuses paid out in the previous year. Nevertheless, Schools Secretary Ed Balls, formerly current Prime Minister Gordon Brown's closest adviser when Brown was Chancellor of the Exchequer, warns that the current crisis will be the worst global recession in more than 100 years. "These are seismic events that are going to change the political landscape," he said. "The economy is going to define our politics … in Britain in the next five years, the next 10 years and even the next 15 years."

It is no surprise that most Britons are furious. One of the principal targets of their outrage is the Royal Bank of Scotland (RBS), which was so massively mismanaged by its former CEO Sir Fred Goodwin -- nicknamed "Fred the Shred" -- that it had to report a loss of close to 28 billion pounds ($40 billion) for 2008.

After spending 20 billion pounds ($28.4 billion) in taxpayer money to rescue RBS in the fall, the government now owns 68 percent of the bank. Nevertheless, the bank still plans to issue bonuses worth 340 million pounds ($484 million), albeit less than the 1 billion pounds ($1.42 billion) originally planned in bonuses. Chancellor of the Exchequer Alistair Darling explained Tuesday that the bank would pay "the minimum it can with regard to its legal obligations," in reference to the fact that some employees are obliged by contract to receive bonuses.

The opposition, as well as Labour MPs like Prescott, called upon the government to prohibit the bonus payments despite the contractual agreements. At the same time, Prescott wrote an open letter to the new CEO of RBS, Stephen Hester, in which he criticized the bonus payments as "morally and economically outrageous." And although Hester told a parliamentary committee that he empathized "100 percent with the public mood" when it came to bonuses, the payouts will still be disbursed.

Hester's predecessor Fred Goodwin told the committee that he "could not be more sorry" for what had happened. Goodwin, who the Labour government had knighted in 2004, collected 13 million pounds ($18.5 billion) in bonuses himself over a 10-year period.

Disasters of the Universe

Not even bankers in the United States are excused for such excesses. Even in the motherland of unbridled capitalism, the mood has now shifted.

In the past, Americans had no objections to seven-figure salaries and giant bonuses. Wall Street was always at the core of the American dream, the place where anyone could make a lot of money in a very short time.

But they have taken it too far this time. Take, for example, former Merrill Lynch CEO John Thain, who had his office redecorated for $1.2 million (€920,000) -- $1,400 (€1,070) waste basket included -- in the middle of the crisis. And even though his bank could only be saved by an emergency sale, Thain, who was forced to resign in January, refused to go without his $10 million (€7.7 million) bonus.

Or Richard Fuld, the former CEO of Lehman Brothers, who secretly sold his beachside villa in Florida to his wife for $100 (€77) to shelter some of his assets from pending civil suits. Fuld had originally bought the estate for $14 million (€10.8 million).

And then there were the executives at insurance giant AIG, rescued from bankruptcy with government funds, who had no qualms about rewarding top-performing employees with a hunting trip to England.

Then, of course, there was Bernard Madoff. The former head of the Nasdaq Stock Market allegedly cheated investors out of $50 billion (€38 billion) with an illegal pyramid scheme. On the day before Madoff's arrest, his wife withdrew $15 million (€11.5 million) from an account at a firm co-owned by her husband.

For many Americans, Wall Street executives now fall into one of two categories: those in the first group are arrogant and greedy, and those in the second are criminals and frauds.

The New York Times wrote that the former stars of Wall Street have now become star villains. Even author Tom Wolfe, who called the Wall Street gurus the "masters of the universe" in his novel "Bonfire of the Vanities," says he is "shocked" by the level of audacity.

A few weeks ago, when it was revealed that Wall Street had distributed bonuses worth $18.1 billion (€13.9 billion) in 2008, even the president could no longer hold his tongue. "That is the height of irresponsibility," said a visibly angry Barack Obama, who must now sell the American public yet another enormous bank bailout package to prevent the US economy from collapsing altogether.

In recent days, it was revealed that Merrill Lynch handed out bonuses of $1 million (€770,000) to each of 696 managers at the end of last year, even though the investment bank incurred a loss of $15 billion (€11.5 billion) in the fourth quarter alone and had to be bailed out by the government.

"It is abundantly clear that we are here amidst broad public anger at our industry," Lloyd Blankfein, CEO of Goldman Sachs, said in a hearing before the House Financial Services Committee last week. "Many people believe -- and, in many cases, justifiably so -- that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system's stability."

The Wall Street luminaries had to submit to the committee's embarrassing questions for a full seven hours. They were asked questions like: "Why do you own a company jet?" or "Why on earth do you need bonuses? Do you get up earlier in the morning?"

Much of today's bonus system was established in the 1970s. At that time, investment banks were similar to law firms, with partners who divided up the profits. Employees with no share of the profits received a relatively modest bonus. Risk was generally kept within limits, because the partners, as principal owners, tended to favor more conservative policies.

But then large commercial banks like Citigroup and Deutsche Bank forced their way into the exclusive world of investment bankers, fighting hard for the business and the employees of the Wall Street investment houses.

One after another, the investment banks Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns and Goldman Sachs became publicly traded companies, so as to improve their capitalization and distribute risk more broadly.

Everything had changed. They were now large, publicly traded financial corporations, and they had a new business model. Instead of relying solely on the highly volatile mergers and acquisitions business, as they had in the past, they began to speculate for themselves.

For investment bankers, the rule of thumb was simple: the bigger the profit from these speculative transactions, the bigger the bonus. In only two decades, the total amount of bonuses paid out by Wall Street banks increased by a whopping 1,695 percent, from $1.9 billion (€1.46 billion) in 1985 to $34.1 billion (€26.2 billion) in the peak year, 2006. Some top executives were collecting bonuses worth 10 to 20 times their base salaries.

The bonus system acted as an "accelerant," says Nikolaus von Bomhard , head of the Münchner Rück insurance group, but others started the fires.

For Joseph Stiglitz, winner of the Nobel Prize in Economics, the arsonist-in-chief is a household name: Alan Greenspan. The hot era began in 1987, when Greenspan was named chairman of the US central bank, the Federal Reserve. Then-President Ronald Reagan wanted to get rid of Fed Chairman Paul Volcker. Although Volcker had successfully combated inflation, he could not be dissuaded from the idea that financial markets must be kept on a tight rein. Greenspan, an admirer of the author and philosopher Ayn Rand, who espoused laissez-faire capitalism, was of a different persuasion altogether.

The new Fed chairman loosened regulations and opened up the money supply further and further in the coming years. It was called "financial innovation" at the time, and no one wanted to, or was even permitted to stand in the way of "innovation."

In 2003, then-President George W. Bush, who was enthusiastic about all forms of deregulation, and representatives of various regulatory agencies posed for journalists as the liberators of the markets, armed with hedge clippers and chainsaws. From then on, Washington blocked attempts by state governments to impose tighter controls on mortgage lenders.

This was followed by the next step in the disaster, the loosening of equity capital requirements. In 2004, the agency that regulates US markets, the Securities and Exchange Commission (SEC), began allowing the major investment banks to take on three times as much debt as before. This enabled them to buy large numbers of mortgage-backed securities, inflating the mortgage bubble even further.

The structure of the US financial system changed fundamentally in the next few years. The once-dominant commercial banks lost more and more ground to the reckless financial wizards in New York. They, in turn, invented increasingly fanciful products, with ever-more opaque names and ever-riskier structures.

At the beginning of 2007, the five largest US investment banks managed a combined portfolio worth $4 trillion (€3.1 trillion). Roughly 40 percent of all banking activity in the United States was now taking place in a high-risk zone.

But who cared? Investment money was abundant, coming from places like China and Dubai, as a result of Greenspan's low-interest-rate policies. Once banks began bundling credit risk into attractive packages which they immediately re-sold, they lost the incentive to scrutinize their borrowers. After all, they got their money back as soon as they sold on the loans.

The investment banks put more and more of their shareholders' money in questionable investments. But they were raking in enormous profits, and they kept charging ahead. Gradually, they divorced themselves from the real world and disappeared into a parallel universe of wealth, self-indulgence and unshakeable faith in their own infallibility.

All that counted was the transaction, because it served as the basis for the banker's longed-for bonus at the end of the year. Reservations about the system were pointless: No one got a bonus for preventing a crisis.

On the other hand, those who took high risks could have it made in just a few years. What was there to lose? If their bets paid off, they received the bonus. If not, it was the shareholders' problem. It was this mechanism of greed that was partially responsible for the financial crisis.

'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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