Egregious Wall Street bonuses may escape unscathed
NEW YORK |
NEW YORK (Reuters) - The rush to recover bonuses paid by companies getting taxpayer money might not only drain talent away from Wall Street, but perversely, could actually fail to recover cash from the most egregious offenders.
A U.S. House of Representatives bill to recover virtually all bonuses paid this year at American International Group Inc (AIG.N) does not cover payouts made in 2008 or before, when the seeds of the financial crisis were planted. But the legislation applies to bonuses paid in 2009 at all companies that have received more than $5 billion (3.4 billion pounds) in government funds, not just those covered by emergency bailouts.
And that creates some glaring inconsistencies. For example, the roughly $2.5 billion of cash bonuses Merrill Lynch paid out last year will go untouched. Apart from AIG, companies getting emergency bailouts include Bank of America (BAC.N) and Citigroup (C.N).
But companies such as PNC Financial Services Group (PNC.N) and US Bancorp (USB.N), which received money from the federal Troubled Asset Relief Program TARP.L but escaped the worst of the credit crisis, will be treated just like those getting the emergency bailouts.
The New York State comptroller has estimated Wall Street cash bonuses totalled $18.4 billion in 2008.
Many analysts and executive search specialists expect employees fed up with lower pay or with being publicly flogged for doing their jobs will flee for foreign banks, hedge funds and boutique banks not subject to the same restrictions.
Some also expect more banks in the TARP program to race for the exits, further hurting the economy because lenders will be even less willing to lend.
"My blood is boiling," said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York. "Honestly, the best employees at these companies will leave."
Vikram Pandit, Citigroup's chief executive, told employees in a memo on Friday that, while some of the outcry is "warranted," it is misguided to be "spreading the blame to each and every employee in the financial services industry."
Merrill, which in the past waited for the new year to award bonuses, doled out $3.62 billion in late December -- just before Bank of America (BAC.N) bought it on January 1 and as it racked up a $15.84 billion quarterly loss.
Thirty percent of the bonuses were paid in stock on January 2, the Wall Street Journal said, and would be covered by the House bill. Bank of America has turned over the names of the top 200 bonus recipients to New York Attorney General Andrew Cuomo, who is examining if the payouts were proper.
CtW Investment Group, which works with union pension funds and has called for Bank of America Chief Executive Kenneth Lewis to be removed, asked Congress on Friday to cap bonuses retroactively, including Merrill's. While Merrill took no TARP money, Bank of America received $45 billion, including $10 billion that would have gone to Merrill had it not been bought.
"It's clearly inconsistent with Congressional intent for the most egregious bonus fiasco on Wall Street not to be captured in legislation," CtW spokesman Michael Garland said.
The Senate is expected to take up its own bonus bill, which may include a lower tax rate, but cover more companies. Differences with the House bill will have to be reconciled.
Steven Cooper, a partner at law firm Reed Smith LLP in New York, said it may be difficult to tax bonuses retroactively.
"There's a lot of anger out there and a lot of threats, but laws that can be upheld and are valid and enforceable, that's very different from what you're hearing," he said.
Bank of America spokesman Scott Silvestri said the Charlotte, North Carolina-based lender believes the bonus bill may be "counterproductive to the policy goal of stabilizing the financial system and restarting economic growth."
He declined to comment on the Merrill bonuses. PNC and U.S. Bancorp did not return calls for comment.
Bert Ely, an independent banking consultant in Alexandria, Virginia, said a big problem with TARP is a guideline that lets Congress unilaterally change rules governing recipients.
"What Congress is doing is turning participation into TARP a major negative," he said. "It may spur companies to consider other strategies to boost capital ratios. One way to do that is to shrink the balance sheet, which means less lending. Unintended consequences, but a very real possibility."
To be sure, there is broad sentiment that, at minimum, excesses in compensation must be weeded out, even if it costs some firms their top talent.
"Companies for all practical purposes are bankrupt and it ought to be reflected in compensation," New Jersey Gov. Jon Corzine, a former co-chairman of Goldman Sachs, said on WCBS-AM radio in New York.
Yet it remains unclear how many appealing jobs there might be for disgruntled employees to pursue, given the breadth of the financial crisis. And repaying TARP funds now would be a challenge for banks that might otherwise run short of capital.
Michael Holland, a veteran money manager, also worries that severe pay caps could limit productivity.
"We understand the anger and frustration," he said. "Nevertheless, a financial institution is unlike any other: it is made up of intellectual capital. It makes America less competitive if its potentially best performers in the future have less incentive to perform at the top of their game."
(Additional reporting by Joan Gralla; Editing by Andre Grenon)
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