So Goldman Sachs, JP Morgan and Morgan Stanley – three well known Wall Street financial institutions, have successfully repaid the US Government the billions of dollars of bailout money it took previously to avoid massive liquidity meltdowns and bankruptcies. In doing so, they have side stepped Government pay restrictions that are applicable to those financial institutions that have not repaid the bailout money.
Recently eyebrows were raised when Goldman Sachs announced it was setting aside US$11.4 billion in bonus payment after a strong Q2 performance. It seems like it is back to business as usual for Wall Street investment bankers. But the underlying current of public opinion is that it should not be business as usual. The French President summed this up as follows: “Public opinion will not accept that after the crisis that we’ve seen, things return to the way they were before.”
While America huffed and the UK puffed, it was the French who blew the house of the old bonus system down. This week French President Nicolas Sarkozy announced that French banks have agreed to curb excessive employee compensations. French bankers will repay part of their bonuses if the performance of the bank or a trader’s team performance deteriorates. Furthermore, up to two-thirds of the bonus payment should be deferred with the balance paid in bank’s shares.
“From now on, the trader must wait three years to cash in all of their bonus and if in the two years following, their activity loses money, he will not have his bonus,” Mr. Sarkozy said.
The French are not alone on this. German authorities said recently that “short-term profits should no longer determine bonuses, which would have to be repaid if deals proved too risky in retrospect”.
Think about it. What drives Wall Street investment bankers? No prize for the correct answer – Money! But while a workman is worthy of his pay, what happened is that Wall Street should more appropriately be renamed Greed Street. It was sheer uncontrolled greed that drove otherwise prudent investment banking management to overlook breeches of corporate governance rules. It was greed that drives bonus payments into the stratosphere. And it was greed that caused the financial crisis that we are currently emerging out of. Should we follow the French and make bonus payments subject to clawback? Or will greed defeat this move?
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