On Wall Street, Profits And Bonuses Dont Live On The Same Ledger

In 2013, Wall Street’s profitability was down 30.1%.  Naturally, this effected bonuses for that year.

They rose…by 15%.

In the Guardian piece You eat what you kill: Wall Street bonuses keep soaring as profits decline, we get a clear picture of what investment banking really means. “Too big to fail” has become “too big to fail to take a bigger bonus no matter the performance”.

It’s while reading stories like this that I’m most relieved that the commercial real estate industry has an entirely different framing than Wall Street’s, one I like to call “reality-based”.  From the piece:

This year, bonus payouts will amount to a whopping 170% of the profits reported by New York stock exchange member firms – profits that continue to be eroded by legal settlements and regulatory expenses. Back in 2009, that figure was slightly more than 36% of profits, and it has crept steadily higher.

Wall Street prefers to look at bonus payouts as a function of revenue. Even so, that still means that banks like JP Morgan Chase, Goldman Sachs and Morgan Stanley are handing over about 40 to 50 cents out of every dollar of revenue they generate every year in bonuses. The argument is that they need to do this to keep their top performers in place, and to provide them with an incentive to keep bringing in more revenue. “You eat what you kill” is the motto on many a trading desk.


The problem, of course, is that if anything, Wall Street should be becoming more cautious. Investors have created a bubble in parts of the bond market thanks to ultra-low interest rates, and it has sparked a craving for any securities that will generate a steady stream of income. Bankers have earned big bonuses for helping to foster this: for feeding the bubble by issuing more and more junk bonds, even as the safety level of those below investment-grade securities deteriorates.

There are two arguments that you’ll hear from Wall Street. First, that bonuses are big because base pay is low. Secondly, they’ll tell you that they need to fork over the big bucks in order to hang on to talent, because if they don’t, hedge funds are just waiting to snap up promising young traders and bankers. Both arguments are flawed.

Read the entire Guardian article here.

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