TOPICS > Economy

Wall Street Set for Record Payouts a Year After Crash

October 14, 2009 at 12:50 PM EST
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Despite heightened scrutiny from both the public and regulators in the wake of the AIG bonus scandal, compensation on Wall Street is set for a record year in 2009. Jeffrey Brown reports.
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JIM LEHRER: Now our story on a return to record compensation in the financial industry.

Jeffrey Brown has our report.

JEFFREY BROWN: Profits are rolling in again on Wall Street, just a year after it led a crash that nearly brought down the global financial system.

MAN: The New York Stock Exchange has just passed down Dow 10000 2.0 hats.

JEFFREY BROWN: And now, after trillions of dollars in taxpayer-funded rescues, it was reported today that the financial sector is also on pace to set a new record for executive compensation.

A Wall Street Journal analysis says 23 top firms will pay out $140 billion this year. That’s 20 percent more than in 2008. And it’s up by $10 billion from 2007, when executive pay peaked. Average pay at those companies will be just over $143,000 when all workers are taken into account.

In Washington today, White House spokesman Robert Gibbs had this to say.

ROBERT GIBBS, White House press secretary: We can’t go back to the type of pay structure that incentivized wild speculation, like we had before this economic collapse.

JEFFREY BROWN: The renewed debate over executive pay came as Kenneth Feinberg, the administration’s executive compensation overseer, pressed to scale back bonuses at AIG. The financial services and insurance firm received $180 billion in rescue funds last year.

AIG is now scheduled to pay nearly $200 million in bonuses next March. That’s on top of $168 million last March, a payout that drew fire from the president on down.

U.S. PRESIDENT BARACK OBAMA: I mean, how do they justify this outrage to the taxpayers, who are keeping the company afloat?

JEFFREY BROWN: A report today on the AIG furor said that, in the midst of the bailout, the Federal Reserve and the Treasury Department did not communicate with each other on the company’s compensation structure.

Neil Barofsky is the special inspector general on the federal rescue program, the TARP. He presented his report at a House hearing.

NEIL BAROFSKY, special inspector general, Troubled Asset Relief Program: The Federal Reserve did not view until very recently — I mean, until recently, before the payments were made — didn’t really view these as much of being a — of a big deal.

And that’s the problem about Treasury outsourcing this, because while Treasury may have been and would be required to have been more sensitive to these issues, the Federal Reserve was looking at this from a creditor. And $168 million, from a creditor’s perspective, just wasn’t that much of a concern.

JEFFREY BROWN: Treasury Secretary Tim Geithner came in for particular criticism. He was head of the New York Fed last year when it helped bail out AIG, and he had assumed his present post when the bonus issue blew up.

NEIL BAROFSKY: Much like if anything goes wrong in my organization, I’m responsible, and it’s my failure, since we are criticizing both the Federal Reserve and the Treasury for failures of communication, management and oversight, of course, he’s ultimately responsible.

JEFFREY BROWN: The Treasury Department would only say it continues to work on compensation packages for firms that participated in the federal bailout.

And we have our own debate on the pay issue now with Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies, a research center in Washington, D.C. She co-authors the group’s annual report on executive compensation. And Steve Bartlett, president and CEO of the Financial Services Roundtable, a trade association representing 100 of the country’s largest banking, insurance and securities companies.

And welcome to both of you.

Sarah Anderson, start with this report from the Wall Street Journal that large institutions are on course for record bonuses. What’s your response?

Back to 'business as usual'

Sarah Anderson
Institute for Policy Studies
More than a year into this crisis...we're still not seeing significant changes in the system.

SARAH ANDERSON, Institute for Policy Studies: Yes. Well, unfortunately, I think it's a sign that it's business as usual on Wall Street. And I find it very disturbing that, more than a year into this crisis, about nine months since President Obama gave a very powerful speech in which he identified executive compensation and -- and that system as a key cause of this crisis, that we're still not seeing significant changes in the system.

And, to me, it's just more evidence that we can no longer think that we can rely on the financial industry itself to just voluntarily do the right thing on executive pay. It's time for government to come in and play a responsible role to fix this problem, because, otherwise, you know, the Dow was up today -- hooray about that -- but unless we fix the problem that caused this crisis, we could see more of these bubble-and-bust cycles.

JEFFREY BROWN: All right, we will come back to the question of government role.

But, first, your reaction.

STEVE BARTLETT, Financial Services Roundtable: I have to say, this is a such a bizarre report and a bizarre story of political voyeurism, if you will, that it's hard to know where to start.

So, let me just start with the basics. What did the report -- what does the so-called report say? The -- this report took 23 companies from Wall Street, not banks, not TARP, by and large, but 23 companies that are sort of involved in the securities business on Wall Street, and reported that, at the end of the year, they plan to pay their employees, just like TV stations do and convenience stations do and others.

And they reported that, as the stock market is up and profits are up and earnings are up and the economy is looking better, they will pay their employees more. That makes perfect sense. I mean, so, the idea that you sort of take these 23 companies and the snapshot and say, let's take a snapshot and, therefore, infer all these evil things that are happening or good things that are not happening is just frankly bizarre. The basics just aren't there. It's a snapshot of 23 companies involved in the stock market that are pay -- that -- some of whom are paying more -- more to their employees and as their profits are up.

JEFFREY BROWN: All right. But it's not just in any industry, as Sarah Anderson has said, as the president has said. These...

STEVE BARTLETT: It's in these 23 specific companies that are named in the report. They have an involvement in the stock market. The stock market, as you have just seen, is up, so one would expect their earnings to be up, as they are. And that helps the American people, 56 percent of whom invest in the stock market.

And that, therefore, their compensation is up.

Any changes on Wall Street?

Steve Bartlett
Financial Services Roundtable
Absolutely [Wall Street] changed, and that should be the story here.

JEFFREY BROWN: Right. But the question is, has anything changed on Wall Street in terms of the way people are compensated, or are we still at business as usual?

STEVE BARTLETT: Absolutely changed, and that should be the story here.

Ken Feinberg is doing a pretty good job on the TARP funds. The idea that he has to -- he's trying to jawbone someone, he just orders what happens at AIG in compensation. And that is what he's doing. We think he's doing a pretty good job on that, as well as those handful of the large TARP companies.

The Federal Reserve is proposing -- and we support and we have worked with the Federal Reserve -- to examine the pay structure, or the compensation structure, which, frankly, was what President Obama was alluding to, was the structure, to make sure that you avoid structures that cause excess risk. That's what the issue is.

And that's what both the government is doing, Federal Reserve is doing, we're doing. And every company is going through clawbacks, restricted stock, longer vesting periods for stock options. That -- because that's what it takes to bring smack about some stability in the system.

JEFFREY BROWN: All right. Well, those are some things.

STEVE BARTLETT: Things are happening.

The government's responsibility

Sarah Anderson
Institute for Policy Studies
I think a lot of American taxpayers would still wonder why bonuses are even on the table.

JEFFREY BROWN: You brought up the government's what you say is responsibility to do more. There are some things that he put on the table that the government has at least talked about doing and started to do.

SARAH ANDERSON: Well, talking about it is one thing, and actually doing it is another.

The pay czar, Ken Feinberg, we don't know exactly yet what he is going to do. He hasn't come out with his report yet. We have heard news stories that he's asking AIG to not give the full amount of bonuses to their employees.

I think a lot of American taxpayers would still wonder why bonuses are even on the table for a company that is completely reliant on taxpayer money. In fact, a lot of the companies that -- that now are seeing some recovery wouldn't even exist today if it weren't taxpayer support. And, so, it is not an appropriate time for them to continue to be doling out these kinds of massive payouts.

JEFFREY BROWN: Let me stop you right there.

STEVE BARTLETT: Well, it's not doling out. And it's not massive payouts. It's compensation.

JEFFREY BROWN: But respond to that. The companies that did take the TARP money...

STEVE BARTLETT: Right. Created a foundation of capital to rebuild the economy. And that's what they have done. Many of them have repaid that.

JEFFREY BROWN: Right. But a lot of people would still wonder at the situation now -- it's not even a year later -- why would they be doing bonuses at all?

STEVE BARTLETT: Pay is set with tens of millions of businesses in this country, hundreds -- 150 million employees. Pay is set by 100 -- by millions of individual decisions every single day, in TV stations, in newspapers, in convenience stores, in technology companies. That's how the pay is set.

If you pay too much, you will lose money and go broke. And some of those companies did. If you pay too little, you will lose talented employees and lose money and go broke. So, it's an art, not a science. And it's set by these hundreds of millions of decisions.

Now, the fact is, is that Ken Feinberg, in the case of the TARP money, has a thumb on them, a tough hand, the same with AIG. He doesn't have to negotiate with AIG. He's trying to get it right. We think he's -- we think he's getting it right. We think he's getting it about right.

But that's only because the government has this huge $170 billion investment in AIG, which we all wish they wouldn't have. Because they have it, he has this special role to oversee pay. That's what he's doing. He's doing it very transparently, seems to be getting it about right.

He's doing the same with the major TARP companies, same thing. The law says that the TARP companies can't pay bonuses this year, as long as they're in TARP. That's why many of them are getting out, so they can retain talented employees. That's what they should be doing to finance the economy.

JEFFREY BROWN: All right. I stopped you as you were about to say what more you would like the government to do...

SARAH ANDERSON: Exactly.

JEFFREY BROWN: ... even on companies that are not taking TARP money?

Compensation and the free market

Steve Bartlett
Financial Services Roundtable
To have the government set pay in this country, that is irresponsible. It would destroy the economy.

SARAH ANDERSON: Absolutely.

If the compensation system, as the president and our treasury secretary have said, was a cause of this crisis, we need to fix the system in order to prevent future crises. And I'm hoping that our regulators are going to come in with a firm hand. And the focus right now in Washington is looking at the structure of pay and how it can be formulated to encourage more long-term thinking, deferring bonuses over a number of years.

We can't any longer have these guys cashing in massive bonuses on high-risk investments that then blow up a few years down the road. That just has to stop.

But there are other things that I think government should be doing to use the power of the public purse to encourage more rational pay practices throughout the economy, even going beyond the financial industry. They could be using tax policy. They could be limiting how much companies can deduct from their taxes for the expense of executive compensation.

They could be using procurement policies to give preferences to companies that have more reasonable gaps between what their executives and their workers are making. So, there are a lot of ways that government could play a responsible role in turning around this problem.

JEFFREY BROWN: All right. We just have a minute here. So...

STEVE BARTLETT: Or an irresponsible role, if you will.

JEFFREY BROWN: Well, are those irresponsible, or are those legitimate?

STEVE BARTLETT: To have the government set pay in this country, that is irresponsible. It would destroy the economy.

SARAH ANDERSON: That wasn't what I was saying.

STEVE BARTLETT: Or influence pay, or tell what the pay should be, or those things.

I said a year ago on this show, when President Obama came out with a very reasonable plan to limit bonuses to restricted stock, good plan. I endorsed it. But I said at that time, this is a slippery slope. Once you start putting into Congress or government agencies to set what the pay of other people should be, you will begin the destruction of the economy.

And that -- you now see where the slippery slope is going, in that direction. We haven't gotten there. I don't think we will get there. I think calmer heads will prevail. I think we do need to restrict the excessive risk. And that's what companies are doing and the Federal Reserve is doing.

JEFFREY BROWN: All right.

SARAH ANDERSON: That's what we should do.

JEFFREY BROWN: All right. I remember when you said that a year ago.

And we will have you back and we will see where this goes.

Steve Bartlett and Sarah Anderson, thanks very much.

JIM LEHRER: On our Web site, NewsHour.PBS.org, you can read economics correspondent Paul Solman's take on compensation for CEOs.