Delamaide: The failure behind Wall St. bonuses
WASHINGTON — It's Wall Street bonus time again and a new chance to dramatize the glaring inequalities these payments represent.
But it is also time to reflect on the economic inefficiency of this concentration of wealth and the failure of financial regulators to implement restrictions on bonuses mandated by law in the wake of the financial crisis.
New York State Comptroller Thomas DiNapoli every year tallies up the bonuses paid on Wall Street, and this year came up with the figure of $28.5 billion, an increase of "only" 3% even as profits declined by 4.5%.
Because Wall Street firms added jobs this year, the average bonus was up only 2% to $173,000.
The Institute for Policy Studies (IPS), a Washington, D.C., think tank, immediately whipped out a report putting those amounts in perspective.
That $28.5 billion bonus pool, for starters, is more than double the annual earnings of all 1 million American workers employed full time at the federal minimum wage of $7.25 an hour.
If that year-on-year increase of 3% seems small to you, the IPS helpfully points out that it is a 27% increase from the bonus pool in 2009 — the last time Congress raised the minimum wage.
That average bonus, which comes on top of an average salary of $190,000 on Wall Street, is by itself three times the median income of U.S. households.
It gets worse.
Because those bonuses go to people who already have everything, they don't spend much of it. The IPS report, citing fiscal multipliers used by Moody's Analytics, notes that every dollar going to a high-income earner adds only 39 cents to the economy.
Low-income workers, however, tend to spend every extra dollar they get, and with the multiplier effect as that dollar passes through various hands, that results in $1.21 getting added to the economy.
In sum, giving $28.5 billion to high-income earners adds $11 billion to the economy, and giving the same amount to low-income workers adds $34 billion.
More perspective. If the federal government were to raise the minimum wage to the $15 per hour being promoted as "one fair wage," that Wall Street bonus pool would amply cover the difference for all of the country's 2.9 million servers and bartenders, or all 1.5 million home health care aides, or all 2.2 million fast-food workers, IPS calculates.
Smart Wall Streeters have always earned more money than someone flipping burgers, and always will, but this research report also spotlights the fact that government regulators have completely failed to follow through on bonus limits required by the Dodd-Frank financial reform act of 2010.
The agencies have exploited the vague principles enunciated in the law to propose some wishy-washy restrictions that have yet to be finalized.
Dodd Frank Section 956(b) may be vague, but it is clear in calling for the prohibition of "any types of incentive-based payment arrangement, or any feature of any such arrangement, that the regulators determine encourages inappropriate risks."
Bankers who recklessly goaded subprime borrowers into inappropriate loans and then unloaded those bad loans onto unsuspecting investors collected their fat bonuses and quietly retired to their McMansions or beach houses when the mess hit the fan.
Likewise, traders who spun these underlying securities into a speculative bubble with derivatives transactions kept their sports cars, yachts and other luxury baubles while the victims of this recklessness lost jobs, homes and futures for their children.
The point of the Dodd-Frank reform is that compensation should be structured so that can't happen again, by deferring payment over a longer period and providing ways to claw back bonuses if they were awarded for business that resulted in losses.
The regulations initially proposed in 2011, however, were very weak, calling only for the deferral of 50% of the bonus for three years, and that only for the bank's top executives, not for the traders who day in and day out are making the big bets that might well be called "inappropriate risks."
In this rule proposal, tougher restrictions or extension to other employees is left to the discretion of the boards of directors, which, needless to say, have not been in a hurry to implement them.
The advocacy group Americans for Financial Reform, a coalition of more than 200 civic groups, has called for much tougher regulations. Restrictions should cover the entire bonus, not just half of it; deferrals should last much longer than three years; and they should cover the thousands of risk-taking employees receiving bonuses, not just top management.
But none of this is happening. Given the torpor reigning at the regulatory agencies, none of this is likely to happen.
The Dodd-Frank mandate on bonus restrictions will continue to be ignored with impunity, and next year we will read again how Wall Street bonuses have increased regardless of bank performance.
And the year after that, and so on until the bubble bursts again.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.