The Specious Logic of Wall Street Pay

It’s remarkable how Masters of the Universe, the new financial elite first identified by Tom Wolfe in 1986, remember nothing and regret nothing. And why should they? Their position remains remarkably secure 25 years later.

We see the “Who us, take responsibility for our actions?” stance in full view courtesy one of their most effective spokesman, Steve Eckhaus, an attorney who has negotiated many big ticket Wall Street compensation contracts. From the Wall Street Journal:

“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”..

In general, he said his clients are “pure as the driven snow” and doing work that supports the economy and justifies their pay….

“You have to know what the profits are” to know what someone should make, said Mr. Eckhaus, noting Wall Street’s top performers usually gobble up 80% of the bonus pool. “Those who are responsible for profits should share in the profits in a way that rewards them.””

This is the usual “heads I win, tails you lose” logic. The rationale for bulging pay packets is that the producers created it, therefore they deserved their cut. But Eckhaus says any bad events are due only to bad luck. Sorry to tell you, but only narcissists and their agents take credit for good stuff and lay the blame on everyone else. Unfortunately, we breed for that in Corporate America, it happens to be a very effective career strategy in large organizations. The New York Times even went so far as to identify “acquired situational narcissism” as a danger afflicting high profile people surrounded by groupies and sycophants.

Where has the old fashioned notion of leadership being tantamount to responsibility gone? Captains famously are supposed to go down with their ships; Truman’s most famous saying was “The buck stops here.” And Jim Collins, in his classic book Good to Great, found that in his group of long term outperforming companies, the CEOs all had the same style, and it is the polar opposite of the CEO from central casting. They paid themselves modestly, did not take credit for successes, and were quick to take the blame for bad outcomes.

So it isn’t surprising that the pathology that Eckhaus promotes and profits from has led to IBG-YBG (”I’ll be gone-you’ll be gone”) abuses, like phony year end marks (due to traders “marking to myself” or executing transactions with complicit colleagues at other firms), gaming of bonus systems (the negative basis trade played a direct role in precipitating the crisis) and accounting fraud (Merrill’s Pyxis deals, Repo 105 at Lehman, and Citibank’s failure to disclose its CDO positions have come to light; there’s no doubt a lot more than hasn’t).

And the idea that the rich pay of Wall Street producers is truly their own output is in many cases a convenient bit of PR. There are some specialties in large firms, such as M&A bankers with their own clients and reputations, who have a proud tradition of setting up their own shingles (many do well on their own, but there have also been some noteworthy lackluster efforts). By contrast, traders are often the most insistent in their belief that their P&L is really their doing (at Goldman, the traders call investment bankers “socialists” because they work on teams and are paid on department as well as individual output). Yet that belief does not stand up to close scrutiny. As we noted in ECONNED in our discussion of Andrew Hall, a famous trader at Citigroup who proved to be an embarrassment due to his receiving over $100 million as the head of an oil trading group and had his business eventually bought by Occidental Petroleum:

Phibro, along with its richly paid chief, Andrew Hall, is leaving Citigroup for Occidental Petroleum. The price Oxy paid for Phibro was only the current value of its trading positions–liquidation value and not a brass razoo more. There was NO premium for the earning potential of Hall and his supposed money machine. It’s not hard to see why. Hall’s returns were heavily dependent on high leverage, cheap funding, and market intelligence from other trading desks, all huge subsidies from Citigroup. In turn, these concentrated capital and information flows do not come about naturally, but are the product of industry-favoring policies.

His example illustrates that the widely proclaimed view that highly profitable traders are worth their exorbitant pay is often a fiction. The fact that no other buyers, not a financial firm, commodities trader, or consortium, stepped forward when Citi was looking for a graceful exit shows that the business was worth very little on a stand-alone basis.

This isn’t just my view; former Goldman co-chairman John Whitehead decried financial services pay levels for bonus year 2006 as “shocking” and criticized Goldman: “They’re the leaders in this outrageous increase.” But pay levels have only risen since then, with only a brief, “Gee, we blew up the global economy” respite in 2008.

Eckhaus is at least openly and unabashedly part of the problem. What is distressing is that people on the wrong side of Wall Street’s self-serving stance, or those who at most get crumbs, also defend this anti-capitalist arrangement. Unfortunately, it will probably take another financial crisis to shake these Stockholm Syndrome victims out of their acquiescence.

Originally published at naked capitalism and reproduced here with permission.