Here we go again. Wall Street has yet to take any real economic responsibility for the financial crisis they created (with the government's "help"), but once again they are seeking excessive bonus compensation. Haven't we already seen this movie before with AIG. In that case, AIG was seeking to pay approximately $280 million in "stay" bonuses to a select group of employees -- employees without whom AIG could have functioned effectively for several months after it became an effective ward of the U.S. Government. However, in that situation, there was a contract in place that had been approved by Treasury and relied on by the employees. Whether or not the employees were legally entitled to bonuses was at least an issue in play. In the end, after the public hue and cry, a substantial portion of the intended recipients "voluntarily" agreed to forego all or a substantial portion of the bonus payments. But what the episode made very clear is that when the American taxpayer has bailed a company out from impending bankruptcy, don't come hat in hand expecting to be paid like business as usual.
Frankly, the outrage was justified on an economic basis, while legally perhaps less so. In the real world, when a company files for bankruptcy, it does not matter whether an individual was entitled to a bonus or not based on his individual performance; if the company doesn't have the money to pay the bonus, it doesn't get paid except to the extent other creditors eventually get paid. So, because the government bailed out AIG, Citibank and Bank of America and many others, they didn't technically go bankrupt even though they were insolvent and would have failed without government intervention for better or worse.
So here we have a group of traders at Citibank who, without regard to the fact that shareholders have been substantially wiped out due to their company's poor risk-management and performance, are demanding bonuses for the trading profits generated by Citibank in the first quarter of this year. I am not convinced. Due to Federal Reserve policies of lending billions to Citibank and others at almost 0% and guaranteeing billions more of Citibank obligations, their trading strategies were far from unique and apparently reasonably easy to replicate at other large institutions. To wit: Goldman Sachs, Wells Fargo and even Bank of America profited from substantially similar business tactics. Consequently, the traders at Citibank were merely meeting the benchmark achieved at other firms. In this sense, nothing extraordinary occurred. In fact, the profits at Goldman Sachs were substantially higher than those generated at Citibank.
The point is that the traders at Citibank, while generating substantial profits for the firm, did so under almost "lay-up" like conditions given the government actions to virtually guarantee the banks a highly profitable first quarter. And the traders at Citibank at best correlated with their peers. There is also a real argument as to whether these financial institutions actually even made a "GAAP" profit since the mark-to-market rules were only adopted after the quarter's end with permission thereafter given by FASB to apply those rules retroactively to first quarter results. Thus, if the prior GAAP rules had remained in effect, there is a serious question whether there would have been any profits to crow about. But never let the facts stand in the way of Wall Street greed.
This mentality of being compensated at obscene rates, after massive, unprecedented government bailouts and only peer equivalent performance is questionable at best and evidences a lack of understanding (i) that their bloated bonuses of the past probably really weren't earned given the mess that ensued from those "profitable years" in which they were "earned", and (ii) that they should never return to those levels especially based on short-term government-primed performance. If bonuses are to be paid, let these key employees receive common stock in Citibank vested over three years. Then we will truly see if their one-time juiced performance resulted in shareholder value for the long-term.
By the way, the one-time FASB rule change benefit was reflected in first quarter numbers. Let's see if these so-called "key employee" traders can replicate their performance without continual government intervention bolstering them and whether their performance exceeds peer performance at other institutions. If it does, maybe there is something to talk about bonus-wise. Are you listening Treasury Secretary Geithner?
