bizzXceleration: Performance, Value and Profit: Pictures for a Prosecution: Wall St. Bonuses vs the Public Good (Add)

If you've been here before you may have noticed we like to tell our story with pictures and so shall it be this time as well, with the slight difference that they'll be more stories and less the complex graphics we're prone to. By this time you've no doubt heard that Wall St. is fixing to pay another set of stunning multi-$B bonuses while the rest of us are still crawling across the floor of the chasm, broken and bleeding on the rocks. How does that make you feel?

It's likely our point of view is implicitly clear and if it's not then several of the last posts will make it clearer. One of the bloggers we both admire and have learned a lot from, Barry Ritholz of BigPicture, has defended the bonuses as the way the Street works and if we want it to recover and do its job that's the price. Aside from the moral reactions or the questions of good public relations we thought we'd speak directly to the implied assessment of the contributions of the Street and whether or not they are justified and earned. We have three major problems leading to a major challenge.

And We Paid Bonuses Because???

1) Currently the Street's profits are entirely dependent on public policy ranging from reduction in competition to implicit guarantees of the TBTF banks to low interest rates to various quantitative easing programs, e.g. the Fed's purchase of mortgage-backed securities and the FHA's being the source of 80% of the mortgage market flow. The point being their profits are being made off our capital, not their own.

2) There is no evidence that the perverse incentives where all the gains went to the high-earners thru trading gains (read speculation) while all the losses went to us are being corrected. Add to which the perverse structure led to the failure or near-failure (including GS which had a near-death experience and was only saved by government action) of the firms themselves as well as almost collapsing Western Civilization.

3) The really deep argument is that banks and financial institutions are the intermediaries that efficiently and effectively allocate capital to their highest and best use. Well the prior two points tend all on their own to destroy that argument entirely but, since we've been reviewing the record, let's review it. We won't repeat ourselves but will simply cite several graphics we've previously put up and let you pop them yourselves because, taken all together they reach a clear conclusion.

WSJ Debt Growth

What those charts tell you is a sequential story - a logical syllogism if you will - that makes perfect sense to us and, IOHO, completely destroys the argument that paying bonuses is innate in the industry, necessary for performance, part of the culture and ensures that the Industry contributes to the greater good. What they tell us is that, beginning with de-regulation in the mid-80s, that Wall St. compensation completely pulled away from the rest of the economy because the industry made exorbitant profits, that we "indulged" in astounding growth in indebtedness beginning then, which created the profits that paid the bonuses while destroying savings and investment, that the periods of highest savings were also the periods of highest economic growth (this one is particularly important), and that the Industry has failed in its duties to itself to perform as businesses and failed to deliver value to society. We really do urge you to review the charts and see if you agree with the syllogism. And if not then why not and what alternative data do you have to propose?

Continued ....

The opening vidclip is Sully Sullenberger appearing on Morning Joe and we put it up as an example of what good leadership is all about, in the small. We were particularly taken with and moved by Sully's comment that one should "take responsibility for the people". The next vidclip is also from MJ and is ofered as a compare and contrast for where we're at with regard to the Industry. We'll just list out some other MJ/MSNBC vidclips that add fuel to the fire. We'll particularly point you to the interview with Michael Moore, not because we don't think he's over the top, but because he's representative of the firestorm that's smoldering away waiting to be fanned into flame by more irresponsible behavior.

Is a second Great Depression possible? : Financial Times' Chrystia Freeland and Donny Deutsch join Morning Joe to consider whether the U.S. economy is really recovering.
Rep. Waters 'glad' Obama going to New Orleans: Rep. Maxine Waters, D-Calif., joins the Morning Joe gang to discuss the state of the U.S. economy and the president's quick trip to the Gulf Coast.
The end of easy money: New York Times' Peter Goodman discusses his new book, "Past Due," a look at how Wall St. made reckless bets and how average taxpayers took the hit
Michael Moore talks 'Capitalism': Filmmaker Michael Moore joins Morning Meeting's Dylan Ratigan to shed some light on his new film, "Capitalism: A Love Story."

This is, in a way, another exercise in syllogism. Only this time it's sort of emotional syllogism but it also tells you how many people are thinking the same things. After all, when a still avowedly conservative talk show host is repeatedly castigating the Street and getting people like Dylan Rattigan or Maria Bartiromo agreeing with him we think the case for smoldering embers just waiting to bust into conflagration is pretty well made. But just in case it's not, and while it's still up, we'll point you to the most recent episode of NUMB3RS, which explores the consequences of the catastrophe and the loss of faith: Playing Russian Roulette - Seven Men Out.

Real Leadership: Her Majesty as Exemplar

At the heart of this whole discussion is the central question, or questions: what does a business owe society and what does a truly responsible leader owe his firm and society as a whole? Not surprisingly Peter Drucker considered those questions years ago and came up with some deep and profound answers, which we've discussed multiple times. With regard to society he saw it as the deepest management obligation to do three things: do no harm, act to reduce negative external impacts and contribute to the overall health of society. We converted his writings into several simplifying charts over time and we'd point you at two, for the same sort of pop-up treatment: a Manager's Responsiblities and Drucker's Fundamental Principles of Executive Leadership.

We think the case has been made pretty strongly that the Finance Industry has failed to satisfy either it's private managerial responsibilities or the fundamental principles, and in fact, by being narrowly self-interested and short-sighted, has actually failed itself. It would be in each firm's own enlightened self-interest to adopt and implement those Principles if for no other reason than that society can no longer afford to tolerate their continued violation.

So what does publicly responsible leadership look like? We think Her Majesty, Queen Elizabeth II, is as much an exemplar of the discharge of duty with the highest standards of personal integrity and honor as any public leader around. We'll also suggest that the movie "The Queen" captures those perfectly. If you haven't seen it we highly recommend it. But why?

The movie traces out a week that began with the death of Princess Diana and goes inside the palaces and the Queen's behavior to watch her change 50 years of behavior in response to her subjects need for public grief. All in response to the irresponsible behavior of a spoiled girl who charmed the public but in fact failed miserably to live up to her own voluntarily assumed responsibilities and duties. West Point's motto is "Duty, Honor, Country". It's what the Queen displays, ultimately it's what's asked of public leaders responsible for large institutions and it's what their own self-worth requires. Now that trailer only gives you a small flavor, you really ought to watch and study the movie, but these other clips will also help: Queen Reflecting on Her Life, Queen's Christmas Message and the Queen & the Prime Minister. I don't know about you but she sets a standard that's hard for me to live up to!

Now, are we going to get it or not?

In the meantime there are a few brief readings excerpts after the break, some immediate prior posts and the pointers to our major collections of previous discussions on the Finance Industry and on Social Responsibility going back almost three years now. We'll trust you'll believe that our brief discussion here is grounded in some careful thought and some background digging.

UPDATE: As is the practice we'll keep adding interesting new tidbits as they dribble in. One of particular interest is the King Report via BigPicture which dissects Goldie's earnings (The King Report: Goldie’s Revenue Contributions). Not surprisingly they're entirely trading based (we continue to view GS as a psudeo-bank in disguise that's really a proprietary hedge [cf. this chart on profit sources] that gets its edge from front-running clients by leveraging the information it gets from providing services). On those topics and the general bank outlook we'll point back to some previous posts that sketched all this out in some detail (More Darkside Earnings Tales: Banks,Goldman und Unsinn,Beyond the CRE "Bombshell": Real Stress Testing for Finance (Updates)). Our real point here is that, if you believed our prior analysis, this morning's headlines are no surprise (Bank of America reports big loss).

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Readings on Wall St. Behavior

Wall Street on Track to Award Record Pay Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal. Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year's $117 billion -- and to top 2007's $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels. The growth in compensation reflects Wall Street firms' rapid return to precrisis revenue levels. Even as the economy is sluggish and unemployment approaches 10%, these firms have been boosted by a stronger stock market, thawing credit market, a resurgence in deal making and the continuing effects of various government aid programs. The rebound also reflects growing confidence by some Wall Street firms that they can again pay top dollar for top talent, especially once they have repaid the taxpayer-funded capital infusions they received at the height of the crisis. So far, regulators and lawmakers have focused on making sure pay practices discourage excessive risk-taking, leaving to companies the question of how much is too much.

Much Ado About Nothing $23B: Goldman Sachs Bonus Its time for the quarterly hand-wringing amongst the populace regarding the over-sized bonuses at Goldman Sachs. This Q, its a mere $23B. The focus on the bonuses of top performing traders and investment bankers is misplaced. There are many, many things to be upset about regarding the financial sector — but bonuses are not one of them. [BR: Or, at least not the most important thing to be enraged over] We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is. You can complain about it, but it is all but pointless. Feel free to pursue a millionaire’s tax of 1% (or 10%) on everyone who earns more than $1m — a super top tier — to pay for health care reform or whatever you want. (Best of luck with that!) Every few years, we lament overpaid athletes, musicians, movie stars. Bruce Springsteen is going to make $100 million+ this year on tour. While you can complain about it, ask yourself how many people can fill 50,000 seat arenas 200 night a year at $100 a pop. Lebron James, Peyton Manning, and others justify their salaries by generating massive revenue and profits for their employers. So too it is with Goldman Sachs and others. The traders who throw off the most profits, the bankers that generate the most lucrative deals are worth tens of millions to their “team owners.” That is how it is, and it is unlikely to ever change.

Op-Ed Contributor - Wall Street Smarts “IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.” The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. “But I have to buy you a drink to hear it?” I asked. “Absolutely not,” he said. “I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening.” He did indeed look capable of buying his own drinks — one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late ’50s or early ’60s — a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts. “O.K.,” I said. “Let’s hear it.” “The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over. “But weren’t there smart guys on Wall Street in the first place?” I asked.

Previous Posts on Debt, Finance & Economic Performancs

Essays on Finance Industry Performance

The Broken Finance Industry: Credit, Crisis, Collapse and Broken Business Models

The credit crisis of 2007-2008 that metastasized into a collapse and nearly caused Great Depression 2.0 was largely created by broken business models based on bad practices, malfeasance, excess leverage and synthetic, structured investment products. We've all learned the hard way that the Finance Industry is more than just another industry but impacts us all. By looking back, perhaps in anger and certainly in dismay and puzzlement, we can understand more about how this all came to pass. And, as a result, more about what to expect because all of these problems remain with us. If you'd like to get a better understanding of how broke the Industry is and what the consequences are this is a place to start.

The Broken Finance Industry: Credit, Crisis, Collapse and Broken Business Models

The Finance Industry brought itself and us to the brink of disaster thru bad practices and poor management. But effective capital markets are vital to the health of the economy. Now we need to consider what's broke, how to fix and how govern the Industry for its own benefit and the health of society.

Facing the Firestorm: Finance Industry, Popular Anger and Re-regulation

The Finance Industry appears to have returned to profitability on the back of public funds and government support programs. Its refusal to acknowledge that debt is leading to a tidal wave of initiatives for regulatory and legislative reform which will be made worse by a refusal to constructively cooperate. Society needs a productive Finance Industry and will get it either voluntarily or otherwise. The Industry's refusal to see these pressures will make things more difficult than necessary, but are unavoidable without leadership and a sense of social responsibility.

The Corporation vs Society: Performance, Social Responsibility and the Win-Win

The unfettered free market was supposed to bring enduring prosperity but recent history shows that markets and participants are not self-regulating. In fact markets require an institutional framework to work, publicly responsible behavior by participants and appropriate regulatory frameworks to balance private gain with public welfare. The results are better performing markets that are sustainable.

bizzXceleration: Performance, Value and Profit

Performance = Management System(Strategy, Operations, Execution): Business, Economy, Industry, Company, Markets

Pictures for a Prosecution: Wall St. Bonuses vs the Public Good (Add)