1. Get to a story way late, and
2. Get that story wrong.
The latest flap over banking bonuses and bank junkets is a classic example. When the media should be providing sound information to help inform the public so that folks can make better decisions, they are instead resorting to titillating half-facts to create riotous anger. Let’s delve into these two issues.
First of all, let’s talk about bonuses on Wall Street. $18 billion in bonuses in a really crappy year sure sounds bad unless you invest about 15 minutes to dig deeper into the story and context. Almost everyone on Wall Street has a split compensation structure. Some portion of their salary is fixed and another portion is variable like a sales person. Some portion of that variable compensation is dependent on the firm’s overall performance; and typically, a larger portion of the bonus is based on the individual hitting specific targets. There are specific formulas used to calculate these bonuses and these are often specified in employment contracts. Executives do indeed get large bonuses and in this environment very few of them deserve bonuses, and by the way, few are actually getting them this year. But bonuses are also paid out to the administrative assistant pool and the fresh out of college analysts. Most of these guys get the bulk of their compensation in the form of bonuses. These are not discretionary give-aways but part of their employment agreement. Essentially, the bulk of their compensation is “put at risk.” For the many that did get bonuses because their little piece of the business did well, many others did not get anything which is as it should be. (see: http://www.google.com/hostednews/ap/article/ALeqM5hMFjDMotZFWhs5tkZ6dj17a43TngD961ON900)
You can argue whether it makes sense to live in New York where a $100,000 doesn’t go very far, but a deal is a deal. You could also argue that these folks would have no bonus if their companies had completely disappeared through bankruptcy. But that’s not what happened, and New York had been the financial capital of the world. Many of these companies were salvaged, swallowed up by stronger companies, or allowed to fail (in which case, people didn’t get bonuses). If you want to keep these banks in which we invested so much functioning, then you have to make the investment in human capital. Ridiculous bonuses are out, but paying competitive rates to attract the right talent should always be in. President Obama’s new guidelines for banks that have gotten extraordinary help from the government is fair. You get a base salary and then you can get restricted stock to enjoy in the upside if things go well. I don’t mind if there is a LOT of restricted stock because getting these companies back on track will be difficult, and we’ll need some talented people to get these organizations fixed. If they are willing to take the challenge and the risk, then we should be happy to provide the upside reward. This philosophy seems to be essentially what the Obama plan embodies.
Would there be a similar uproar if a union worker worked over time and didn’t get paid? I think you’d see the opposite reaction in terms of the injustice of it all. But the $18 odd billion paid in bonuses reflects a lot of the year before the crash when things were still skyrocketing upward. People need not worry about the destruction of Wall Street if that’s the burn-them-at-the-stake vengeance being sought. Walls Street is dead. There is not one major investment bank left standing. They have all collapsed, been swallowed up, or converted into depository banks. We are not likely to retain our status of financial capital of the world and that will have implications on everyone as much as people would like to hate the denizens of lower Manhattan. It’s clear that most of the top talent will be moving out of the banking world over the next 12 to 24 months. Many of these people may be held in considerable contempt as being too smart for their (and our) good, but the whole Wall Street versus Main Street debate is a false one. Main Street bought what Wall Street had to offer. Let’s not forget that. The divide is a luxury for rationalists. Wall Street was dumb enough to lend massive amounts of money to a polity that had a negative to near negative savings rate for much of the past decade. Pointing the finger at Wall Street is a wonderful way to escape broader culpability.
Debating whether the news media has a liberal or conservative bias is sometimes silly. What’s clearer is that the media has an bias toward entertainment and amusement versus serious news. Serious people looking for serious information should depend on other sources of information over the traditional media. In the end, there’s not much difference in political coverage in the country than that of cheap celebrity tabloid journalism.
The other great flap was the Wells Fargo Las Vegas junket. There was a great uproar that a “bailed out” bank was wasting money on taking mortgage brokers of all people to a recognition event. But how quickly we forget that Wells Fargo did not want money from the Treasury for exactly this reason (see: http://www.newsweek.com/related.aspx?subject=Brad+DeLong). The bank felt that it did not want to sign away its freedom for money it did not need in contrast to its banking brethren. In order to add broad stability to the banking system, Paulson forced the bank to take $25 billion over the protests of Wells Fargo’s chairman. The bank did post a fourth quarter loss of over $2 billion, but most of these were related to the acquisition of Wachovia which resulted in Wells keeping many average depositors from having to deal with an acquisition with another hobbled bank which was Citigroup. How do these news organizations forget facts they themselves reported on only a few months ago.
It’s hard to understand. Sphere: Related Content
