Corporate Bonuses: The bubble that it seems will never burst

According to a report issued by New York Attorney General Andrew Cuomo Citigroup, Inc., Merrill Lynch, and seven other banks who received more than $175 Billion (yes, that is billion with a "B") in taxpayer, aka OUR MONEY, paid out more than $32 Billion in bonuses to executives. According to Bloomberg, more than 5,000 of those bonuses were more than $1,000,000.

Cuomo's study, called “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture,” comes as Congress and the Securities and Exchange Commission examine whether to limit the compensation paid to top corporate executives.

Citigroup and Merrill Lynch suffered losses of more than $27 billion at each firm, the report said. Yet Citigroup paid out $5.33 billion and Merrill $3.6 billion in bonuses.

Industry talking heads say that pay is tied to performance and that government should not get involved. The problem is that this type of structure led to the taking of huge amounts of leveraged risk, and when that blew up in their faces, they fired employees, eliminated 401(k) contributions, ruined the economy and left us (the taxpayers) to pick up the tab.

Take as an example the case of Andrew Hall, who runs Philbo, Citi's oil-trading subsidiary. He is on track to collect $100 million, which is his cut from profits from a year of extremely aggressive bets on the oil market. Citi says his trading resulted in $2 billion for Citi over the past five years and they are contractually obligated to pay him. The problem is that this type speculation was not used to lock in supply or steer capital where it was needed, but rather by outsmarting other investors. That bodes the question---what happens when he bets wrong and loses 2 billion, and 10 of his collegues do the same? Well, we know how that story ends.

On main street, if you bet the farm and lose, you lose the farm. On Wall Street, if you bet the farm and lose, the rest of us have to buy you a new farm.

The problem remains that these executives continue to suffer the what I call the "Marie Antoinette Syndrome." They don't get it. They continue to fly around in corporate jets, promote their children, pay themselves (and their buddies whose boards they sit on) huge bonuses while the rest of the country suffers under immense economic stress.

Despite their political power across both parties, I would submit that this simply cannot continue. The industry has had the chance to police itself. That time is past. Just as small businesses cannot put lazy family members on the payroll and pay them to hang out at the country club, neither can banks.

One day the government free cheese program will be over. Banks will have to compete in a new environment. I submit that when that day comes, many good bankers will have gone to community banks and they will become a real force in the industry. In the meantime, we will continue to read about such bonuses at the same pace we read about major league baseball players and steroids.