After a brief downturn, Wall Street bonuses have bounced back to pre-crisis levels, prompting some to wonder what happened to the regulation and reform we were promised.
WASHINGTON — After Wall Street bonuses declined significantly for several years in the wake of the financial collapse that began in 2008, compensation is now back at pre-crisis levels, according to new figures released last week.
Bonuses paid to employees throughout the securities industry rose by 15 percent last year, with the average topping out at nearly $165,000. The overall bonus pool amounted to nearly $27 billion, having grown by a whopping 44 percent over the past two years — even for those firms that received significant assistance from the federal government.
For Wall Street, the 2013 figures constitute the highest average bonus since start of the financial crisis and the third-highest level on record, according to new data from the New York comptroller. Securities bonuses have rebounded despite overall profits at the big banks and other finance firms being down by some 30 percent compared to 2012, measured according to members of the New York Stock Exchange.
“Wall Street navigated through some rough patches last year and had a profitable year in 2013. Securities industry employees took home significantly higher bonuses on average,” New York State Comptroller Thomas P. DiNapoli said last week while announcing the new findings. “Although profits were lower than the prior year, the industry still had a good year in 2013 despite costly legal settlements and higher interest rates.”
Profits for 2012 were reported at nearly $17 billion. Though down from $24 billion the previous year, the 2012 profits were still historically significant. Indeed, the past half-decade has seen three of the financial sector’s most profitable years ever, belying not only complaints about growing regulatory requirements but also standing in stark contrast to the tepid economic recovery being experienced by much of the rest of the country. Last year also saw record-sized settlements between financial firms and the U.S. government over fraud and other unlawful activities.
The average bonus level masks what are likely significant disparities between the amounts being received by high-level executives and lower-level employees. Even so, the new findings show that the average salary in the financial sector — $360,000 for 2012, the last year for which data is available — is more than five times the average salary for the rest of the private sector.
DiNapoli contextualized the findings on profits and bonuses in terms of Wall Street’s “resilience” in the face of a “changing regulatory environment.” He noted a “major” regulatory overhaul having taken place since 2008, requiring banks to maintain larger cash reserves, limiting trading with a firm’s own money and imposing broader measures to reduce risk and strengthen transparency.
For others, however, the new figures are ominous, underscoring a distinct — and quickly reinstated — gap between Wall Street and the “real economy.”
On the one hand, this gap is at the base of the fast-growing inequality that has come to characterize the current era, both in the United States and abroad. On the other hand, this disconnect suggests an ongoing weakness in the country’s overall system of regulation and accountability within the financial sector — issues that were supposed to have been dealt with by Congress over multiple rounds of lawmaking and regulatory tightening.
“Rising bonuses contradict any notion that sanity or contrition enjoy firm standing on Wall Street,” Bartlett Naylor, a financial policy advocate with Public Citizen, a watchdog group, told MintPress News. “Last year was one of Wall Street penalties, capped by JP Morgan’s record $13 billion fraud payment. Yet increasing average bonuses by 15 percent only reinforces a culture of abuse.”
In 2010, at the height of the public debate over the federal government’s controversial assistance to financial firms, more than 70 percent of U.S. respondents told a Bloomberg poll that large bonuses should not be given out at banks that took bailout money. Further, only 7 percent supported bonuses as an incentive to return the sector to solvency.
Yet in the intervening time — indeed, in the half-decade since the financial crisis — relatively little has been done to alter the often outlandish levels of compensation enjoyed within the sector. This continues despite widespread analysis suggesting that the heavy bonuses on offer on Wall Street often do not translate into better performance, as well as concerns that unmoored compensation could have led to the risk-taking that led to the financial collapse in the first place.
“It’s not very hard to get people’s blood boiling on this issue. It’s five years since the crisis and the number of unemployed in this country is still nearly 3 million more than it was in 2008, yet the bonus culture that contributed to the crash has come roaring back,” Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies, a think tank here, told MintPress.
“There were a lot of great speeches in the heat of the moment, especially related to bonuses in financial companies that received bailouts, but there still have been no meaningful restrictions implemented.”
The most significant legislation to be passed in the aftermath of the financial collapse was a broad regulatory-reform package known as the Dodd-Frank Act, which became law in 2010. Several parts of this massive bill deal directly with executive pay.
One part, known as Section 953, requires annual disclosure of the ratio between the compensation received by a CEO and that received by a company’s average worker. Another, Section 956, expressly prohibits “incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the firm.”
Neither of these rules has been finalized yet, though repeated congressional deadlines have passed. Details for Section 953, for instance, were only proposed in September. And while a similar proposal for Section 956 was put forward in 2011, it requires agreement among, and sign-off by, some half-dozen federal agencies and regulators. That hasn’t yet happened and, according to Anderson, the agencies involved have been “dragging their feet.”
One of the few recent bipartisan efforts to ramp up pressure on the sector came in the form of a new landmark tax reform proposal from the Republicans’ head tax writer, Rep. Dave Camp (R-MI). That bill, unveiled last month, included a surprise levy on big banks, a move that has resulted in furious lobbying by the financial industry. For the moment, however, Camp’s proposal is not expected to go anywhere in Congress, at least until after the elections at the end of this year.
Over-focus on the bottom
Meanwhile, inequality has risen to the top of multiple global agendas. In January, the World Economic Forum warned that the growing gap between rich and poor, brought about by globalization, constituted “the most likely risk to cause an impact on a global scale in the next decade.” Just last week, the International Monetary Fund, a paragon of financial orthodoxy and conservatism, made an abrupt policy about-face to warn that income inequality is bad for economic growth and that the answer to the problem is progressive redistribution.
Much of this new focus is because the global concentration of wealth that has taken place over the past three decades has increased in recent years, and stands at modern record levels today. According to analysis by Credit Suisse, just 1 percent of the global population currently owns around half of the world’s wealth.
Citing this trend, twice in the past three months President Barack Obama has stated in major speeches that income inequality is the “defining challenge of our time.” Many analysts are now suggesting that the inequality theme will be central to the remaining years of Obama’s presidency, and it offers a key strategy for Democrats during national elections over the coming two years.
Yet the Institute for Policy Studies’ Anderson suggests this response has been timid and misdirected.
“Obama has talked about inequality forcefully in recent months. But when it came to talking about what he’d propose, it’s been pretty much reduced to raising the minimum wage,” she said.
“The top end of the inequality problem gets skipped over, while the president just talks about the minimum wage and additional training. But that’s the challenge: to keep the inequality debate in the United States meaningful, focused on both raising the bottom and bringing down the top.”
For the moment, some impetus on tackling executive compensation could be coming from Europe, though this remains mixed. In November, Swiss voters rejected a referendum that would have capped executive pay at 12 times that of lower-level employees. Although the measure failed, observers say the vote sparked a significant discussion on whether high compensation actually makes firms more competitive.
The European Union, though, did recently institute a cap on banker bonuses. Starting at the beginning of this year, bankers in the EU will only be allowed bonuses equal to their annual salary, or twice that with the approval of shareholders.