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Return of Wall St pay bonanza triggers concern
2009-07-24
NEW YORK (AFP) - The Wall Street gravy train is gathering speed again as banks only just emerging from financial crisis lavish billions of dollars on their employees. Announcements over the last week by Goldman Sachs and Morgan Stanley of a return to mega compensation pools are seen by some as a sign of health. For others, they mark a worrying throwback. When Wall Street tipped into the abyss last year, dragging the country's economy with it, popular and much political anger was directed at so-called fat cat executives -- individuals paid fortunes with little regard to their performance. But Wall Street appears to be on the mend now, with the Dow Jones shares index topping 9,000 and a handful of banks, which survived thanks to government bailouts, emerging as powerful giants. Goldman Sachs last week reported record 3.4 billion dollar earnings for the second quarter -- and disclosed that it had set aside a record 6.6 billion dollars for compensation expenses in that quarter, or 11.4 for the first half of the year. On Wednesday, it was the turn of Morgan Stanley. The bank reported a third consecutive quarterly loss yet still found a way to set aside 3.9 billion dollars for pay packages. Both banks have paid back their emergency loans under the government's Troubled Assets Relief Program, which means they are more free to ignore political pressures. But the apparent lack of change in Wall Street's compensation culture worries those who argue that irresponsibility and arrogance were at the heart of the meltdown last year. President Barack Obama, whose administration oversaw the rescue, said in a PBS television interview Monday that mentalities had yet to change. "The problem that I've seen, at least, is you don't get a sense that folks on Wall Street feel any remorse for having taken all these risks. You don't get a sense that there's been a change of culture and behavior as a consequence of what has happened," he said. France's finance minister, Christine Lagarde, attacked in an interview with The Financial Times published Tuesday the "absolute disgrace" of guaranteed bonuses that some banks are starting to pay again. These long-term bonuses, which banks like Citigroup and Deutsche Bank say are needed to retain key staff, are a return to "the old ways of compensating with insufficient relationship between compensation and lasting performance and risk management," Lagarde charged. She suggested that G20 governments agree on curbs when they meet in September. In the US Congress, Democrat Barney Frank, who heads the financial services committee, is pushing for a law that would empower shareholders to rule on executive pay packages. "Shareholders should vote. The problem is the boards of directors and the CEOs -- there's really no arms length relationship here. They're pals," he said in an interview with Tech Ticker website. "If the shareholders whose money it is are willing to pay... that's their business," he said. But what "they cannot have is a compensation structure that has bad incentives." Analysts say the picture is more complex than the sometimes populist political debate, and that banks face a very real danger of losing their best and most knowledgeable personnel to competitors. Alan Johnson, managing director of a compensation consulting firm, said the government has a right to set standards, since the government bailed out the banks. However, he said he was "skeptical" about shareholders' ability to take charge of the issue, and stressed that the right kind of risk taking must be encouraged. "If people take prudent risks, employ a lot of people and pay a lot of taxes, I don't have a problem with that," he said. "We should look at Goldman Sachs as a positive symbol." John Challenger, a consultant, said that Washington desperately needs US banks to survive and remain world leaders in a tough environment. "It is hard to justify outsize compensation packages, but these banks are competing with each other," he said. "The US government does not want them to be overwhelmed by the weight of bad assets or by losing all their talent."
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