It appears that I need to clarify my own views to my "audience" on the issue of compensation. I have always believed that traders, investment bankers and top executives have become wildly overpaid ( this does not include regular real commercial bankers).
On the other hand, I don't believe their compensation was the root cause of this crisis. Take a look at my early posts and the ensuing comments. The collapse was caused by the bursting of the housing bubble which happened as a result the failure of government to enforce existing regulations applicable to subprime mortgages and unregulated credit default swaps.
Nevertheless, it is my view that the extremely high levels of senior executive compensation has been harmful, and particularly destructive for my industry, the law, as equally "smart" lawyers attempt to keep up with their business clients. The things law firms have done to keep up with their business counterparts have done great harm to what once was a learned and collegial profession. The practice of law now is more just like another bottom line business. I blame high corporate compensation to a large degree ( not just in banking-- look at CEO and other senior exec comp). We felt we had to keep up.
Regular bankers never used to be very highly paid. They did fine, but it was never considered a high paying job. Rather being a banker was thought to be a stable job with good but not great pay, with good retirement benefits and tenure. Interesting how that has gotten completely turned around.
Investment bankers were the guys who got the big bucks, but back then at least they owned their firms as true partners. Therefore they were risking their own capital and if they reaped the benefits, at least they took the risk/losses as well. Needless to say they were a lot more careful.
How did this all change? First investment banks went public, so they were now in large part risking "other peoples money". In addition since they were no longer partners and couldn't earn profits, they got paid extremely high bonuses from gross profits ( before the net profits were finally given to the shareholders). If they lost money, no matter; that hit the shareholders ( which often included themselves - but they still got their compensation in all events). There is a great article by Michael Lewis in November 2008 where he interviewed the former head of Salomon Brothers who made that very point.
Second, as I said, regular commercial bankers never made that much money. Recall how modestly profitable the core business of banking is. However when Glass Steagall ended ( and even before, using good lawyers), commercial banks got into investment banking. They too starting paying themselves mega bucks just like investment bankers did.
Of course, this all begs the questions as to why any of them are entitled to such out sized compensation. It's all very incestuous with boards and consultants and the like, but my guess is it's the shareholders who, as always, were asleep at the switch. Remember who would get all that bonus money if it doesn't go to the executives--- to the shareholders or to build up capital. However , I read somewhere that shareholders who had widely diversified portfolios wanted the bankers to take big risks so they could make big profits ( even after paying out big bonuses) and felt that as long as they were diversified they could absorb whatever losses might arise. Of course that was before the Great Recession.
Can we turn the clock back? Do we want to?
Eric
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