Friday, January 23, 2009

Wall Street's culture of entitlement hard to shake

Incredible. Even Pres. Obama chimed in on this. Complete AP story here. That these people are extracting so much wealth out of the system while destroying it and causing so much suffering is astounding.

John Thain should have known the rules.

After all, when he became CEO of the New York Stock Exchange in 2004, he replaced Richard Grasso -- a man who embodied the excesses of the times and was forced out for taking a massive annual pay package of $187.5 million. Thain at the time accepted a much smaller $4 million.

But now, the Wall Street wunderkind is gaining similar notoriety. As head of Merrill Lynch, he sped up bonuses to several executives before Bank of America Corp. bought the investment bank on Jan 1. He also spent $1.2 million decorating his Manhattan office, according to media reports, as Merrill hemorrhaged money -- a decision that's invoking particular rage among Americans, including President Barack Obama. Thain left his post at Bank of America on Thursday after unexpectedly big losses at Merrill Lynch; the bonuses were a likely contributing factor in his departure.

Thain's actions exemplify how hard it is for the industry to wean itself off the hefty paychecks and spending the last decade brought -- even as financial companies now rely on taxpayer dollars to stay in business.

Last year, a clampdown by Citigroup Inc. on color copies and BlackBerrys made headlines, showing how the nation's faltering banks were having to cut back on nonessentials. But analysts say there's still a deeply ingrained culture of entitlement at financial companies. It's a mindset banks will have to work harder at changing as they come to grips with their failures, and as they face more scrutiny after accepting government help.

"You've always had this Wall Street ethic of, I'm going to push the rules as far as I can. That's been part of the culture," said R. Edward Freeman, academic director of the Business Roundtable Institute for Corporate Ethics and Olsson Professor of Business Administration at University of Virginia's Darden School.

The long hours many bankers work help feed an attitude of entitlement, Freeman said.

"I've had former students talk about sleeping under their desks," he said. "This leads to this idea of, I'm entitled to being rewarded. But sometimes, that's disconnected from performance."

And, Freeman added, the government for years gave Wall Street carte blanche.

On Friday, citing the reports "about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices," Obama said the lack of accountability and transparency at financial companies "have to be part and parcel of a reform package if we're going to be responsible in dealing with this economic crisis."

The reports of Thain's expenditures follow news just a few months ago that bailed-out American International Group Inc. spent about half a million dollars for executives to attend a beach retreat in California.

Wall Street employees came to expect big compensation packages as their paychecks kept ballooning year after year.

The difference between wages in finance and wages in other private sector industries was "excessively high" from the mid-1990s until 2006, according to a paper by New York University's Thomas Philippon and the University of Virginia's Ariell Reshef published this month by the National Bureau of Economic Research. The last time the difference was similarly excessive was around 1930, they wrote -- right after the stock market crash of 1929.

Many bank CEOs and other executives gave up their bonuses late last year as the government started limiting compensation as part of its Troubled Assets Relief Program. Thain was among them, as were four other Merrill executives -- but only after Thain initially sought out a $10 million bonus, The Wall Street Journal reported.

Merrill Lynch paid Thain more than $83 million in 2007 -- making him the highest paid CEO on Wall Street that year. The firm then lost more than $37 billion over the course of 15 months, and was saved from collapse in a government-brokered buyout by Charlotte, N.C.-based Bank of America Corp. . . .

And Citigroup recently said it plans to tie executive pay more closely to performance. It spent $6.6 billion on total compensation and benefits in the fourth quarter of 2008 -- down 26 percent from the same quarter in 2007.

The changes were slow-moving, though, considering that the institution's problems started escalating in late 2007. For the first three quarters of the year, compensation and benefits were actually higher than in the same period a year earlier, even though Citigroup was losing money. That was before the company received a government bailout.

For all of 2008, Citigroup's spending on compensation and benefits was down 4 percent from 2007 -- although its work force shrank by a much larger 14 percent. That means the company's expenses per worker were rising as the company struggled. . . .

Managers argue that big bonuses are necessary to retain good employees . . . .

But those looking from the outside in are skeptical.

"How much does it take to retain good people? The truth is, there are an awful lot of talented unemployed people right now," Post said. "There's a mythology that there are only a precious few geniuses that can run these places." . . .

See this also ("John Thain's Top Ten Greatest Moments") from TPM. Thain was a big McCain backer, by the way.

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