Wall Street Plans $38 Billion of Bonuses as Shareholders Lose $74 Billion

[Didereaux]

Source: Bloomberg

Nov. 19 (Bloomberg) -- Shareholders in the securities industry are having their worst year since 2002, losing $74 billion of their equity. That won't prevent Wall Street from paying record bonuses, totaling almost $38 billion.

That money, split among about 186,000 workers at Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos., equates to an average of $201,500 per person, according to data compiled by Bloomberg. The five biggest U.S. securities firms paid $36 billion to employees last year.

Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=ahE8xVisWsbE&refer=home

---

Guess where a LOT of that $74 Billion comes from? Yep, Gov and private pension funds and 401K's

[underpants]

1. I'm investing in torches and pitchforks

Something tells me demand is about to "spike" but then I haven't had anyone in suspenders or a horrific coke habit tell me that so what do I know?

[marmar]

2. Voodoo economics?

:scared:

[rodeodance]

3. and the rich get richer.

[EV_Ares]

4. New York City lives & dies by those bonuses, waiters, car dealers,

all and anything regarding the luxury stores wants and expects them. no justification for it but as long as shareholders and people accept it, it will go on and on right along with our greed and corrupt culture. Look how we let our politicians get away with everything they do, it just keeps going on.

[MikeNearMcChord]

5. From Charles Dickens

It was the best of times, it was the worst of times,
it was the age of wisdom, it was the age of foolishness,
it was the epoch of belief, it was the epoch of incredulity,
it was the season of Light, it was the season of Darkness,
it was the spring of hope, it was the winter of despair,
we had everything before us, we had nothing before us,
we were all going direct to Heaven, we were all going direct
the other way--in short, the period was so far like the present

:mad: Madam Defarge,call your office. :mad:

[AnneD]

40. Knitting needles...

at the ready....

[kineneb]

47. and a store of five fleeces

to process into yarn

(really- friends gave me five full fleeces, two garbage bags full)

[AnneD]

48. Cool...

Might come in handy to knit something warm this winter. Want some:popcorn:

[TechBear_Seattle]

6. Learn something about the business before you write, please

Speaking as someone who is in the industry....

Firms make their money in two ways. Some comes from cash reserves that are invested, either as actual investments or because the firm is a dealer who maintains an "inventory" of securities. Typically, direct investments make up no more than 15% of the money a firm in a given year, and it is subject to the same market ups and downs faced by all other investors; in a bad year, firms will lose money.

Most of a firm's income comes from brokering transactions. Any time you (whether you are a small individual investor with a 401(k) or an institutional investor managing a mutual fund or corporate retirement fund) buy or sell, the broker charges a fee to conduct the transaction. The company I work for gets about $10 per trade. A firm like Goldman Sachs gets more; where we need to contract with a securities clearinghouse to conduct business (and they, of course, get their cut) larger firms have the resources to be their own clearinghouse, which allows them to charge less but make more. And where we do a few hundred thousand trades in a year, larger firms will do tens or hundreds of millions of trades a year. It does not matter whether the market is going up or going down; all that matters is that investors and investment managers are conducting trades.

If you predicted a falling market and made five transactions to hedge against declines, you have made five contributions to some firm's year-end profits. Or do you think these businesses should broker your investment trades out of the goodness of their hearts?

Note: Edited for grammar.

[Didereaux]

7. whoa, methinks we have a 'player' amongst us! I think I'll stick to Bloomberg, thank you

[TechBear_Seattle]

11. It seemed you were drawing incorrect conclusions from the article

Specifically, that the brokerage firms were making record profits by mistreating or defrauding investors. I felt the need to explain that such was not the case; I see so much misinformation and misunderstanding here about how the industry works that I get a tad defensive about such things. No offense was intended. :hi:

[Didereaux]

20. THAT was in the ARTICLE! I simply said...

that a LOT(not the lot, not all) of the losses would be from stockholders which are many times pension funds and 401K's. No personal offense taken, but it tends to veer threads when the wrong issue or wrong section is addressed. ( I do that myself to often, hence my lack of personal offense ;) )

[Tempest]

32. What he's failing to take into account

Is that the firms themselves are losing tens of billions from their own investment into the scam ARM market.

[TechBear_Seattle]

36. What you are demanding is very illegal

By federal and industry regulation, there is a strong separation between the divisions which underwrite securities and the divisions which broker transactions. The reason for this is pretty simple. The underwriters have access to proprietary and inside information; they have to have this information in order to do their job with due diligence. If anyone involved in the brokerage business had access to this information, every trade they brokered involving the securities underwritten by the firm would carry the taint of inside information. Even if they used the profits from one division to cover the losses in the other violates this "Chinese wall" and so would be a violation of federal law and industry regulation.

Also, you must keep in mind that all investment firms did was buy up mortgates and bundle them in to various investment instruments, which they have been doing for decades. While investment firms have lost a great deal of money underwriting these securities, they are not the ones responsible for creating or issuing the mortgages themselves. The blame for that lies squarely on the mortgatge issuers, not the investment firms.

[TechBear_Seattle]

33. The thing is, that is wrong

Brokerage houses make their money by brokering a trade. That has absolutely nothing whatsoever to do with the direction the market is taking. Yes, pension funds, 401(k) and other investments have lost money, but (with very few exceptions) that is not the result of brokers engaging in questionable practices. Speaking as a small investor myself, I can assure you that I have made plenty of misjudgements when I have bought or sold (crimeny, have I ever :eyes: ) and even experienced fund managers have misjudged the market and made mistakes. But the decision of a small investor or a fund manager to buy or sell is not (at least, is not supposed to be) the result of a broker decision. The broker only brokers a trade; that trade is why her firm gets paid, why the firm makes money and why she and her co-workers will probably get a bonus at the end of the year.

[Didereaux]

37. Okay, Okay, I finally get where you are coming from..not MY comment, but the whole article.

And I see some of your points. Probably should have replied DIRECTLY to to original post and then sloooow folks such as myself would have picked up on it sooner! ;)

But I would add I tried to be clear that SOME of the monies actually lost originated in those 401's and pensions. Brokerage houses and such do not exist in a closed piggy bank.

[EV_Ares]

8. You don't consider the article from Bloomberg credible? eom.

[JNelson6563]

29. Bloomberg=Liberal rag

:rofl:

[TechBear_Seattle]

41. Compared to the WSJ, it is

At least, such has been the case since Murdoch bought the Journal.

But that is a strawman argument, as I am apparently far to the left of most DU members. :hi:

[JNelson6563]

43. Hey, you're alright in my book TechBear

:toast:

[Tempest]

9. There's a big problem with your example

Brokerage firms, including Goldman Sachs, are taking huge write-offs for losses.

The firms are losing money, and cutting staff, at the same time they're giving out obscene bonuses.

[TechBear_Seattle]

14. That is a different issue

Many brokers for large Wall Street firms work only for the year end bonuses; they do not draw a salary and they do not earn a commission. Other brokers will earn a small commission and in exchange get smaller bonuses. However, the employment contracts require that the brokers get a bonus (which technically makes it profit dependant salary and not a bonus, but that's not the point.) Most of these bonuses must be paid; otherwise, the firms are in breach of contract and subject to much greater penalties stemming from lawsuits. Also, consider that brokers who have such contracts bring a great deal of money into the firm. If, say, Goldman Sachs defaulted on its payroll, it will likely lose all of its brokers to other firms that have not defaulted. That would be extremely bad for business; GS would very likely have to close down within a year.

Also, the write-offs come from underwrititing hedge funds and bundled mortgage investments, which by regulation are separate business ventures from engaging in transactions on the secondary market (ie trading securities.) This means that the mortgage and hedge fund underwriting divisions of the firm can lose money while the brokerage division earns record profits. Both are reported on the firm's balance sheet and reports, but they are effectively different businesses with unrelated profits and losses.

[EV_Ares]

17. Exactly, I don't see any misunderstanding there. How do you misunderstand

the sub-prime business, the write offs, the firing of employees, then on top of everything else, the CEO who brought on this crap, gets millions in bonuses for losing millions of the shareholders money. This doesn't count the ripple effect it has throughout the economy, jobs, business, psychological effect, etc.

It is pure greed and corruption.

[Tempest]

31. Just look at the CEOs at the firms who are getting fired over the mess

They lost their companies tens of billions, but they still get tens of millions in golden parachutes.

In reality, they should get a blanket party.

[closeupready]

38. Exactly - they make money by moving it around.

Not necessarily from whatever direction the market is moving.

[Bonhomme Richard]

10. Be fair. These people have serious household expenses to pay.

Yeah......Right.
Jerks

[pattmarty]

12. Hey, at least the bonus are less than the losses.

[doc03]

13. I can understand if the market goes up

or down the traders are still doing their job. But an average bonus of $201,500 per empolyee, that word bonus should be spelled (boneus) perhaps. I get no Christmas bonus just two paid holidays and that's probably more than most people get in this country.

[TechBear_Seattle]

15. Many of these brokers earn only their "bonus"

They get no salary, they get no commission. In many cases, a minimum "bonus" is written into their employment contracts. The word "bonus" is used only because it is traditional to call it a bonus.

[doc03]

16. Boneus would be more appropriate then

I really don't have much problem with the average person getting $200,000 but I have seen news stories that many get in the Millions.

[TechBear_Seattle]

19. Why?

The money to pay these bonuses comes from the fee the firm charges when a trade is transacted. It does not matter whether the market is going up or down, only that trades are being made. If you make a trade, is it unreasonable for the firm brokering your trade to charge a fee for the service? When the firm engages in millions of trades during a year, is it unreasonable to pay the excess after expenses back to the people who conducted those trades?

[doc03]

21. They could lower their fees, like the

Repugs say about tax cuts (it's your money). That's like my employer last year we had a proxy battle and our Board of Directors was voted out. Our old CEO made $300,000 then new Board brought in a new CEO & President that said they would work for no salary as long as we are losing money. Last year the company turned a profit, this year under the new management these geniuses were able to lose $150,000,000. They didn't get a salary but they pocketed $5,000,000 each in stock options.

[TechBear_Seattle]

28. If you think the fees one firm charges are too high, take your business to a different firm

Or don't invest in securities at all. :shrug:

Brokerage houses do not operate as charities; why do you think they should?

[doc03]

30. I did

[TechBear_Seattle]

42. End of problem, then.

:toast:

[EV_Ares]

18. The broker chose the business, signed the contract and I am sure he

understood it just as well as the sub-prime borrower who signed his contract to buy a house and this broker and others was using to make money off of. He suffers the consequences as everyone else is having to.

[TechBear_Seattle]

25. The brokers getting the bonuses are NOT the ones who brokered mortgages

The brokers getting the bonuses buy and sell securities, ie stocks, bonds, options, etc. The closest they get to the mortgage meltdown is A) a meltdown of their own mortgage and B) transacting trades on bundled mortgage investments. They are NOT the people who created the bundled mortgage investments, they are NOT the people who sold the mortgages themselves and they are NOT the people who underwrote the mortgages in the first place.

Bundled mortgage investments are where an investment company buys up mortgages from the original lender such as banks and home loan companies. These are bundled together, typically as real estate investment trusts, which then become something resembling a mutual fund. When people pay on their mortgage, the payments are made to the trustee of the REIT, who then distributes at least 90% of the money to investors who have bought shares of the trust (the remaining money, by law never more than 10%, is retained to cover costs of administering the trust.) These have historically been very stable, dependable investments. When people default on their mortgages, however, the trusts fall drastically in value.

Goldman Sachs and other firms have lost huge amounts of money on REITs and similar funds because they have underwritten funds which have had a lot of defaulted mortgages. Imagine spending ten million dollars to buy mortgage contracts, only to end up with seven million dollars of value. Many mortgages have not gone into default and about 30% of US mortgages are guaranteed by Ginnie Mae (the Goverment National Mortgage Association) so the trusts have not become worthless. However, there is almost no chance for underwriters to get back the money lost in this way. Thus, they write it off as a loss.

You can not blame investment firms for bad business practices with regards to mortgages. Again, investment firms only bought up already existing mortgages to create these mortgage investments; they did not issue or sell the mortgages themselves. And the business of underwriting REITs and the like is totally separate from brokering shares in REITs and other securities such as stocks, bonds, options, investment funds and so on; losses in one business can not really be connected to record profits in the other business even when both businesses are conducted by the same firm.

[Tempest]

35. Where is your proof of this?

The brokers getting the bonuses are NOT the ones who brokered mortgages

You are aware of how the bundled mortgage loans are traded, aren't you?

[TechBear_Seattle]

39. The proof is knowledge gained in more than 10 years working in the industry

Does that work for you? :hi:

First off, I should have said "wrote mortgages." That is more correct and less likely to cause confusion. My apologies.

That said, you are confusing two things. Investment companies do not write mortgages; that is done by banks, credit unions and other lenders. They take on the risk of the loan, set the terms, etc. The problem is that mortgages represent money that is tied up; a loan company has only so much money to give away and after it is gone, they need to get more.

Enter investment companies. They buy existing mortgages from the loan companies who wrote them. Loan companies are usually happy to sell, as they can get the principle plus a premium immediately and give up all the risk of the loan. Investment companies then bundle these mortgates into REITs and other similar instruments; this process is called underwriting. Investors can then buy shares of a REIT; the market value of a share is based on the aggregate interest, assuming that none of the mortgages go into default or get refinanced. When the people paying on their mortgage make payments, the money "flows through" the REIT account with at least 90% going to the shareholders, which is how they make money from the investment. (The remaining money goes to cover expenses; anything left over is money made by the underwriting firm.)

The primary fault for the adjustable rate mortgage melt-down lies with the loan companies who wrote the mortgages. The REIT underwriters knew what they were doing in buying ARMs, as it is exactly their job as underwriters to know the risks. The potential higher returns from REITs with a lot of ARMs (along with a corresponding higher risk to investors) by law was disclosed in the prospectus of the REIT, so investors knew exactly what they were getting into.

Sorry, but you really can not lay blame for the mortgage melt-down on investment companies; blame falls squarely on the original lenders.

[EV_Ares]

44. Doesn't matter, they are part of the entire system and involved as well;

so they take the consequences just like everyone has to.

[YankmeCrankme]

22. Just so I understand this right.

You're saying that these people get no money all year long until the end, then they receive a bonus (pay)? How were they maintaining their lifestyle before getting paid? These people are living off their savings until they get paid? That doesn't make sense to me, please explain.

[EV_Ares]

23. Just like I said before, if that is true, the broker chose to be paid that

way and I am sure he understood when he agreed so he suffers the consequences during these kind of times as he enjoys his lifestyle from the money he has made off of others.

[TechBear_Seattle]

27. But, again, the company has made money because trades were made

Why should the firm not pay the money back to the people who made those trades possible?

[EV_Ares]

45. Exactly, "those people who made those trades possible" the same people

who were involved in some way or another for the entire mess and happening of the sub-prime mortgages and as I understand from the liberal rag as you call it, along with the WSJ, none of this is over yet. So, why should these people gain at this time on the misery of those who are the results of the greed and corruption of these groups.

Maybe another time. I know our bonuses are based not only on ourselves meeting our goal but the units, the divisions, etc on up to the CEO.

Everyone is involved regardless of how you want to spin it and carve it, dice it, whatever, they all had a part in it, some more, some less. They are all swimming in the shark tank together and they all suffer the consequences together because they all had a part in this entire debacle.

This is like a lot of things as there is more than one way to look at it and I can understand how you want to see it. I think you have to understand as well, that there is not a lot of sympathy out there for these people anyway in these particular times. They are seen in a lot of cases as greedy, corrupt, not to be trusted and all they want is to have your money for them to make more for themselves, not necessarily what is best for you. This is why I am totally against them getting their hands on social security.

Myself, I understand that and I accept that so I don't just let the guy that has ours have a free hand, you question everything and we have a pretty good understanding of each other and our risks that we are willing to take.

I respect your knowledge of the industry and appreciate your filling us in on it as well as understand your feelings with family being in the business. I am sure all of us would have a different take if we were more involved or closer to the business as yourself.

[TechBear_Seattle]

26. How does a farmer maintain his lifestyle before getting paid?

My step father worked as a broker on Wall Street for many years; his two brothers and one of his sisters work there still. They all take some joy at this time of year in pointing out how paltry my own year-end bonus really is (I am the IT department for my firm, so I basically get the scrapings from the barrel.) I dare say I have reasonably accurate information. :hi:

Also, keep in mind that people making this kind of money do not have savings so much as personal investments. If you were given half a million dollars today, you would not drop it off into a savings account; you would invest it in a reasonably safe instrument with a decent rate of return. Yes, it will be shakey for a few years, but when you start out you are generally getting a regular salary with a smaller yearly bonus and not working just for the year end jackpot. By the time you are working on bonus only, you generally have enough invested to cover day-to-day incidentals just on the return from those investments.

And one last thing: the "average bonus of $202,000" is a bit misleading. That almost certainly includes one top broker making $3 million and 40 or so assistants, secretaries, clerks and IT guys getting around $30,000.

[YankmeCrankme]

46. Was just curious about how it worked.

Figured everyone earned a salary and received bonus on how well the company did and since the company did bad bonuses would not be big.

As for farmers, unless I have inaccurate information, they take loans out to live until they can sell their harvest. One of the reasons they have a high potential for losing farm to banks, i.e. bad harvest or low price for goods means they can't repay loan.

[Mountainman]

24. Just wait until they get their hands on the Social Security trust fund.

They'll churn the shit out of that and make billions more while people will lose their retirement insurance.

[doc03]

34. That's exactly why the Rthugs want that SS money

They churn the shit out of trades to pump up the fees. Another old trick is pumping up a stock to a small investor so the ones with the big accounts can unload them. Myself I invest strictly in no load Mutual Funds.

[Acadia Blue]

49. A solar shingle company would be a good idea. I read that we

export almost all out solar roof tiles, and roof devices to the EU>

[Solar_Power]

50. $38billion / 186,000 workers = average bonus of $205K

Life is good (for some)

[prolesunited]

51. And every time we have the audacity

to ask for a bigger crumb from the table, we're accused of class warfare.

[cliss]

52. I think they should give them more bonuses.

Give those CEO's and COO's and CFO's and everyone else. Then watch these corporations go belly up.
That will be the end of this irritating situation.

Morgan Stanley?
Well, that's interesting. According to rumours, they are next on the guillotine. Seems they have a problem of some subprime portfolios. They ain't gonna make it.
Well, it's obvious they're raiding the coffers before it's too late. Just like Enron!