Banks Asking for More Regulation with Record Bonuses

Even in the midst of the worst financial meltdown since the Great Depression, the biggest Wall Street banks, the same banks that relied on hundreds of billions in government cash to stay afloat, are paying out record bonuses to their employees. This, of course, is old news.

What they don't realize is that this is a Pyrrhic victory for them. The banks are twisting the dagger in their own side and lopping off the ears of their shareholders. If you own bank stocks, get out now.

Record bonuses are in. Goldman Sachs handed out $16.7 billion in bonuses in the first nine months of 2009 according to Bloomberg. That's just shy of the $16.9 billion given out in the pre-crash record year of 2007.  Not only did this result in bad press, but there are several shareholder lawsuits pending. Shareholder Ken Brown is claiming that in 2008, Goldman handed out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation. (see the lawsuit).

Bloomberg is reporting that Bank of America is also planning to award record bonuses to some of its investment bankers. “We have to compensate our people competitively,” spokesman Robert Stickler said. “If we don’t do that, we lose our talent.” I'd expect we'll see some more lawsuits aimed at BofA.

But the lawsuits aren't really the problem for these banks. The problem is that the compensation as well as the bad press it's getting is setting the stage for some very nasty regulation. The bank lobby has 0 credibility and the public's antipathy to the banks is at an all-time high. In this setting, legislators will be tripping over each other to pass legislation that will control and reduce bank profit. Don't believe it? It's already happening.

Congress recently passed a credit card reform bill as well as a bill that changes the way banks process overdrafts. Both are expected to cost the banking industry over $50 billion per year. And that's just the beginning. What the bank bonuses are signaling is that the banks are so profitable once again that perhaps it's time for them to start sharing some of that treasure chest. Especially when that treasure chest was maintained via public bailouts and funds.

I predict that 2009 will be the high water mark for the finance industry in the United States. The banks overplayed their hand and now they are going to watch as the government and general public begin to slowly dismantle the profit-making system that succors them. Expect a lot of hand-wringing and talk about how regulation of the banking system is bad for everyone, but most of it will be ignored. The public is mad and has come to realize that what's good for the banks is no longer good for Main Street.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • baloney

    January 09, 2010

    The entire idea of needing to compensate their people competitively is a load of crap. Half of the people who they are paying these salaries to are overprivileged children of their damn clients. But I don't see any change coming.

  • JRodgers

    January 12, 2010

    Dodd and Geithner are protecting the industry. Without them, Congress would pass an extraordinary tax on the industry akin to the Darling tax in the UK.

  • Sam Cass

    January 12, 2010

    @JRogers - Dodd and Geithner will both be gone by next year.

    Obama is considering a tax on bank profits. This is the lesser of the problems the banks are going to have to deal with:

    http://www.nytimes.com/2010/01/12/business/economy/12bailout.html?ref=business

    Regulation will be a far bigger problem for bank profits. But with every mention of fat bank bonuses, the financial industry digs its grave deeper.

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