Several big banks in US ignore Europe's lesson on greed

Bloomberg Sep 19, 2012, 01.51AM IST
(Several big banks have finally…)

William D Cohan

Four years after the collapse of Lehman Brothers Holdings and the near-total paralysis of capitalism's central nervous system - the moment fear completely overwhelmed greed on Wall Street - we are starting to see a few glimmers of hope.

The good news: Several big banks have finally started taking steps to reform Wall Street's out-of-control compensation system, which rewards bankers and traders with big bonuses for taking insane risks with other people's money.

The bad news: These banks are in Europe, and most of their US cousins still just don't get it.


The bank also appointed an outside committee to examine its pay practices generally, and pledged to be at the forefront of change in the industry. While not yet the sort of extensive transformation that will protect the rest of us from bankers' bad behavior, the Deutsche Bank proposals at least prove the old saw that in the land of the blind, the one-eyed man remains king.

UBS, for its part, said it is considering capping banker and trader bonuses and making them a function of the executives' fixed salaries or of the bank's profitability.

UBS also said it was examining a five-year vesting option for stock awards, along the line of Deutsche Bank's proposal. Credit Suisse Group and HSBC Holdings have also taken baby steps in the direction of compensation reform.


Just as before the financial crisis and unlike almost every other business on Earth, about 50% of every dollar of revenue generated on Wall Street goes right back out the door in the form of compensation.


Worse, neither Lloyd Blankfein, the chief executive officer of Goldman Sachs Group, or Jamie Dimon, his counterpart at JPMorgan Chase - Wall Street's highest-profile leaders - have said anything about changing this flawed system, while continuing to be paid tens of millions in annual compensation. Instead, Goldman cut corners by eliminating its two-year analyst programme for college seniors. This is not leadership.
To his credit, James Gorman, the CEO of Morgan Stanley, has at least addressed the flawed Wall Street compensation system: In 2011, Morgan Stanley's bankers and traders had their cash bonuses capped at $125,000.

Gorman said publicly, at the World Economic Forum in January, if they didn't like it, they could just leave. Few have, and why would they? Where else but Wall Street can they get paid so much for risking none of their own money?


Who could forget, in the past few months alone, JPMorgan Chase's London Whale debacle, where close to $6 billion of depositors' money was lost in an ill-advised, obscure proprietary bet on the direction of interest rates?

Or the devastating loss of confidence in the markets caused by the big banks' manipulation of the London interbank offered rate? Or HSBC's money-laundering scandal?

Or Standard Chartered's bookkeeping shenanigans to help Iran? Or Nomura Holding's insider-trading scandal? These happened after the financial crisis laid bare a Wall Street culture that more closely resembled La Cosa Nostra than anything else.


(The most recent example came from Anshu Jain, one of two new leaders of Deutsche Bank, who laid out a plan for an internal change of culture with the admission that "tremendous mistakes have been made. We can see times have changed and we need to change and change rapidly.")

Part of the answer, perhaps, is that Wall Street behaviour merely reflects the latest acceptable norms in society as a whole, which sadly has seen a steady decline in ethics, morality, compliance and leadership in the last generation.