Wall St. Jacks Up Pay After Bailouts
Lawmakers Warn Against Return to Pre-Crisis Levels

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, July 23, 2009

NEW YORK, July 22 -- Wall Street's biggest banks are setting aside billions of dollars more to pay their executives and other employees just months after these firms were rescued with a taxpayer bailout, renewing questions about compensation practices in the aftermath of the financial crisis.

The recent outcry over bonuses at bailed-out firms prompted public alarm and promises of reform from financial leaders, who acknowledged that pay and bonuses should not reward risky short-term business decisions -- such as those that contributed to the meltdown -- but instead longer-term financial performance.

But Wall Street, helped by improving profits, is on track to pay employees as much as, or even more than, it did in the pre-crisis days. So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year.

The increase in set-asides for employee pay has raised the ire of Washington, where lawmakers denounced financial leaders for returning to old habits and vowed to enact measures governing executive compensation.

"It strengthens our commitment to getting legislation passed," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview Wednesday, adding that a committee vote on a bill to increase oversight of Wall Street pay has been scheduled for Tuesday. "The amounts are troubling."

Goldman Sachs caused a stir last week when it disclosed it had set aside a record $6.6 billion for compensation expenses in the most recent quarter, bringing the total for the first six months of the year to $11.4 billion. If that pace continues for the rest of the year, Goldman's employees will earn an average of about $773,000, more than double the figure last year and even exceeding the $700,000 paid in 2007.

The recent set-asides came as Goldman announced it earned a record $3.4 billion for the second quarter, positioning itself, along with J.P. Morgan Chase, as one of the strongest banks to emerge from the crisis.

But some analysts and investors had especially sharp words for Wall Street rival Morgan Stanley, which reported Wednesday that it had set aside $6 billion so far this year for compensation expenses even as it recorded its third straight quarterly loss. In reporting its second-quarter results, Morgan Stanley said it lost $1.26 billion, after accounting for one-time charges including an $850 million expense related to paying the government back after its bailout. Still, the company set aside $3.9 billion in compensation expenses, representing 72 percent of its revenue for the quarter.

In response to a question during Wednesday night's news conference, President Obama said that Wall Street had yet to change its behavior and practices.

"With respect to compensation, I'd like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses," he said.

Traditionally, Wall Street banks have set aside about 50 percent of revenue to pay their workers, though that ratio is lower at firms with larger commercial banking operations, like Citigroup and Bank of America, which have a sizable number of lower-paid employees handling consumer business.

Morgan Stanley's compensation figures raised eyebrows among some analysts, who peppered Chief Financial Officer Colm Kelleher with questions about employee pay during a conference call.

"Clearly, we have to pay competitively," Kelleher said during the call. "We are a preeminent investment banking franchise. Obviously, we really would like to have far more revenue to make the compensation issue easy."

He said the ratio of revenue to compensation would have been close to 50 percent if Morgan Stanley were able to exclude a $2.3 billion charge it took arising from an accounting rule related to the company's debt.

In an interview, analyst Brad Hintz with Sanford C. Bernstein challenged that explanation, saying Morgan Stanley's compensation ratio has remained high throughout the financial crisis.

"Unfortunately, this means that Q2 was a pretty good quarter for the employees, but not so for the shareholders," Hintz said.

The compensation figures reported in earnings for Goldman Sachs, J.P. Morgan Chase, Citigroup, Bank of America, Wells Fargo and Morgan Stanley include not just salary and bonuses but also pensions, contributions to 401(k) accounts, health care and other benefits. These disclosures provide the only publicly available information on overall compensation at the firms. The compensation expenses booked each quarter include ongoing salaries as well as money set aside to pay bonuses at the end of the year.

The total expenses for pay and benefits at the six biggest banks will work out to $128,000 in average annual compensation per employee if firms continue to put aside money at the same pace for the remainder of the year. But pay is not evenly distributed at these companies.

Rainmaker traders and bankers take home millions of dollars a year while secretaries settle for much less. For instance, at J.P. Morgan, which includes both a large consumer banking operation and investment banking, the annual average pay per employee would be $132,000 if the company continued to set aside money for compensation at the current rate. But in the investment banking division alone, the average worker would be paid $466,000.

At Morgan Stanley, a majority of the $3.9 billion booked this quarter for compensation expenses was for employees in the institutional securities division. That division carries out activities such as bond underwriting that performed better than last year but still lost money on the whole.

All six banks have received federal bailout money from the $700 billion rescue package adopted by Congress last year. Although three -- Goldman Sachs, Morgan Stanley and J.P. Morgan Chase -- have since returned the funds during the latest quarter, they continue to benefit from a variety of other emergency federal programs. With the exception of Morgan Stanley, all the banks posted profits this quarter.

Lawmakers' renewed focus on compensation comes as Congress considers the most sweeping reform of financial regulation in decades. Compensation is shaping up to be central in those efforts. Earlier this year, public outrage swept the country on news that banks paid out $18 billion in year-end bonuses in 2008. The amount, while down about 40 percent from 2007 levels, drew a denouncement from President Obama.

Now, some bank executives said it should come as no surprise that set-asides for compensation would rise as performance recovered.

Representatives of several banks pointed to recent changes in compensation designed to discourage employees from engaging in risky activities that could cripple the bank and imperil the broader financial system. These revisions seek to tie an employee's compensation to the bank's long-term performance. For example, Morgan Stanley has introduced a clawback provision that could allow the firm to take back a part of the bonuses paid to thousands of employees if they engage in activities that prove detrimental to the company, such as triggering major losses or harming its reputation. Goldman Sachs has increased the time employees must wait before benefiting from restricted stock awards. The vesting period is now four years, up from three.

Several bankers noted that the amounts set aside are not a perfect measure of what will be paid out in bonuses at year-end. For example, Goldman took back $490 million it had previously set aside to pay employees when it lost money in the fourth quarter of 2008.

"We have accrued compensation for only six months, and no decisions will be made on bonuses for months," said Goldman spokesman Michael Duvally.

Still, some compensation experts questioned the pay expenses booked this quarter.

"Recent compensation decisions are indeed surprising given that the lessons of the financial crisis are so fresh and clear and that the need for compensation reform is so widely accepted," said Lucian Bebchuk, a Harvard law professor who has met with administration officials to discuss pay principles.

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