How Banks Justified High Bonuses
Dan Roam: Hi! I’m Dan Roam the author of The Back Of the Napkin and I’d like to show a pictorial problem with you today called the Bonus Battle. A couple of weeks ago I was in New York, I was meeting an investment bank. They said to me Dan we have a big problem. Although we’ve have a super profitable year everybody hates us. The American public they hate us. The media they hate us. Even President Obama who used to love us, even he hates us now. Why might this be? I said well I believe we can solve problems with pictures so let’s look at some pictures.
The first picture we have to start with is a picture of TARP. If you remember back to the year 2008, 700 billion dollars given by secretary, the treasury Hank Paulson in those days to help bail out the American economy of that 700 billion about 250 billion went to banks and most of that went to six banks, City Bank got 45 billion. Bank of America got 45 billion. JP Morgan Chase got 25 billion. Wells Fargo 25 billion, Goldman Sachs 10 billion, Morgan Stanley 10 billion but the good news was they got the money, they use it and they were able to pay it back. These banks are very happy because they were able to pay back all their money but the President is really mad and in fact there’s about a $120 Billion out of Tarp. It’s like they never to be collected back because it went to companies like AIG or general motors, never coming back.
The president is saying banks I’m so mad at you. I want you to pay back all of this money as well. Well now let’s think about that for moment. Why would he want to do that? Why is he so upset? Let’s make about the profitability of the Wall Street banks in year 2009. Terrible year for the economy, the economy is down, unemployment is up. Do you know how much money the banks made in profit in 2009? $60 Billion, that’s a record profit. The closes they’ve ever come was in the year 2000 and they have a profit of $25 Billion enormous amount of money.
So let’s ask ourselves, how is it possible in such a bad economy for Wall Street to be so profitable? Well there’s two reasons, number one, revenue has gone up in the year 2009 because there’s been a lot of activity. A lot of mergers and acquisitions, a lot of bankruptcy activity, a lot of borrowing and the other side of that equation is cause have been down. Cause for investment banks for Wall Street really come from two places. The percent interest rate that they have to pay and that’s been kept down and stuffing cause and guess what they have been cutting stuff left and right. Revenue up cost down highly profitable, that’s okay.
No one should really be too mad about that I suppose but let’s think about bonuses. How much do you think in 2009 the banks are going to be paying themselves from their $60 Billions in profit and bonuses? Do we think they’re going to be paying half of that maybe two thirds of that? No. You know how much the banks are going to pay themselves this year for bonuses for 2009, $90 Billions.
Now we begin to see why the President and the American public are so mad. How is it that they are able to pay $90 Billion and bonuses when they did even make that much money because bonuses aren’t calculate on profit? Bonuses for Wall Street are calculated on total revenue. So look at City Bank for a moment. City Bank earned revenue of a $115 Billion in 2009 but lost $11 Billion. Not a profitable year still paying themselves record bonuses.
So as always talking this investment bank I said the picture that I would draw to help you solve this problem is very simple. Simply take less money and then we’ll see what the American public and the President think about your bonuses.
Transcription by:
Scribe4you Transcription Services