Two Wall Street firms that received at least $60 billion in government bailout funds will be rewarding their financial advisers with controversial retention payments, the terms of which one senior executive described as "very generous" in audio obtained by the Huffington Post.
The soon-to-be-merged financial giants -- Morgan Stanley and Citigroup's Smith Barney -- announced the payments during an internal conference call last week, but warned advisers against describing them in terms that would cause PR headaches.
"There will be a retention award. Please do not call it a bonus," said James Gorman, co-president of Morgan Stanley. "It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration."
The payments, Gorman said, will be calculated based on performance numbers from 2008 instead of 2009, when the merger is expected to be completed. That decision virtually guarantees an increase in the size of the awards. While 2008 was challenging for the firms -- Morgan Stanley's client assets in fee-based accounts dropped 25 percent in the fourth quarter, and a round of lay-offs is expected -- 2009 is expected to be substantially weaker.
"I think I can hear you clapping from here in New York," Gorman joked during the call, after announcing that the payments would be linked to '08 performance. "You should be clapping because frankly that is a very generous and thoughtful decision that we have made. We spent a lot of time kicking this around. We could easily have done it from the point of closing, which is obviously going to be somewhere in the latter half of this year or around the middle of the year. But we just decided... that it was right thing to do, to give you that certainty that it would be based off '08. '09 is a very difficult year... So that degree of anxiety, which many, many of you have emailed me about... is now off the table."
Audio of the conference call was provided by a reader who responded to the Huffington Post's call for information about wasteful or extravagant spending by bailout recipients.
Morgan Stanley and Citigroup, which will combine their brokerage firms into the world's largest, have received a combined $60 billion in government bailout funds. Officials with the firms said that the retention packages, which are rumored to value as much as $2 to $3 billion, would not come from that pool of money. But critics note that money is fungible, and question whether such payments are a proper use of funds for banks that are dependent on the government to stay afloat.
"They are putting lipstick on a pig," said Peter Morici, a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. "Very often, retention bonuses are paid to undeserving executives who helped drive their enterprises into the ground. This is like people who hold up banks getting paid to stop holding up banks. It isn't good policy. It's not always the case, but on Wall Street, people were vastly overpaid for the value that they created."
Retention awards for Morgan Stanley and Smith Barney employees have been rumored since their merger talks began. But the terms of the payments, which are still being hammered out, are bound to spur critical questions.
An official for Morgan Stanley downplayed the decision to value the payments off the more favorable '08 numbers. "You pick a point in time that you base any retention program off of and the decision was to base these off of the production these individuals would have achieved in 08," said spokesman Jim Wiggins. "Whatever they end up getting paid will be based off their 2008 production. That doesn't say anything at all about the timing it is going to be paid or when it will be paid."
Wiggins also defended the decision to provide financial advisers with retention packages. Noting that the money would "be paid out of the operating revenues for business and not" TARP funds, he said the system was necessary to prevent an exodus of key personnel.
"Retention programs like this are standard practice in the industry whenever you do a deal like this one," he said. "This is a profitable business. Our financial advisers are being heavily recruited by other companies like UBS... It is absolutely critical to hold this together and hold them in their seats so this will be a successful joint venture."
This assessment is challenged by an array of industry observers. Noting that retention awards are a relatively small sum of cash when compared to the money that the U.S. government will be spending on subsidizing bondholders, Christopher Whalen of Institutional Risk Analytics nevertheless called it a gratuitous expense.
"These firms are attempting to continue to pay their people the way they have in the past and in the current job market here in New York, I don't think it is necessary," said Christopher Whalen of Institutional Risk Analytics. "You certainly don't need to pay people to stay in their jobs right now, because they are praying to Jesus that they just don't lose their job generally."
Certainly, as recipients of billions of dollars in government funds, Morgan Stanley and Smith Barney find their accounting decisions under greater scrutiny. As part of the merger, the two entities have promised to make $1.1 billion worth of budget cuts -- or roughly half the projected amount of retention payments.
Oh my fucking god! Evil greedy monsters... I am so livid... I can't even articulate how much I am... so ... ugh... I have lost all faith in bankers.
1 comment:
Umm...you had faith in bankers? There are a disproportionate number of douchebags in banking an finance, and you'd better believe that they are doing everything they can to convince anyone who will listen, and especially congress, that they are not giving bonuses or that the bonuses are essential. It seems that there have been several editorials or public statements from executives or their lawyers that these incentives are critical for business to operate successfully and that they aren't that big a deal. Fuck them. They are abusing the system. If the market were working efficiently as capitalism's proponents like to make it out to, then all these fuckers would be out a job. But no. I agree that propping their businesses might be essential to prevent the the collapse of the economy, but these fuckers should go. I still don't see why the congress can't say "We are giving money to the business, but in exchange for this you CEOs and CFOs have to resign." Oh right, because most all of congress thinks that such things are too interventionist and that government shouldn't dictate to business. Ugh. The hypocrisy of all of this is what pisses me off. Bankers and auto CEOs are lining up with their hands outstretched but then don't want the government to tell them what to do. Damn it all. You can't be pro-free market and want hand outs. Oh, wait you can if you have lots of money and employ tons of people (even if you lay them off by the hundreds). But if you are one of millions of poor Americans those same douchey bankers and their allies bitch and whine when their money goes to help you pay for school, health care, etc. Ugh...the whole system pisses me.
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