If your primary concern is the income inequality between the .1% of income earners and the remaining 99.9% of people, you should be pleased that the situation appears to be rectifying itself:
Wall Street traders, who typically receive the fattest year-end bonuses among bank employees, are poised to suffer the biggest pay cuts as revenue at their divisions dropped an average of 12 percent so far this year.
Goldman Sachs Group Inc., the New York-based bank that makes most of its money from trading and set a Wall Street pay record in 2007, slashed average compensation 26 percent in the first nine months. By contrast, Charlotte, North Carolina-based Bank of America Corp., which employs branch managers and brokers as well as bankers and traders, raised average pay 10 percent.
While some compensation consultants say traders’ pay will rebound as soon as revenue recovers, new regulation and capital requirements may lead to sustained reductions in the multimillion-dollar awards that sparked popular outrage and spurred investigations by politicians and regulators after the 2008 financial crisis, analysts say.
“The industry will be significantly less profitable going forward, also significantly less risky,†said Douglas J. Elliott, an economics fellow at the Washington-based Brookings Institution and a former JPMorgan Chase & Co. banker. “The lower profitability means there will be less net revenue to distribute between the shareholders and the employees. I do think there will be a squeeze on compensation over time.â€
There’s a table at the link showing total earnings, number of employees, compensation, and compensation per employee. When you exclude the minimum wage and other modestly paid clerks and other workers at the large commercial banks, compensation is clearly still pretty high.
Note that as incomes decline at the big banks incomes at the top law firms are likely to decline right along with them.
I must interject that I’m wholly with Joseph Stiglitz on this:
Legal penalties for financial fraud in the U.S. have become “just a cost of doing business,” Stiglitz said. “It’s like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.”
“We fine them, and what is the big lesson?” said Stiglitz. “Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you’re still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards, but look small compared to the amount that you’ve been able to cash in.”
Taken together, Stigliz said, this system of widespread fraud, lax regulation and non-deterrent enforcement, created a system of skewed incentives that rewarded criminality, gambling and other bad behavior, and left American workers, investors and homeowners holding the bill.
When the take is in the billions or even in the trillions, penalties in the millions are chicken feed.
If, on the other hand, like me you’re equally concerned about the income inequality between 4.9% of income earners just below that topmost .1%, whose earnings are roughly equal to those of the top .1%, and the rest of us, you’ll still be worried. Far, far too many of those, hundreds of thousands and millions, are rent-seekers of various different stripes. When income becomes less a matter of effort, talent, and creativity and more a factor of getting the rules made in your favor is it any wonder that the economy isn’t performing as well as it should?
I wish Stiglitz could be more descriptive of the nature of the inadequacies of enforcement. I take it from his immediate launch into an attack on corporate personhood, that his problem is legal. He wants the government to punish crimes, but not prove their case with the legally required evidence or face the procedural obstacles of things like jury trials and appeals. If so, he might as well be banging his head against the wall.
If the problem is that the fraud is difficult to prove, then require the paperwork that would make tracing the fraud easier. I hear that the Big Five, I mean Big Four accounting firms might have an opening coming up.
PD, I’d think the no-doc and fill-in-the-blank loans would provide an easy basis for an enforcement cycle. Those would provide more than enough “example” prosecutions.
I’ve said it so many times I’ve lost count: incentives matter. Until people start talking about incentives they should just be ignored.
For example, he mentions stock options. Stock options should be structured so that you can’t cash in on them for a period of time. Thus, the drive to push up short term gains vs. long term sustainability would be reduced. The longer the holding period for cashing in the more the incentive shifts to long term sustainability. Although you’d want to find a good balance. If you only look at the long term you could find yourself in a messy short term situation.
PD,
I think Stiglitz is talking about punishment after wrong doing has been proven*. At least that is how I read it. If you are got, you shrug your shoulders pay the fine and move one and keep all the ill gotten rewards.
*In a legal sense.
I’m not familiar with this particular regulatory program, but it’s not uncommon in safety and environmental regulations for penalties to be imposed in such a way that the amount can be no less than the profits earned, or losses avoided. Sometimes it must be multiples.
The problem is that the costs avoided by not installing the safety widget are usually revealed to be nominal, particularly if something bad happens like the factor explodes.
As for victims, well that a matter of civil justice and compensatory damages, and they may not appreciate fines and penalties that crowd out their own claims.
“I’ve said it so many times I’ve lost count: incentives matter. Until people start talking about incentives they should just be ignored.
For example, he mentions stock options. Stock options should be structured so that you can’t cash in on them for a period of time. Thus, the drive to push up short term gains vs. long term sustainability would be reduced. The longer the holding period for cashing in the more the incentive shifts to long term sustainability. Although you’d want to find a good balance. If you only look at the long term you could find yourself in a messy short term situation.”
From your friendly, long term, illiquid investment private equity guy………….I agree, and feel better now.
I meant to say profits earned or losses avoided “as a result of the misconduct.”
That is a major market intervention Steve.
FWIW I fired my dot-com options as same-day sales. I would have come out about 80% poorer with a two year hold. YMMV.
Oh, my vesting periods ran 2-5 years, but I’m not sure that what you mean.
“When the take is in the billions or even in the trillions, penalties in the millions are chicken feed.”
How come the agents perpetrating the fraud aren’t put in the slammer? I would think that would get their attention. Or is there now a category, “Too Big to Go to Jail”, in addition to the other one?
To properly align incentives, I think that they need to be able to actually lose money. Harder to do, but more proper.
Steve
sam:
The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.