Sunday, February 8, 2009

Gordon Gecko's Back!

"Greed Is Good" is the headline of a story in yesterday's Wall Street Journal, reminding me, of course, of Oliver Stone's wildly successful movie about the biz, Wall Street.

"Greed is good," says Gordon Gecko at one point in the movie, but in true Hollywood style, the greedy guy gets sent to jail. In reality, the greedy gents on Wall Street pay themselves bonuses out of federal bailout funds.

Roy Smith, a former partner at Goldman Sachs, is the author of the WSJ article. In it, he argues that "bonuses are an important and necessary part of the fast-moving, high-pressure industry, and its employees flourish with strong performance incentives."

How I wish bonuses had provided adequate incentive for sustainable profit on Wall Street! And how I wish that these banks had flourished along with the employees!

Perhaps if bonuses had been tied to performance, we wouldn't be in such a mess today.

I love how when the Wall Street insiders speak about the fiscal debacle they've crafted for us, they try to explain why paying bonuses are important, not provide a mea culpa for their greedy ways. Here's Smith on the importance of bonuses:

The Wall Street compensation system has evolved from the 1970s, when most of the firms were private partnerships, owned by partners who paid out a designated share of the firm's profits to nonpartner employees while dividing up the rest for themselves. The nonpartners had to earn their keep every year, but the partners' percentage ownerships in the firms were also reset every year or two. On the whole, everyone's performance was continuously evaluated and rewarded or penalized. The system provided great incentives to create profits, but also, because the partners' own money was involved, to avoid great risk.

All that changed, apparently, in recent years, when commercial banks were somehow allowed into the private club of investment banks.

As improving technologies created great arrays of new instruments to be traded, the partnerships went public to gain access to larger funding sources, and to spread out the risks of the business.

Greed took over and despite the headline for the story, the outcome has not been pretty.

You had to pay everyone well because you never knew what next year would bring, and because there was always someone trying to poach your best trained people, whom you didn't want to lose even if they were not superstars. Consequently, bonuses in general became more automatic and less tied to superior performance.

And again, I keep bumping up against the rather large wall that Wall Street has erected to protect themselves against common sense. Here, a former investment banker argues for the good of greed, yet in his story, greed divorced compensation from performance in a manner that has brought us to the brink of financial ruin.

Smith notes that not one CEO on Wall Street got a bonus in 2008. I'm curious to see if that is indeed the truth; somehow I'll bet they've paid themselves handsomely to compensate themselves for the stress of leading their companies into bankruptcy.

At any rate, somehow, someway, the people in companies that have received billions of bailout dollars gave themselves billions of dollars in bonuses. The CEOs may not have seen a penny of the bonuses, but large amounts of bonuses have been handed over to somebody in those firms.

At this point, I'm sick of Wall Street insiders defending greed as an admirable business trait. It's not admirable. It is bankrupt, both morally and financially.

What I want to see out of Wall Street isn't a defense of their greedy way of doing business.

I want to see a recognition that they have played a significant role in the destruction of capitalism as we know it, that their desire to socialize their astronomical losses runs completely counter to their arguments against government intervention.

I want them to understand that they are as despicable as the welfare queens mocked by Reagan back in the 1980s.

I want them to finally come to the realization that greed is not an appropriate way to build a business.

As Adam Smith once said, matching buyers to sellers is what counts in capitalism, not creating profit on fumes and clouds in the service of greed.

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