Study: Big bonuses killed Bear, Lehman

The Wall Street bonus issue is not going away anytime soon. Can bonuses do more harm than good? You bet.

By Jamie Dlugosch Jan 8, 2010 4:22PM

The debate on Wall Street compensation continues. Main Street investors will not let go of this hot button issue, nor should they.

 

Granting huge bonuses at a time of deep pain for much of the country is insidious. It's ever worse when these bonuses are allocated by firms propped up by the financial might of the federal government.

 

SmartMoney reports today on a Harvard report that huge pay packages helped destroy Lehman and Bear Stearns.

 

That may sound off, since we like to think pay is tied to performance. Instead, it seems the potential for huge personal gain resulted in runaway risk-taking.

 

Realistically, how many of us would pass on this sort of offer: Take huge risks, without much consequence if it doesn’t work out. Reap the short-term reward. Keep the money no matter what happens later.

 

That was the way much of Wall Street worked for too many years. The American taxpayer bore the consequences in terms of a massive bailout and a damaged economy.

 

As a fiscal conservative at heat, I find it troubling to chime in on Wall Street pay. Who am I to begrudge someone the opportunity to earn massive compensation? What companies pay is really none of my business.

 

Until, that is, those companies take us into a crisis of epic proportion. Then it is my business, and yours, too.

 

Essentially, the Wall Street rescue has allowed firms to continue doing what they do with no consequences (except, of course, for the few actually allowed to fail.) The ramifications will continue even after all the loans have been repaid.

 

They've been handed have massive pools of capital that can be traded, leveraged and pooled together in ways that allow Wall Street firms to amass profits. No issues there.

 

These firms do provide the grease needed to keep capitalism flowing. But what happens when the next crisis hits? Truth is, nothing has really changed to head off the next one.

 

Ultimately, what happens on Wall Street isn't rocket science. Yes, there are gifted employees there that can and do amazing things, but there's really no shortage of good bankers and brokers who could do something similar.

 

It's size of bank or brokerage, rather than skill, that creates the money to fund these huge bonuses. But that size -- the 'too big to fail' problem -- also a creates systemic risk that puts taxpayers at risk,

 

Bottom line: Bonuses should indeed be capped and capped hard at the banks we bailed out, and something has to be done about 'too big to fail' banks.

 

It's pretty clear Wall Street will not change on its own, and Congress isn't exactly doing to job. Perhaps the courts will have a say in the matter. New lawsuits against Goldman Sachs claims that shareholder money is being wasted on huge bonuses.

 

I think a reasonable case could be made that such a claim is true, if not a legal one.

 

(Over the last three years my Top 10 Stocks of the year have done spectacularly well. This year will be no exception. In fact a few of the stocks on the list are already off to strong starts to the year. Get your free copy of Top 10 Stocks for 2010.)

 

Related Articles:

 

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

129
129 rated 1
281
281 rated 2
444
444 rated 3
732
732 rated 4
629
629 rated 5
623
623 rated 6
610
610 rated 7
440
440 rated 8
303
303 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.