Issue of the week: Those big bonuses are back

Don’t look now, but “bankers are starting to make mega-bucks again,” said Matthew Lynn in Bloomberg.com. New York Attorney General Andrew Cuomo revealed last week that Citigroup, Merrill Lynch, and seven other big U.S. banks, which have collected $175 billion in federal bailout funds, paid $32.6 billion in bonuses last year. In all, more than 5,000 bankers received bonuses of $1 million or more—1,444 at JPMorgan alone. This year, with markets and confidence rising, the payouts will be even bigger. Goldman Sachs alone increased its bonus pool by 33 percent in the first six months of 2009, to a record $11.4 billion. The swelling of Wall Street’s bonus hoard has all the earmarks of a bubble: “The price of bankers has become disconnected from real forces of supply and demand.”

That bubble could burst sooner rather than later, if Democrats in Congress have their way, said Anne Flaherty in the Associated Press. “Bowing to populist anger and defying President Obama,” the House voted last week to prohibit pay schemes that encourage employees to take reckless financial risks. The bill’s prospects in the Senate are uncertain; many senators prefer the administration’s proposal to give shareholders a “say on pay”—a nonbinding vote on bonus packages. But no matter what happens to this particular legislation, it’s clear that bonuses are back in policymakers’ sights.

That’s bad news for a certain Citigroup oil trader, said David Segal in The New York Times. Andrew Hall, who runs Phibro, Citi’s oil-trading subsidiary, is on track to collect $100 million this year, “his cut of profits from a year of characteristically aggressive bets on the oil market.” Citi, the recipient of $45 billion in taxpayer aid, says it’s contractually bound to reward Hall for his trading, which has earned $2 billion for Citi over the past five years. But Kenneth Feinberg, the Treasury official who oversees compensation practices at financial firms receiving federal bailouts, may have other ideas. His spokesman noted pointedly that Feinberg “has broad authority” to decide compensation at bailed-out firms. Even if Feinberg ultimately approves the bonus, the issue is “a live grenade” for Citi, which is reported to be negotiating “a quiet divorce” from Hall.

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The sooner, the better, said Paul Krugman, also in the Times. The type of speculation in which Hall specializes “is bad for America.” To be sure, speculation can serve useful social purposes. Speculators use futures markets to lock in supplies of heating oil before the weather turns cold, for instance, or to stockpile gasoline ahead of the summer driving season. But Hall profits “mainly by outsmarting other investors,” not by steering capital where it’s needed most. Worse, massive bonuses like Hall’s encourage young people to pursue financial careers instead of more socially useful occupations. Case in point: Since Attorney General Cuomo identified JPMorgan as the Wall Street shop doling out the most seven-figure bonuses, the firm has been deluged with job applications.