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Right now a major news item in the tremendous bonuses that are still being given right under the nose of the bailout dollars that suspiciously may be a significant contributor to these bonuses. But the practice of gigantic bonuses has been around a while and while it has come more so to the front of the news now, a look back to flush times shows that this practice had problematic aspects even then.
One big item currently is the around 4 billion dollars in bonuses given by John Thain head of MerrilL Lynch to select employees right before the takeover by the Bank of America.
It would have been normal practice to give the bonuses in January, but the astute Mr. Thain saw that he had his hand on the handle and choose to act ahead of the approaching merger.
The information came out that Merrill was reporting a 15.2 billion dollar flat out loss for just the 4 th quarter. This is not a small loss but something akin to a major earthquake to the financiers of the soon to be combined entity. There are reports that the Bank of America wisely wished to back out of this merger, but was strong armed by the team of Feds led by Henry Paulson that this merger was for the in part the salvation or saving of the markets that indeed are still crumbling. In either event, the approach to what was happening is quite interesting from the point of view of Mr. Thain's thinking.
John Thain had been at the helm at Merrill for about a year and had been highly regarded to the point where McCain had mentioned him as his candidate for treasury secretary had he won. Yet as the markets and his company slide into near oblivion, his truer colors emerged quite brightly.
Mr. Thain does look like he would be good for a part in the Rocky Horror Picture show, a long running show that has its fans for years and has audience participation. All in fun but the type of thing you leave to a degree at the theater, no harm done. But in the case of Mr. Thain, it has gotten creepy and real harm is being done.
In is interesting that Mr. Thain, wanted his own 40 million dollar bonus for arranging the takeover by Bank of America yet he seems to have been very imprudent about what he was eventually handing off to the big bank. Just taking the 15.2 billion dollar loss for the quarter, who is to say that this barrage of losses is over or is it just continuing for the Merrill operations? 15.2 billion dollars in losses represents a lot of deals and positions gone sour and who knows what the last of that is going to be. Almost no company in the world can survive these types of losses on a quarterly basis and yet unfortunately Bank of America has this thrust right in their lap and now it is really their loss of 15.2 billion and might as well add 4 billion in bonuses to make it 19 billion. One result is today's share price of Bank of America which starts the day at 3.93. Not good.
Essentially Mr. Thain helped ruin two of the biggest financial concerns in the world, and he almsot got a 40 million dollar bonus for doing this.
So why is there a bonus at all in this situation. Not some but all of the money that was sent off as bonuses should have remained in house to help plug the holes. After all who is going to foot the bill eventually? Well, as it turns out it is the taxpayer again and therefore the tax payers actually paid this 4 billion bonus period because otherwise the money just wasn't there. A pretty rough context considering all that is going sour all over the place, including more prudently and wisely managed business that are going over do to the economic storms coming over every hill.
When push comes to shove, the million plus employees showing up at work everyday at Wall Mart paid this 4 billion dollar bonus to financiers who had all the money in the world to work with, yet quickly fritted it away with poor financial management.
But this issue also goes into, what does Merrill and its now combination with Bank of America potentially own in liabilities to others in the financial world? All these deals involve other players that are also more likely to get bilked on their dealings where the operation is drained of 4 billion dollars in bonuses. As a going concern, Merrill is sending signals that this comes first and any primary obligations are secondary.
So the company loses face not only with the public but also with its own client base as they don't seem to have any conservation towards their dealings with the other global customers who could also be left with large losses.
An individual with financial problems and potentially large debts doesn't go out and buy a yacht and a company with potentially huge debts shouldn't give out large bonuses with the debts still harboring.
A lot of the argumentation around the need to give bonuses in the context of large bailouts to these concerns is that these people are so needed, so far above and talented the next tier of employees, that at exorbitant sums they must be retained. So this argument was used in AIG giving million dollar plus bonuses to 700 or more top employees, despite the holding company being basically insolvent and propped up only by massive government interventions to the tune of well over 1,000,000 million dollars, or over 100 billion. This argument would be better if these people were scientists on the cusps f the next breakthroughs but what do these people have to offer to John Q. Public that is so awesome? And then the lower teir employees at AIG get shown the door pretty quickly, where some of this money could have kept a lot of them at least with a job, and this potential further burdens the government and tax paper.
The signal gives many messages, one is a sense of entitlement that will draw the ire of an endless amount of people who just don't see it that way. The bill for these bonuses has come to everybody's door, yet to many it seems that these were the lead architects of this current world wide credit disaster. And the other thing is the government backup traditionally should go to the poorest segments first so there will not be people out on the streets or going hungry.
It does seem doubtful these storied financial concerns will ever recover the goodwill and the news of the bonuses in these times and circumstances will play into this greatly. It will be hard to find any feel good shareholders in the future, and the customers will flee in droves not wanting to feed what are now perceived as greedy vultures rather than astute financial experts they had portrayed themselves as.
The last Rocky Horror Picture show with Mr. Thain ended publicly when the head management of Bank of America, let by Mr. Lewis, gave him the quick boot.
But that is currently and how about these bonuses in the good times and what where some of the pros and cons of that?
Bonuses in good times particularly in represented a tremendous tax base for the city, lots of money thrown back in the local economy for restaurants, limo drivers and things like that.
But the bonuses represented problems even then, They encouraged excessive risk taking with other people's money and a lack of care in business practices. If a trader gets a multi million dollar bonus this year, why not try to enlarge that even further and take on bigger risks next year and if worse comes to worse, its not my money and I still even if I get fired have a multi million dollar keep for myself. So it is almost a no lose situation to a degree.
The whole operation could be worked with eyes towards the bonus, so leverage it up and keep it going to the max and keep the money pouring in. What the worst case scenario is if it ever happens isn't so much my concern as I can still live on a beach the rest of my life off these days. So the players ante's up even more and everything got exotic or complex. They liked to brag so complex that even the CEO's couldn't grasp it. Well that is great isn't it?
But this complexity was just another ruse. These are complex models based on computers, so the guise of complexity was used to keep up the aura of specialist and super talented. Yet these unconventional complexly designed financial instruments could have been spotted early on as having pricing and liquidity difficulties because of the complexity of the design of these issues and how that might hinder a wider and transparent market for them especially if and when things turned downward. Hence we have completely designed so called toxic securities, and the toxins are coming in a larger part from the complexities.
These financial products that are so complex that only someone akin to Albert Einstein could design them, are actually acting like a log jam, where logs are being swept down the river, but now can't get anywhere because of the jam up of logs made by a certain logging crew at certain pints in the river. And these are the crew masters that still demand exorbitant pay.
Then these bonuses seem to operate in the shadows. Who knows what someone at a trading desk really did and the profits that were claimed up front and personal were in fact down the road losses or illusions like seeing that mirage of water on the highway on the way to the beach. It wasn't actually there.
How much money was taken off the table by these pay outs for example for now suffering pension funds of the average Joe worker that got up early and showed up for a job for 40 years?
If someone gave Steven Spielberg a 100 million dollars to budget a feature, he might as the most talented director ask for 5 million up front. But if he asked for 40 million up front, all of the sudden the feature isn't in the same budget range and the potential work of art may be compromised as there would be only 60 million left to shoot the actual film. Realistically he wouldn't trim the tree that much before anything was done.
There is an outcry that baseball players are overpaid and stars like Tom Cruise get too much for a movie. But if someone buys a ticket to a movie, a baseball game, or bus a popular novel and they don't like any of the above, maybe they are out a combined 60 to 100 dollars. It seems like a lot of people are paying a lot more than that for other peoples work and they didn't get a movie, a Harry Potter book or a good day of baseball out of it.
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» left by robert melaccio sr. (234 days 16 hours ago.)
Joseph, good job but let me ask, why anything different? They all come from the same pot. All of them and they all belong to the same club. Yes once a Dodger always a Dodger. Yes and we, for whatever reason, follow blindly. Well I have my answer and opinion and it comes true each and every day right before my and the worlds eyes. It is just that some will never see it. best wishes.
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