Wall Street Bonus Season to End All Bonus Seasons: David Pauly

Commentary by David Pauly

Dec. 11 (Bloomberg) -- Congratulations to E. Stanley O’Neal and Charles O. Prince III. They got theirs when they could.

Before he was fired as chief executive officer of Merrill Lynch & Co. in October 2007, O’Neal received $33 million in bonuses for his previous two years’ work.

A month later, Prince quit as CEO of Citigroup Inc., after getting $49 million in bonuses for 2003 through 2007.

Can you imagine the uproar in Brooklyn, Washington and Dubuque today if O’Neal, Prince or any of their compatriots were getting bonuses of that magnitude?

The traditional Wall Street pay system -- where bonuses accounted for 60 percent of pay -- died this year. Its demise was inevitable after the U.S. government committed $700 billion to save investment banks and commercial banks from their mind- numbing mortgage losses.

John Thain, Merrill’s current CEO, was slow to catch on to the new reality.

Thain, who has negotiated the sale of his 94-year-old firm to Bank of America Corp., asked Merrill directors for a year-end bonus of $5 million to $10 million. He came to his senses after a Wall Street Journal report of his request created a political dust-up. Government bailout capital was supposed to be for lending, not paying executive bonuses. On Monday, Merrill said Thain and four other top executives would forgo any 2008 bonuses.

Slashing Away

At the same time, Morgan Stanley chief John Mack gave up his bonus for the second straight year and his two co-presidents went without a 2008 payout. Total pay for the 14 members of the company’s operating committee was slashed by an average of 75 percent.

Morgan Stanley also started a “clawback” plan, whereby the firm will take back part of bonuses if recipients act in ways detrimental to the company. God help anyone who cooks the books or makes wild bets on the markets.

Executives at Goldman Sachs Group Inc., which has been the most profitable U.S. investment bank, had joined the choir earlier, forgoing bonuses for 2008. A year ago, CEO Lloyd Blankfein and co-presidents Gary Cohn and Jon Winkelried each got a total annual package of about $70 million, including bonuses of $27 million.

Considering their past pay, none of these people will starve. Thain got a $15 million bonus for taking charge at Merrill Lynch a year ago and might get a $5.2 million change-of- control payment for selling the firm to Bank of America. Morgan Stanley’s Mack got a bonus of about $40 million in stock and options two years ago.

Looking Ahead

Thain and three other top Merrill executives now will be paid by Bank of America. Congress, its bailout money at stake, will be watching to see how much they get.

The old bonus system is history now that Wall Street firms have become commercial banks. Goldman Sachs and Morgan Stanley have made the switch. Merrill Lynch will be part of Bank of America. Bear Stearns Cos. was subsumed by another commercial bank, JPMorgan Chase & Co. Lehman Brothers Holdings Inc. failed.

As commercial banks, Wall Street players are required to keep more capital in relation to their debts. No more deals with 50-to-1 leverage. Less debt leverage will mean lower profit and lower bonus expectations.

Wall Street will strive to build checking and savings accounts -- perhaps through acquisitions. They will find it’s safer to finance their investments with deposits rather than overnight loans.

A year ago, Wall Street’s then-Big 5 investment houses paid their employees bonuses totaling $39 billion. That was a record amount. It should stand forever.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net