Of Compensation and Common Sense

Posted on July 28, 2009

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Scott Jagow of PRI’s Marketplace has an interesting blog post today about a group called Wealth for the Common Good. Jagow links to the group’s Web site where one finds on the home page the following:

Wealth for the Common Good is a network of business leaders, wealthy individuals and partners supporting public policies that promote shared prosperity and fair taxation.

Over the last 30 years, we have disproportionately benefited from the economic policies. We feel it’s time rebalance the economy so that it works for everyone — not just the wealthy. Our country is facing unprecedented economic challenges right now: We all need to pay our fair share to resolve these issues and make long overdue investments in education, health, energy and infrastructure.

Reading Jagow’s post, and spending some time on the group’s Web site, I started thinking more about recent news reports that banks that have repaid government loans are setting aside outsized amounts for employee compensation.

A Bloomberg report notes that Morgan Stanley set aside 72 percent of the firm’s second quarter revenue for compensation and benefits, more than both Goldman Sachs and JPMorgan Chase (at least those two firms, unlike Morgan Stanley, made money in the quarter; Morgan Stanley reported a quarterly loss of $159 million).

One has to wonder if the headlines generated by such decisions are really in the long-term best interests of these firms. As a recent Reuters article points out, “Goldman Sachs Group knows it may be losing the battle of public opinion.” If the public believes that the big investment banks have essentially pulled a fast one on the country it’s not hard to imagine that pressure will grow to rein in these firms (in fact, just as I am getting ready to publish this, the Washington Post is reporting that “The House Financial Services Committee voted moments ago to ban pay practices at financial firms that encourage ‘inappropriate risk,’ one of the government’s boldest moves into the private sector”). Why not follow the example of the Wealth for the Common Good group – if only to score some PR points? Seems to me that bankers are taking a risk by going back to “business as usual” so quickly. At a recent public forum, Federal Reserve Chairman Ben Bernanke said that the bailouts were motivated by the fact that he did not want to be the Fed chief who “presided over the second Great Depression.” That’s certainly a sentiment that most people would agree with. But if folks on Main Street start to believe that the bailout was about little more than making sure that highly paid Wall Street bankers would once again receive eye-popping bonuses, it’s possible that the investment banks may regret not abstaining for at least a little bit longer.

Posted in: Compensation