What is Wall Street?

What did Wall Street do right to earn record bonuses in 2009 just one year after its near-death experience in 2008?

• In 2008, Wall Street almost died and if it did, it would have brought much of the world economy along with it which is why it did not die. Amazingly, Wall Street recovered so mightily after only one year that it paid itself record bonuses in 2009 which were slightly more than in 2007 (a record year at the end of the previous bull market). What did Wall Street do right to earn record bonuses in 2009 just one year after its near-death experience in 2008? http://online.wsj.com/news/articles/SB10001424052748704281204575003351773983136

• Answer:

  I think it may be important to clear up some terms.  Rather than saying that Wall Street paid itself bonuses, it is more accurate to say that employees at trading and investment firms received high bonuses.*  It is also important to note that a lot of the compensation is in the form of company stock options a not necessary salary. As to why, to quote the below 2009 article, The increase in both revenue and compensation is due partly to the industry's consolidation during the financial crisis. J.P. Morgan, for example, acquired Washington Mutual Inc. and Bear Stearns Cos. Bank of America bought Merrill Lynch & Co. and Countrywide Financial Corp. Those deals inflated revenue and compensation because the acquirers' financial results now include the purchased companies. More important to note that compensation is not entirely linked to performance.  A lot of the decision making has to do with what the firm believes is good enough to draw in new employees and keep existing ones from going elsewhere.***  If I rival firm is paying 10% more than your firm, you may have to increase your pay to keep from having a https://en.wikipedia.org/wiki/Brain_drain.  The NY Times has an article about a burgeoning field in consulting related specifically to banker compensation.** Finally, firms also argued that they were contractually bound to give out bonuses and they couldn't reneg.  This was specifically addressed by the https://en.wikipedia.org/wiki/AIG_bonus_payments_controversy***.   The linked wiki article also discusses the need for large bonuses and compensation to retain talent. Finally, compensation can also be correlated with the strength of the CEO vs the rest of the stockholders.  A 2006 study determined that CEO compensation is higher in companies with weaker shareholder rights.  In other words, the more power executives have at a company, the more likely they are to compensate themselves well.**** Is it fair?  Not really.  Not too much can be done about it without drastic changes in our laws and how the economy works.  Shareholders could try to put up a fight, especially since most of them lost a lot of money while the people they entrusted to run the company got richer.  However the executives are shareholders too and there's only so much that can be done. Personally, I feel we'd be better off as a society if some of the math whizzes who get into investment banking^ had gone into hard sciences and engineering.  Unfortunately, there's much higher incentives to go into the former than the latter. * http://www.vanityfair.com/politics/features/2009/03/wall-street-bonuses200903 and  *http://www.nytimes.com/2009/01/29/business/29bonus.html?_r=0 for 2008 bonuses, http://online.wsj.com/news/articles/SB10001424052748704281204575003351773983136 for 2009 bonuses and http://online.wsj.com/news/articles/SB10001424052748704518104575546542463746562 for 2010 bonuses ** http://www.nytimes.com/2012/01/17/business/the-invisible-hand-behind-wall-street-bonuses.html *** http://www.forbes.com/2009/03/16/bailout-bonus-aig-business-washington-aig.html ****http://papers.ssrn.com/sol3/papers.cfm?abstract_id=919060 ^http://www.businessinsider.com/quants-meet-the-math-geniuses-running-wall-street-2013-7