Press, Strong Democracy
NYT is just superb with its
While top executives received the biggest bonuses, what is striking is
how many employees throughout the ranks took home large paychecks. On
Wall Street, the first goal was to make “a buck” — a million dollars.
More than 100 people in Merrill’s bond unit alone broke the
million-dollar mark in 2006. Goldman Sachs paid more than $20 million
apiece to more than 50 people that year, according to a person
familiar with the matter. Goldman declined to comment.
stop right there and just ponder that for a moment. It wasn’t just the CEO
making $20 million a year at Goldman. Fifty people did.
great about this story is how it illustrates clearly the problem we’ve all
talked about for months now: that Wall Street bonuses distort the incentives
of its traders and executives in favor of short-term gain, longer-term risk
be damned. The Times shows how Dow Kim, an executive with Merrill
Lynch, got $35 million in 2006 for helping bring his company $7.5 billion in
profit that year—a number the paper correctly calls a “mirage” because “The
company has since lost three times that amount, largely because the mortgage
investments that supposedly had powered some of those profits plunged in
following graph twists the knife:
Unlike the earnings, however, the bonuses have not been reversed.
Kim do it? By turning out garbage like this:
Back in New York, Mr. Kim’s team was eagerly bundling risky home
mortgages into bonds. One of the last deals they put together that
year was called “Costa Bella,” or beautiful coast — a name that
recalls Pebble Beach. The $500 million bundle of loans, a type of
investment known as a collateralized debt obligation, was managed by
Mr. Gross’s Pimco.
Merrill Lynch collected about $5 million in fees for concocting Costa
Bella, which included mortgages originated by First Franklin.
But Costa Bella, like so many other C.D.O.’s, was filled with loans
that borrowers could not repay. Initially part of it was rated AAA,
but Costa Bella is now deeply troubled. The losses on the investment
far exceed the money Merrill collected for putting the deal together.
again, the Times hammers home the short-term gain theme:
By the time Costa Bella ran into trouble, the Merrill bankers who had
devised it had collected their bonuses for 2006. Mr. Kim’s
fixed-income unit generated more than half of Merrill’s revenue that
year, according to people with direct knowledge of the matter. As a
reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5
billion to $6 billion bonus pool to the 2,000 professionals in the
just kept heading for the cliff—because that was what they were paid to do:
After that blowout, Merrill pushed even deeper into the mortgage
business, despite growing signs that the housing bubble was starting
to burst. That decision proved disastrous. As the problems in the
subprime mortgage market exploded into a full-blown crisis, the value
of Merrill’s investments plummeted. The firm has since written down
its investments by more than $54 billion, selling some of them for
pennies on the dollar.
Times repeatedly broaches the question of whether those bonuses ought
to be returned, or “clawed back.” The emphasis is mine here:
Clawing back the 2006 bonuses at Merrill would not come close to
making up for the company’s losses, which exceed all the
profits that the firm earned over the previous 20 years. This
fall, the once-proud firm was sold to Bank of America, ending its
94-year history as an independent firm.
the story even throws in a nod at something we like to see pointed out: That
the financialization of the economy has been bad for the country:
The bonanza redefined success for an entire generation. Graduates of
top universities sought their fortunes in banking, rather than in
careers like medicine, engineering or teaching. Wall Street worked its
rookies hard, but it held out the promise of rich rewards. In college
dorms, tales of 30-year-olds pulling down $5 million a year were
a really terrific effort by the Times, and another notch for its “The
Reckoning” series, which is much better than what The Wall Street Journal
has put forward.
Copyright 2008 Columbia Journalism Review.