Multi-tasking during the Fire

"When firefighters are still struggling to extinguish the blaze, talking about fire prevention seems premature. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at restructuring the financial regulatory structure so we don't go through this again."
-- David Wessel, Wall Street Journal, 12 March 2009

At GlobalRiskJobs, we couldn't agree more. Yet, this crisis has legs, and I don't think anybody is really ready to declare that the end of it is near. But, it does seem as if the stirrings have regulatory discussion have begun in earnest this week. When government officials like Bernanke, and business commentators like Wessel begin to turn their attention to regulatory architecture, it is a good thing for the market for risk and compliance professionals. It means that what you have known was coming for the past year or more is beginning to materialize. For a long time, it appeared that the discussion would not begin to take place until the system was stabilized. Yet, the longer the pain goes on, the more apparent it is that discussions of real change on the regulatory front need to occur now. For awhile, things were held up by the natural turbulence of a massive government change-over. As the Obama administration settles in and appointments have been made, the executors have dug-in and begun to take steps. Be prepared for the pace to pick up.

The links:

• Bloomberg's Jonathan Weil writes that Moody's admission of its shortcomings in independence and integrity in federal court last week will prove extremely damaging to the Agency's public reputation.
• Bernie Madoff is ready to plead guilty. While he is ready to go down on his sword and face up to 150 years in prison on 11 charges, he's holding out on the conspiracy charge to avoid implicating others. The WSJ has a helpful primer on the Madoff case so far.
  
• Not in my lifetime? GE has lost its S&P AAA rating which the company had held since 1956 - the year of CEO Jeff Immelt's birth.
• Compensation consultant Johnson Associates believes Wall Street's longtime comp structure is going to change radically.
• The Oracle of Omaha has weighed in on suspension of mark-to-market debate.
• As MBA's enter the home stretch, the WSJ has a story on the state of hiring at London's banks. It's not pretty.

The Season of Endless Losses

Doesn't it seem like the bank losses just keep coming out of nowhere? In the past, didn't banks just swallow hard, take the equity beating and move on? What's going on here? Well, it's different this time and the so-called Shadow Banking System is why. PIMCO's Bill Gross wrote about it way back in December 2007 in his monthly Investment Outlook, when he wrote that we were witnessing nothing less than a breakdown of a modern banking system that had become exceedingly complex. The piece was an interesting read back then, it is a stunning read now. Flash forward to the current day, where Forbes has a commentary written by NYU-Stern Professors Viral V. Acharya and Philipp Schnabel warning us to expect the shadow banking losses to keep coming. They cite the recent RBS ($41B) and State Street ($10B) losses as examples of losses that seem to come from out of the blue but are largely the product of off-balance sheet vehicles which were set up to arbitrage regulation. The commentary is adapted from a soon to be published book called Restoring Financial Stability: How to Repair a Failed System....A quick tour around the news outlets:

• Today's Wall Street Journal contains several good Op-Ed pieces as the stimulus debate continues. Former Vice Chairman of the Federal reserve Board Alan S. Blinder presents his economic wish list, former U.S. House Majority Leader Dick Armey thinks Washington could use less Keynes and more Hayek, and the inimitable George Soros thinks we can do better than a "Bad Bank".
• Early Madoff critic Harry Markopolos testifies at a Congressional hearing today. His written testimony has been released here. It's more blistering criticism of substandard performance by regulatory and enforcement bodies.
• Continuing yesterday's thread on "Bonus Outrage", early details today of a $500,000 cap on executive pay at TARP banks proposed by the Obama Administration. Also, check out Thomas Frank's WSJ opinion piece about the Wall Street bonus system.

Wall Street Compensation Under Fire

In the time since it was revealed that John Thain paid bonuses to legacy Merrill employees in the run up to the BofA merger, there has been a growing outcry about Wall Street compensation. It seems a day does not pass without a new story and a new angle on the bonus controversy. I know everyone is weary of the "Wall Street / Main Street" rhetoric that was so prevalent in the fall, but the heart of bonus season has added new fuel to the fire. No doubt spurred on by U.S. President Obama's "shameful" comment in reference to Merrill's conduct, it seems every media outlet has an opinion on the matter. Personally, I was pulled into the debate immediately upon arriving at a Super Bowl party on Sunday night. On one side, a guy who makes his living on Wall Street, on the other a tech entrepreneur doing everything he can to keep his small company moving forward in a sinking economy. At the center of the storm, how can a bank that takes government money to survive pay any bonuses at all? Let me be clear, the Wall Streeter is not a guy who has made outsize sums of money pushing now-toxic assets around the financial universe, but rather a hard-working guy with 3 kids who makes a decent living (by NY standards) in a more traditional product area. He is, however, employed by a financial institution that has taken billions in TARP funds to stay afloat. You can guess where this is going...The media loves to write about the hedgies and bankers who got paid millions and ruined the financial system, but there is another side to this as well. While many of the American Middle Class lives paycheck to paycheck to eke out a living, it may come as a surprise to hear that lots of Wall Streeters live bonus check to bonus check. A disruption to the comp cycle can be just as devastating for these folks. Yes, there are lots of people in the NYC suburbs, for instance, with 3 or 4 kids, living in one modest residence, with hefty property tax bills, paying nannies and babysitters to ease the dual working couple burden who, as shocking as it sounds to the rest of the world, cannot make ends meet on a $150,000 base salary. They rely on that "variable comp" component to get even or sock a few bucks away for college and retirement every year. But, the debate raging now is all about the question of what IS a bonus? Is it a little extra cash in years where everything goes right? Or is an entitlement that gets scaled based upon different performance metrics? How many of you who work on the street have heard the mantra, "it's a year end business" when asking for a bump to your base salary, perhaps? Is it "discretionary" compensation, as many bosses like to put it? Or is it "arbitrary" compensation, as many receivers of a bonus can tell you they feel there is no rhyme or reason to the number. I remember vividly being told by a super-cynical more senior banker early in my career that one's bonus is "a little bit about what you've done, a little bit about what we think you're going to do, and a LOT about what the job market away looks like". Well, I'm thinking he may have been right. It seems that this comp year at financial firms that generally did not make money last year and have dim prospects for this year, the defense of bonuses is that troops will simply walk across the street and find another employer if they don't get paid. The Main Street reaction is that this argument is pure B.S. and the hundreds of thousands of layoffs in the sector would seem to back that up. But as the latest news of a financial talent raid illustrates, the reality is that there will always be a bid for skilled people. That's what the banks fear. In past downturns, things have turned hard the other direction and banks did not want to be caught in the talent squeeze by having to dole out even more money by way of guarantees to attract people back to their firms when lots of others want to hire the same people. Will it play out the same way this time?

Let's take a quick tour of compensation news form the last few days.

• Catherine Rampell looks at a history of the holiday bonus
• NY Times has some, er, passionate letters to the editor today regarding the bonus debate.
• President Obama continued to pound the table about Wall Street bonuses.
• Rob Cox at Breakingviews says the bonus system should be reformed, not destroyed.
• Andrew Ross Sorkin ponders what a world where regulators receive bonuses would like.
• David Segal reports on a most unpopular group of professionals.
• News that Credit Suisse will cut bonuses 55%
• BofA looks like it knew more about Merrill bonuses than it initially let on.
• News that Deutsche Bank will cut bonuses by 60%.
• Deal Journal wonders if Thain might have been right about the Merrill bonuses.

And remember, wherever you stand on the bonus debate, you can always look to GlobalRiskJobs for Risk and Compliance career opportunities and compensation information.