Barackonomics 101 – Those Billion Dollar Banker “Bonuses”

In what looks to be a continuing series on the LRC blog, I present another example of our current Puppet-in-Chief’s ignorance about finance and economics. Here is his tirade aimed at the bonuses paid out to employees at investment banking firms:

President Barack Obama issued a withering critique Thursday of Wall Street corporate behavior, calling it “the height of irresponsibility” for employees to be paid more than $18 billion in bonuses last year while their crumbling financial sector received a bailout from taxpayers.

As someone who has worked in the investment banking field (not as a banker, by the way) for 20 years at such giants as Merrill Lynch, Citigroup, UBS Warburg, and Chase, I suggest that someone explain to Obama that what are figuratively called “bonuses” in the world of investment banking are not, in reality, bonuses. They are incentives that are a part of a banker’s total yearly compensation package.

With the exception of the few top officers of a banking firm (CEO, CFO, etc.) most investment bankers are paid a base salary of around $150,000 a year. (This may vary from firm to firm). At the end of the year, depending on how well their respective division did in terms of generating revenue for the bank, each banker is given an additional financial compensation on top of his base salary that is commensurate with the money generated by his department.

Though investment bankers working in the Mortgage Financing Department of their respective banks probably did not make money in the current housing debacle for their firms (and I would venture to guess that many, if not all, probably lost their jobs), the bankers who worked in the rest of the banks’ areas of finance (such as Private Equity, Investment Banking, Venture Capital, etc.) in all probability did generate revenue in their respective departments. Therefore, they are certainly entitled to collect the incentive that is part of their total yearly compensation package.

Finally, I need to make it clear that I am not in favor of any government bailout of any company. In the case of the bank bailouts, since the government set no guidelines (as far as I know) of how the money was to be used, each bank is going to allocate the money in the best way it seems fit for the optimum functioning of the company. Since paying good employees their expected compensation for the job that they have performed well makes good business sense (if the money for the compensation is available), a bank doing this is following good business practice and should be admired. What is NOT to be admired is how the banks, in this instance, obtained the money to accomplish this good business practice.

[Thanks to Mohammad Baki for pointing this “bonus” misconception out to me.]

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8:02 pm on January 31, 2009