It’s not Personal, it’s Just Business

Needless to say- we are paying a lot of money for the follies of the banking oligarchs. I think there may a teensy argument regarding innovation, risk taking leading to economic growth, etc… compensating for the costs but it wilts quickly in light of the price tag that seems to rise with every news article.

However, I am cognizant that these folks have reaped billions of dollars in bonuses that ostensibly were performance related. So… now my question is what happens when the performance that the bonuses were based upon turns out to be vapor and in the worst case, fraudulent?

In order to investigate this, I have done a very quick study of the income and net profit of financial services for 20 quarters. The results are pretty interesting. A sample of 158 financial services firms over the period from March 2004 through December 2008 yielded Revenue net of interest expense of $3.5 trillion USD and net profits of $636.7 billion USD (data courtesy of Gridstone Research.)

In all fairness, in my study there are a number of quarters that I do not have data for so the results could be a bit larger. (I will endeavor to post the excel spreadsheet and the data once I figure out how to do so.) Even if I have an error of 20%, I think it is a fair statement that we have given corporate welfare in multiples of the total profit that the broader financial services industry has made in the past 5 years.

So all of the bonuses that have been reaped were ultimately based on phantom profits and some steep losses. What we are doing as side effect of trying to save the worldwide economy that these managers have run into the ground, is subsidizing their personal wealth. Now that is what I call pay for performance! Makes me wonder, what business schools did these managers attend?


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