The plight of the overpaid

By Felix Salmon
April 20, 2009

Gabe Sherman has put together an astonishing concatenation of moans and whines from New York’s monied classes, and it makes for enlightening reading. You thought that New Yorkers were all liberal Obamaphiles? Well, they were — until their seven-figure bonuses started coming under attack.

The most interesting part of the piece, to me, is the way in which these professionals consider what they do to be much more valuable than what other people do:

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

As Sherman says, bankers are the last Americans to Get It: they don’t think that the excesses of Wall Street were responsible for wealth destruction rather than wealth creation, and they still think that a degree from Wharton is, in and of itself, a Good Thing. One financier essentially tells Sherman that the going rate for any job which involves being woken up in the middle of the night should be roughly $2 million a year — which is not the kind of attitude guaranteed to make you friends among, say, the farming community.

Most people outside Wall Street have come to the conclusion that excess pay was a direct cause of the current meltdown, but the highly-paid symbolic analysts at our biggest investment banks somehow have a massive blind spot when it comes to that fact. Just check out the cognitive dissonance here:

“One of my relatives is a doctor, we’re both well-educated, hardworking people. And he certainly didn’t make the amount of money I made,” a former Bear Stearns senior managing director tells me. “I would be the first person to tell you his value to society, to humanity, is far greater than anything that went on in the Bear Stearns building.”

That said, he continues, “We’re in a hypercapitalistic society. No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee… you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed—that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.”

Of course Wall Street’s compensation structures were doubly responsible for its flawed risk management. Firstly, they created excess risks: they encouraged investment bankers to put on what I call the Rubin Trade, where you make massive bets that something with a 95% probability of happening will indeed happen. And secondly, they contributed to the marginalization of the risk-management function in investment banks: since risk managers were paid so much less than star traders and top management, they tended to get overruled a lot, and in any case be discouraged from spending too much time looking at the really important big-picture views of systemic risk.

The bankers’ belief in their own ability to make money is so unshakeable that you still hear things like this:

The most aggressive employees, those who took the greatest risks, thought of themselves less as members of a firm and more as independent contractors entitled to their share of the profits. In this system, institutions tended to be hostage to their best employees. “The feeling is, if people don’t get compensated adequately, they’re going to go out and do this on their own,” says Alan Patricof, who founded the private-equity firm Apax Partners.

Well, I hope they do. So long as they’re not gambling away trillions of dollars of other people’s money at systemically-important institutions, they’re welcome to do as they like. But if they do work at a systemically-important institution — one where the government and the economy as a whole will pay dearly if they blow up — then they shouldn’t be paid the kind of money which encourages putting on outsize risks. And the sooner they wake up to that fact, the better.

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