Business life: My finance news blog

The fat cats were supposed to get their comeuppance.

After Wall Street’s most prominent firms — by their own admission — helped cause the 2008 financial meltdown and got bailed out by the government, they were supposed to stop handing out million-dollar bonuses to employees. No one was supposed to get seven- and eight-figure rewards, not after the Great Recession left one in 10 Americans unemployed. Not after President Barack Obama — who on Thursday called such pay "obscene" — had promised to clamp down on lavish bonuses.

It turns out little actually changed.

Americans will see that starting Friday when JPMorgan Chase & Co. releases its 2009 financial results. The other big banks will follow. The messages will be the same: Compensation is at near-record levels.

The form of the pay is changing. Instead of cash, bonuses will be paid mostly in stock that can’t be redeemed for years. But the numbers are still staggering. Together, the six biggest U.S. banks are on pace to pay $150 billion in 2009, slightly less than the record $164 billion in 2007 before the crisis, according to New York state comptroller’s office.

How this happened is complicated. It involves a remarkable turnaround by the banks, but one fueled by the bailout. It shows the power of the financial lobby. And it highlights the age-old debate about how much U.S. companies need to pay to retain talented bankers and traders.

Scott Talbott of the Financial Services Roundtable says keeping those workers from going to overseas firms is critical. "The market will find a way to pay these people what they’re worth," says Talbott, chief lobbyist for the group representing some of the largest financial firms.

But Douglas Elliott, a fellow at the Brookings Institution and a former banker, thinks "The way the public sees it is that we wrote a $700 billion check to the banks, and they got to burn through it as they pleased."

THE BAILOUT

The government played a big role in the bonanza by bailing the banks out. In the days after the meltdown, banks were given access to cheap government loans and other federal subsidies. Because the banks weren’t required to put it toward lending, they could use it as they pleased.

Many bet on risky securities that paid off when the markets surged. The result: big profits and big bonuses. Profit at Goldman Sachs nearly doubled to $8.4 billion in the first nine months of 2009 from the previous year, and analysts expect its full-year profits to top $10 billion.

Goldman set aside $16.71 billion from January through September for compensation, including salaries, bonuses and associated costs. That puts it on pace to meet the record $20.2 billion in compensation costs it had for all of 2007.

Should Goldman’s annual compensation go that high, it works out to $600,000 each for its 31,700 employees. It won’t be distributed like that, of course. The best performers and executives stand to earn millions.

The nation’s biggest banks all took money from the Troubled Asset Relief Program. Some needed it; others were pressured by federal officials to take it. Regardless, the banks weren’t restricted in how to spend it. They faced limits on compensation, but that lasted for only as long as they held the funds, which gave them incentive to pay the TARP back quickly. In total, banks took $245 billion and have paid back $162 billion.

LOBBYING MACHINE

Bonus outrage and the momentum to do something about it peaked last February, when crippled insurer American International Group Inc. moved to pay $165 million in bonuses to hundreds of employees in the same financial unit that brought down the company. Treasury Secretary Timothy Geithner called Wall Street pay "out of whack."

The fact it didn’t happen speaks to the industry’s powerful lobbying machine. In the past decade, no industry has spent more lobbying dollars than Wall Street and its offshoots. From 1998 to 2009, the FIRE lobby — or finance, insurance, real estate — spent $3.8 billion, according to the Center for Responsive Politics. By comparison, the energy and defense industries spent $2.6 billion and $1.08 billion, respectively.

Meanwhile, Wall Street’s generosity to political candidates ramped up even as the industry began careening. Financial firms contributed a record $476 million in the last election cycle. That’s more than double the No. 2 donor, the health care industry, which gave $166 million, even as Congress began to debate landmark health care legislation.

WHAT’S NEXT

Washington is scrambling to get something done to temper the populist anger. The financial lobby still could block those efforts.

The Obama administration is proposing a 10-year tax on the largest banks to cover a projected $117 billion shortfall in the bailout fund.

The Fed is reviewing a plan that would give it more oversight on compensation by reviewing pay practices at thousands of banks. The central bank would be able to veto pay plans if it found them to encourage excessive risk-taking by executives, traders or loan officers.

The Federal Deposit Insurance Corp., which regulates most of the nation’s banks, is seeking input on a plan that would tie fees that banks pay for deposit insurance to how much a company’s compensation plan encourages workers to take risks in order to achieve higher returns.

A few in Congress want to go further. Rep. Dennis Kucinich, D-Ohio, introduced legislation Tuesday to impose a 75 percent bonus tax.

"What you’re seeing is a public-be-damned attitude from the banks," he said. "They’re rolling in dough while the taxpayer has to sacrifice.

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