Bonuses on Wall Street - The old myth - the New Reality

If we don't pay bonuses then our good people will walk to other firms - used to be true but now...

I deserve a bonus because I made so much money. Oh did you? No you used the leverage of your bank to make the money. You used the bank's capital to make the money. Now that capital belongs to the tax payer.

The bonus issue has to be addressed.

You can't pay based on the use of the firm's capital and leverage. That is not in the control of the trader or the banker. The gearing is the issue.

Using the gearing of what is in effect free capital is what has killed our financial system. No downside for the person = ultimate irresponsibility.

In the good old days - when I was young and a partner at Wood Gundy - we used our own money to make money. We risked the firm's money that was provided by us. Then you really did make the money. You argued your share of the firms capital and then you took the risk. If you lost, all would have to pay - you paid the most because you would have hurt your partners.

This is where the control can return. It is not about limiting the payout. It is is putting the risk back into the equation. To do that you have to take the firms' capital off the table. You have to put the bonus pool into the risk.

In the old days again at Goldman - it was assumed that you would leave the firm in your early fifties late forties. Your bonuses accumulated in the capital account of the firm until you sold at book in your last 5 years. Of course if the traders etc blew the pool, you left with nothing. That never happened but it could and it put the discipline into the deal.

The practice today is not based on risk - everyone expects a bonus. Put the risk back and put back the idea of being a partner.

The goal in the firm is to make partner. The big money comes from retiring or leaving the firm as partner where the pool of capital has been built by a successful enterprise over time