Bonus, Is It Still A Dirty Word

The financial crisis isn't over yet, but already Wall Street firms are back to awarding astronomical bonuses. David Wessel, of The Wall Street Journal, talks with Steve Inskeep about why big bonuses are returning despite public outrage for such compensation just weeks ago.

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STEVE INSKEEP, host:

The financial crisis isn't even over, yet some Wall Street firms are once again paying astronomical bonuses to their bankers, or at least astronomical to most of us. To find out what's going on here, we've brought in David Wessel, economics editor of The Wall Street Journal and regular guest here. David, hi, once again.

Mr. DAVID WESSEL (The Wall Street Journal): Good morning.

INSKEEP: He's in our studios. And I want to start with this $98 million bonus. A $98 million bonus that one oil trader is expected to get at Citigroup, a company that's received billions of dollars from the government. What did the guy do to deserve $98 million?

Mr. WESSEL: He works for a unit of Citigroup called Fibro that trades in the oil market. And he made a good bet about what was going to happen to oil prices, made a lot of money for Citi at a time when they were losing a lot of money elsewhere, and under his contract his cut is almost $100 million.

INSKEEP: Let me try really, really hard to understand this, because it's easy to despise or denounce whoever this guy is getting the $98 million. Is there an argument that he earned it, that's it's not government money, that he's not taking a taxpayer subsidy and running with it? Is there any kind of argument like that?

Mr. WESSEL: There is an argument that he had a deal. And the deal was, we're giving you some money, see if you can make it into a lot of money, and if you make it into a lot of money, we'll give you a slice of it. But it is also true that none of these guys would be in business if the government and the taxpayers hadn't stepped in and first saved the entire system and secondly saved Citigroup from collapse.

INSKEEP: Then you also said one question is whether the compensation czar for the federal government will break his contract. Is that something the government can do?

Mr. WESSEL: The government can't, as far as we know, break contracts that have already been made, but the compensation czar may have a lot of weaponry. He might be able to say, okay, you can pay that thing, but I'm ordering you not to make a contract like that in the future and maybe to get some of that money back in a future contract. It'll be very difficult for Citigroup to ignore the wishes of this compensation czar. He has unusual powers for banks in which the taxpayers have taken unusual actions to keep them alive.

INSKEEP: Has anybody's bonus ever been reduced?

Mr. WESSEL: There have been some instances. There's a fascinating case now. The Securities and Exchange Commission recently went after a guy. His name is Maynard Jenkins. And even though he hasn't been accused of any wrongdoing, he got $4 million in bonuses and stock. The company later restated the books and the SEC is suing him and saying that $4 million you got wrong, you got to give that back to the company.

INSKEEP: And so that case is in civil court at the moment.

Mr. WESSEL: It is, and he's resisting it. And it's based on old law, the Sarbanes-Oxley Act, that was passed after the last corporate scandals. It will be very closely watched to see how much muscle the government actually has under existing law. And of course as you know, there's talk about giving them more muscle in new laws.

INSKEEP: I suppose we should try to look at a nuance here, because if someone makes a billion dollars for Citigroup or any other company and then walks away with a $20 million bonus, we might find it outrageous but they made a profit for the company. I guess the real question here is whether people are still getting bonuses for short term or apparent gains that actually create long-term risk, long-term trouble for the company that they're profiting from.

Mr. WESSEL: That's exactly right. The decision has been made, and it's a widely shared goal, the compensation ought not to lead people to take wild risks that if they pay off they get the money, and if they go sour the taxpayers pick up the losses.

INSKEEP: Do you mean to say that people on Wall Street now agree that this was a bad way to compensate people?

Mr. WESSEL: I think that there are a lot of people on Wall Street who now realize that giving people bonuses to do things that are in their individual short-term interest but are not in the company's long-term interest is not a good system. So I think the principle is established. Where the difference is, that people on Wall Street say that people will only work hard if you allow them to get big bucks if they do well, and there's no limit to how much money someone can make if they do well. And other people say, well, gosh, even if you get the formula right there's some level of obscenity that comes with someone getting almost a $100 million for doing nothing but playing poker with other people's money.

INSKEEP: David Wessel of The Wall Street Journal, good to see you.

Mr. WESSEL: You're welcome.

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