Why Do People Who Work in Finance Earn So Much More Than the Rest of Us?

[Better Believe It]

Why Do People Who Work in Finance Earn So Much More Than the Rest of Us?
By Les Leopold
January 21, 2011

Banning Big Wall Street Bonuses Favored by 70% of Americans
By Catherine Dodge
December 22, 2010

More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows.

An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street’s return to financial health.

A large majority also want to tax Wall Street profits to reduce the federal budget deficit. A levy on financial services firms is the top choice among more than a dozen deficit-cutting options presented to respondents.

With U.S. unemployment at 9.8 percent, resentment of bonuses and banking profits unites Americans across political, gender, age and income groups. Among Republicans, who generally are skeptical of business regulation, 76 percent support a government ban on big bonuses to bailout recipients, that’s higher than backing among Democrats or independents.

http://www.businessweek.com/news/2010-12-22/banning-big-wall-street-bonuses-favored-by-70-of-americans.html

As bonus season arrives, the gap between the American people and Wall Street couldn't be wider. And where is Washington in this great divide? Don't ask.

At a moment when Americans desperately want jobs on Main Street and expect Wall Street to pay its fair share, Washington officials are hard at work -- seeking jobs for themselves on Wall Street. (Congratulations, Peter Orszag, on parlaying your position as Obama's OMB director into a top job at CitiGroup, the bank that received hundreds of billions in taxpayer bailouts and guarantees on your watch!)

Actually, it sounds a bit quaint these days to suggest that the rich must actually suffer the consequences of failure. These top financial institutions did not have to pay for their reckless gambling and gaming because they were deemed to big too fail, and so were bailed out. Goldman Sachs, for example, made a very bad bet when it purchased $13 billion of financial "insurance" from AIG to cover its toxic assets. AIG, due to its own enormously bad business decisions, could not pay up and was on the verge of bankruptcy. Had it gone under, Goldman Sachs would have received pennies on the dollar for its bad gamble, and might have gone broke. Instead, AIG was bailed out by taxpayers and Goldman Sachs got 100 cents on the dollar. It gambled, lost, and instead of suffering the consequences, was made whole by the government. And now Goldman Sachs execs are hauling in tens of millions in bonuses (disguised as stock options, even as its profits slip a bit from astronomical highs.)

Where does all their wealth come from?

There are only two possible sources for all the money the financial sector is spewing: The bankers are either creating new wealth or they're siphoning off wealth from the rest of us. Hedge fund honchos like to boast about how they weren't bailed out and therefore are entitled to their enormous hauls. (The top 10 in 2009 earned an average of $900,000 an HOUR. The top 25 earned as much as 658,000 entry level teachers.)

But our noble hedge fund managers have a great deal of difficulty accounting for what I call their "paradox of productivity." You see, there's supposed to be a connection between the productivity of your employees and your profits. Apple Corporation, for example, earned about $6 billion in 2009 by expertly engaging its 35,000 employees. (They went on to earn $6 billion in the last quarter of 2010 alone.) Along the way they offered us an array of popular new products that people are enjoying and putting to use. Appaloosa, the hedge fund, earned about as much as Apple in 2009 by speculating on god knows what. But it has fewer than 250 employees and it's not at all clear what these individuals added to our economy -- certainly not the iPad. How can 250 workers, no matter how wise and talented, produce as much real worth speculating on stuff as 35,000 Apple employees can make inventing, manufacturing and marketing useful products? They can't. So hedge funds must be siphoning off wealth from elsewhere, not creating it themselves. (If you think I'm wrong, please prove otherwise, because I haven't found a single book or paper about hedge funds, even from insiders or academics, that explains this paradox of productivity.)

Please read the full article at:

http://www.alternet.org/economy/149634/why_do_people_who_work_in_finance_earn_so_much_more_than_the_rest_of_us_/?page=entire

[msongs]

1. because they control the politicians in the white house and congress nt

[Brilliantrocket]

2. I don't think we should regulate how much people earn.

If there's someone or a structure out there that can pay 900k an hour, so be it. As long as no illegal activity is taking place, I'm fine with it.

[Better Believe It]

5. The government regulates incomes now and the tax code can be changed to

tax income and businesses at much higher rates among those who are engaged in non-productive employment such as hedge funds and their managers to discourage such speculative activities.

The Wages and Hours Act, minimum wage laws, tax laws, etc., currently regulate incomes.

[Celebration]

6. ordinarily I would be okay with it

But this someone or structure has caused untold economic misery to the country, has been deemed "too big to fail" and therefore their risky activity is subject to period bailouts using our own tax money. Any entity that is "too big to fail" in essence is a regulated industry, and not subject to the free market. So let's actually regulate them, and not allow them to skim all the cream off, deplete the capital of the entity, and leave the tax payer with all the sour milk down the road.

[Better Believe It]

7. Tax the rich until their eyes bleed!

And after that they will still live much better than most of us.

[snot]

10. Two factors to consider: Scale and Opacity (or, when stuff SHOULD be regulated)

Part of the reason senior managers or financiers can scrape off so much money is that we let them create such gigantic organizations, transactions, and investment pools.

This is true in MANY situations. E.g., if you help merge two giant cos., it's not that much more work than merging two small cos.; but you can charge a lot more for your services because the share represented by your fees (and by the bonuses to the sr. execs. of the cos. involved) still looks like a tiny fraction of the total value involved. People who do this for a living know this full well.

So there is every incentive for the people who control the decisions as to whether to get bigger or do bigger transactions to just DO them, regardless of whether they're actually good for anyone other than the sr. execs. or service providers.

Another factor is the lack of transparency to the "little" people affected. Once orgs or transactions reach a certain size or complexity, those at the top are less directly answerable to those along the bottom of the hierarchy; and even where there's full disclosure to those along the bottom, the latter have a hard time understanding it.

For all these reasons, these are situations in which regulation is absolutely essential. And in order to police sr. managers or financiers effectively, the regulation needs to be relatively extensive (both in the sense of what regulators can look at and in the sense of having the funding to maintain adequate enforcement capability).

Of course, one part of that regulation that I think would be most beneficial would involve recognizing that at a certain point, the "economies of scale" cease to be worth the looting opportunities and general threat to the global economy that also result from large size -- and simply prohibit orgs or transactions from getting too big.

This was part of the benefit from anti-trust laws, when we used to enforce them.

Another regulatory approach I've always wondered about: to prohibit investment advisors from earning more than a living wage plus a percentage of the profits they actually deliver to their investors, and couple that with provisions allowing losses that aren't discovered until later to be clawed back.

But all of this would require a gov't that serves the people.

[Gormy Cuss]

15. How about this for a reason?

“The American people bailed them out and immediately they went and paid their employees very large bonuses,” says poll respondent Michael Robertson, 43, of Wayne, Michigan. “I don’t believe they should have a bonus at all for a while.”

On a broader note though, there is the question of whether the bonus structure creates too strong of an incentive to feather their own nests without regard to the societal consequences of schemes like securitizing mortgages.

[somone]

3. Why Do People In Organized Crime Earn So Much More Than the Rest of Us?

is probably the answer

[ananda]

4. Absolutely.

Imagine if the Feds went after criminal bankers and wall streeters with
the same fervor as that latest organized crime roundup.

[obxhead]

8. I say 90% on bonuses more than 100K. nt

[Coyote_Bandit]

9. There are lots

of professional level Main Street finance jobs that pay $40,000 a year or less.

Not everybody who works in finance is grossly overpaid.

[ProgressiveProfessor]

13. Key point...its only the top of a large pyramid that are paid at that level

[unblock]

11. it's more a question of why do we tolerate a system that permits this?

the extraordinarily high pay of a small number of individuals -- not just in finance but also at the top of the dogpile in many industries -- is evidence of a system that's totally screwed up.

even with the example of apple, i'm sure we can all recognize more economic value steve jobs has contributed to society than the hedge fund managers, but i'm sure his compensation last year is ridiculously large compared to the actual value he individually added specifically last year. same goes for pretty much any ceo.

the problem is that the market and reasonable pricing probably works reasonably well when it's not highly concentrated, so the compensation of average joe jobs seems more or less reasonable given contribution, need, supply and demand, etc. but go up the pyramid and money gets concentrated and with huge amounts at stake the compensation and fees get really out of whack.

the problem is that the "decision" and consequences are made to rest with one person, so that huge financial value rests on hiring that one right person and rewarding that one person hugely. but a slightly different management structure would avoid that and it's not at all clear that the company is better off having a single ceo compared to a committee or other set up that isn't as expensive.

in the case of hedge funds, huge financial value is at stake in getting the price exactly "right" on every stock and bond and other financial instrument every nanosecond of the day. so we, as a market, pay a few people astounding amounts of money for tweaking those prices. but is that contributing real economic value?

the goal of having "correct" prices is so that supply and demand flow freely. if the price is too high, little will trade because buyers won't play; if the price is too low, little will trade because supply is too low. getting the price right makes sense in an industry with a real good, because we, as a society, want to get ipads moving from suppliers to customers. that's what a strong economy does, move resources around from those who have in abundance to those who are in need of that resource. although i use "need" in the context of an ipad with tongue firmly in cheek....

but what about getting the price of apply STOCK exactly right? if the price is slightly off, perhaps the market for apple stock will be a bit less liquid and shares won't trade quite as much. well, that's just not an economic disaster the way getting the price wrong in any other industry is a problem. sure, the capital markets work best when there's a very liquid secondary market, and serious problems in the secondary market would ultimately mean problems in the primary market -- companies would have a tough time getting reasonable money for actually issuing new shares. but there's no evidence that the secondary market needs to be as liquid as we are trying to make it, by getting the price "right" every nanosecond.

all sorts of changes could be made to the markets that kept shares moving at reasonably accurate prices but limited the crazy volume of trades. so what if you need to wait an hour to get a fair price to sell your shares? do you really need to be able to sell it at the exact price of the nanosecond? more importantly, is there real economic value in that?

because you're paying financially for it. that's how the hedge funds make their money.

[alarimer]

12. This is why we need to bring back higher tax brackets.

I think 90% sounds good. Tax the shit out of these immoral assholes.

[Odin2005]

14. They are fucking parasites. A perfect example of the inherent injustice of Capitalism.