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<DIV style="MARGIN-RIGHT: 165px"></DIV>
<DIV><FONT size=+2><B>Wall St. Jacks Up Pay After
Bailouts</B></FONT><BR>Lawmakers Warn Against Return to Pre-Crisis
Levels<BR></DIV>
<P><FONT size=-1>By Tomoeh Murakami Tse<BR>Washington Post Staff
Writer<BR>Thursday, July 23, 2009 <BR></FONT></P>
<P></P>
<P>NEW YORK, July 22 -- Wall Street's biggest banks are setting aside billions
of dollars more to pay their executives and other employees just months after
these firms were rescued with a taxpayer bailout, renewing questions about
compensation practices in the aftermath of the financial crisis. </P>
<P>The recent outcry over bonuses at bailed-out firms prompted public alarm and
promises of reform from financial leaders, who acknowledged that pay and bonuses
should not reward risky short-term business decisions -- such as those that
contributed to the meltdown -- but instead longer-term financial performance.
</P>
<P>But Wall Street, helped by improving profits, is on track to pay employees as
much as, or even more than, it did in the pre-crisis days. So far this year, the
top six U.S. banks have set aside $74 billion to pay their employees, up from
$60 billion in the corresponding period last year. </P>
<P>The increase in set-asides for employee pay has raised the ire of Washington,
where lawmakers denounced financial leaders for returning to old habits and
vowed to enact measures governing executive compensation. </P>
<P>"It strengthens our commitment to getting legislation passed," Rep. Barney
Frank (D-Mass.), the chairman of the House Financial Services Committee, said in
an interview Wednesday, adding that a committee vote on a bill to increase
oversight of Wall Street pay has been scheduled for Tuesday. "The amounts are
troubling." </P>
<P><A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=GS&nav=el"
target="">Goldman Sachs</A> caused a stir last week when it disclosed it had set
aside a record $6.6 billion for compensation expenses in the most recent
quarter, bringing the total for the first six months of the year to $11.4
billion. If that pace continues for the rest of the year, Goldman's employees
will earn an average of about $773,000, more than double the figure last year
and even exceeding the $700,000 paid in 2007. </P>
<P>The recent set-asides came as Goldman announced it earned a record $3.4
billion for the second quarter, positioning itself, along with <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=JPM&nav=el"
target="">J.P. Morgan Chase</A>, as one of the strongest banks to emerge from
the crisis. </P>
<P>But some analysts and investors had especially sharp words for Wall Street
rival Morgan Stanley, which reported Wednesday that it had set aside $6 billion
so far this year for compensation expenses even as it recorded its third
straight quarterly loss. In reporting its second-quarter results, Morgan Stanley
said it lost $1.26 billion, after accounting for one-time charges including an
$850 million expense related to paying the government back after its bailout.
Still, the company set aside $3.9 billion in compensation expenses, representing
72 percent of its revenue for the quarter. </P>
<P>In response to a question during Wednesday night's news conference, President
Obama said that Wall Street had yet to change its behavior and practices. </P>
<P>"With respect to compensation, I'd like to think that people would feel a
little remorse and feel embarrassed and would not get million-dollar or
multimillion-dollar bonuses," he said. </P>
<P>Traditionally, Wall Street banks have set aside about 50 percent of revenue
to pay their workers, though that ratio is lower at firms with larger commercial
banking operations, like <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=C&nav=el"
target="">Citigroup</A> and <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=BAC&nav=el"
target="">Bank of America</A>, which have a sizable number of lower-paid
employees handling consumer business. </P>
<P>Morgan Stanley's compensation figures raised eyebrows among some analysts,
who peppered Chief Financial Officer Colm Kelleher with questions about employee
pay during a conference call. </P>
<P>"Clearly, we have to pay competitively," Kelleher said during the call. "We
are a preeminent investment banking franchise. Obviously, we really would like
to have far more revenue to make the compensation issue easy." </P>
<P>He said the ratio of revenue to compensation would have been close to 50
percent if Morgan Stanley were able to exclude a $2.3 billion charge it took
arising from an accounting rule related to the company's debt. </P>
<P>In an interview, analyst Brad Hintz with Sanford C. Bernstein challenged that
explanation, saying Morgan Stanley's compensation ratio has remained high
throughout the financial crisis. </P>
<P>"Unfortunately, this means that Q2 was a pretty good quarter for the
employees, but not so for the shareholders," Hintz said. </P>
<P>The compensation figures reported in earnings for Goldman Sachs, J.P. Morgan
Chase, Citigroup, Bank of America, Wells Fargo and Morgan Stanley include not
just salary and bonuses but also pensions, contributions to 401(k) accounts,
health care and other benefits. These disclosures provide the only publicly
available information on overall compensation at the firms. The compensation
expenses booked each quarter include ongoing salaries as well as money set aside
to pay bonuses at the end of the year. </P>
<P>The total expenses for pay and benefits at the six biggest banks will work
out to $128,000 in average annual compensation per employee if firms continue to
put aside money at the same pace for the remainder of the year. But pay is not
evenly distributed at these companies. </P>
<P>Rainmaker traders and bankers take home millions of dollars a year while
secretaries settle for much less. For instance, at J.P. Morgan, which includes
both a large consumer banking operation and investment banking, the annual
average pay per employee would be $132,000 if the company continued to set aside
money for compensation at the current rate. But in the investment banking
division alone, the average worker would be paid $466,000. </P>
<P>At Morgan Stanley, a majority of the $3.9 billion booked this quarter for
compensation expenses was for employees in the institutional securities
division. That division carries out activities such as bond underwriting that
performed better than last year but still lost money on the whole. </P>
<P>All six banks have received federal bailout money from the $700 billion
rescue package adopted by Congress last year. Although three -- Goldman Sachs,
Morgan Stanley and J.P. Morgan Chase -- have since returned the funds during the
latest quarter, they continue to benefit from a variety of other emergency
federal programs. With the exception of Morgan Stanley, all the banks posted
profits this quarter. </P>
<P>Lawmakers' renewed focus on compensation comes as Congress considers the most
sweeping reform of financial regulation in decades. Compensation is shaping up
to be central in those efforts. Earlier this year, public outrage swept the
country on news that banks paid out $18 billion in year-end bonuses in 2008. The
amount, while down about 40 percent from 2007 levels, drew a denouncement from
President Obama. </P>
<P>Now, some bank executives said it should come as no surprise that set-asides
for compensation would rise as performance recovered. </P>
<P>Representatives of several banks pointed to recent changes in compensation
designed to discourage employees from engaging in risky activities that could
cripple the bank and imperil the broader financial system. These revisions seek
to tie an employee's compensation to the bank's long-term performance. For
example, Morgan Stanley has introduced a clawback provision that could allow the
firm to take back a part of the bonuses paid to thousands of employees if they
engage in activities that prove detrimental to the company, such as triggering
major losses or harming its reputation. Goldman Sachs has increased the time
employees must wait before benefiting from restricted stock awards. The vesting
period is now four years, up from three. </P>
<P>Several bankers noted that the amounts set aside are not a perfect measure of
what will be paid out in bonuses at year-end. For example, Goldman took back
$490 million it had previously set aside to pay employees when it lost money in
the fourth quarter of 2008. </P>
<P>"We have accrued compensation for only six months, and no decisions will be
made on bonuses for months," said Goldman spokesman Michael Duvally. </P>
<P>Still, some compensation experts questioned the pay expenses booked this
quarter. </P>
<P>"Recent compensation decisions are indeed surprising given that the lessons
of the financial crisis are so fresh and clear and that the need for
compensation reform is so widely accepted," said Lucian Bebchuk, a Harvard law
professor who has met with administration officials to discuss pay principles.
</P></FONT>
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