The bonus brouhaha has given many people the idea that the primary beneficiaries of federal bailout funds have been "Wall Street" and the heavily bonused investment bankers. That is emphatically untrue. It is true that the problems at Citigroup—the largest recipient of government aid, and the most troubled of the big banks—came from the investment-banking side. But the problems of Bank of America and Wells Fargo (WFC), as well as the rest of the banking industry, did not. They came from bad loans driven by years of bad decisions by the people who are now getting a free pass amid the Sturm und Drang of the bonus outcry.
Does Wall Street compensation need to be restructured? The story of salary reform in general is an awful study in being careful what we wish for. An irony of the bonus debate is that one of the reasons so much of investment banking compensation is given in the form of "bonuses" is that since 1993, corporations have had to pay additional taxes on "salaries" of more than a million dollars. The product of a backlash against inflated paychecks, the rules led to a corresponding inflation in compensation that could vaguely be called "performance based," from cash bonuses on Wall Street to stock options in the rest of the business world. Having tried to shoehorn what are effectively salaries into the performance-based bonuses to stay within the tax guidelines, investment bankers are now to some extent reaping the rewards of their semantic sleight of hand—if you're going to call the money you pay a "bonus," you can't blame folks for asking, "What for?"
If indeed there are changes in how Wall Street bankers are paid, they are likely to be largely cosmetic. A careful look at the Cuomo report reveals a surprisingly simple rule of thumb for Wall Street compensation. Look at the investment-banking houses in Cuomo's list—Morgan Stanley (MS), Goldman Sachs, and Merrill Lynch—and you find that generally in most years they pay roughly half their revenue out in compensation. In a few cases, as with Morgan Stanley, whose compensation hit 59 percent of revenues in 2007, they get out of whack for a year, and in a very few cases (Merrill in 2007), a huge drop in revenue makes everything go topsy-turvy.
Is this too much? It's not really something that investors in Goldman Sachs, Morgan Stanley, or JPMorgan Chase—who can fend fine for themselves—are crying about. Merrill, now part of Bank of America, and the investment-banking side of Citi are different: Effectively, the government is a major investor in these and so certainly has an interest in knowing where the money is going. We'll see whether the government can pressure them to come up with a better ratio. When all is said and done, it doesn't seem likely: The 50 percent rule seems surprisingly resilient.
The more important question, however, is whether imposing a culture of frugality on Wall Street will solve the most pressing problems of the banking industry. To this, the answer, bluntly, is that it will not. The unfortunate reality of bonus rage is that, understandable—and in some cases, even justified—as it is, it's ultimately a distraction from the real business of remaking the banks. Investment banks will always attract public outrage because they employ a fairly small number of people at outrageous salaries to do jobs that very few people will really understand. But the outcry over the excessive salaries of a few has created the false sense that the ills of the banking business lie mainly with sky-high pay.
They don't. You can hate JPMorgan Chase and Goldman Sachs for having the most millionaires on their payroll. But if you really want a better deal for consumers, the culture that has to change most isn't the bonus culture of Wall Street. It's in places like Bank of America, which might be less generous to their employees but more toxic to the public interest.
*Correction (Aug 10, 2009): This piece originally stated that Bank of America was headquartered in Charlotte, Virgina. That is incorrect. Charlotte is in North Carolina.