The Financial Times has reported on where $4 billion of the TARP money went…. to pay bonuses to the executives who bankrupted Merrill Lynch (story). They deposited $10 billion in TARP money in October and wrote themselves $4 billion in bonus checks a couple of days before Bank of America took over the insolvent firm. We can no longer say that the $350 billion first round of TARP money sank without a trace. Now Bank of America needs another $20 billion in TARP money to make up for this and some other losses from Merrill that it didn’t expect.
One interesting aspect of the story is how weak is the correlation between pay and performance. Merrill paid its people 6 percent less in 2008 than it did in 2007, when the firm’s numbers still looked pretty good. If total incompetence and driving a company into bankruptcy yields 94 percent of the pay of doing a great job, what incentive is there to try to turn a profit for shareholders?
This is nothing short of highway robbery. No one from Merrill should have received any kind of bonus whatsoever for their actions in 2008. That American taxpayer funds were used to pay Merrill bonuses is disgraceful and that money should all come back to the TARP pool. Geithner, GET TO WORK!
Two questions: Where was the oversight? Surely, once it was known that bailout money was going into the banks (and Merrill, or its rescuer was clearly going to be a recipient), a method of overseeing the financial management of these companies needed to be created? Or did the government just trust that they would do ‘the right thing’?
Secondly, how do we change corporate culture to get the definition of ‘bonus’ to return to be something that is paid for creating success, not just turning up every day?
Hey John Doe – where are you now? Still want to defend your previous comments: “It’s not some sort of free equity that executives just go ahead and distribute to themselves. Again, that is just ridiculous. ” and “And Wall Street CEOs are not intent on making out like a bandit with this money and leave their successors holding the bag.”
Ridiculous indeed. Thain deserves to be lynched, not just fired.
“A source familiar with the matter says Mr Thain, in the weeks leading up to the December 8 compensation committee meeting, had been weighing the possibility of requesting a bonus of at least $10m for himself before ultimately deciding against such a move.”
My goodness, I’d like to know the circumstances under which Mr. Thain would NOT consider requesting himself a bonus.If the fact that Merrill had become such a turd that TARP funds needed to be added to close the deal with BoA were not reason to dissuade him, what reasons would?
On the other hand, I remember my previous employer’s (a well-known Fortune 500 company) annual report. In good years, it always attributed the performance to the strong, apt leadership in place. In bad years, it attributed the performance to unforeseen, or uncontrollable market forces. It’s never the leadership’s fault!
Off Topic:
Phil, are you in line for a Terrafugia flying car that just went to market ? I heard about this quite awhile ago but never thought they’d actually do it, if for no other reason than government regulation. I’d love to see a blog entry on it.
http://dsc.discovery.com/news/2009/01/22/flying-car.html
WSJ story says Thain is an MIT engineer & Harvard MBA.
JP: That is remarkably off-topic! Let me bring it back on-topic and say that if I had my $4 billion in bonus money for 2008, I would definitely put down a deposit on a Terrafugia. I know the guys (they are local) and they are sincere and hard-working. The challenge of bringing a new aircraft to market is daunting and fraught with regulatory hassle. Remember that delay means that more capital will be required and a business that constantly needs more capital is a tough one to run in this environment (unless you’re a bank and can keep getting taxpayer money!).
Assuming that Terrafugia succeeds in delivering legal airplanes… would I want one? I don’t have a second house so I’m not sure where I would go with it. Most of the airports that I visit have fairly convenient loaner or rental cars. When I do travel somewhere in the Cirrus I often have it loaded pretty close to its gross weight, which means that a two-seater wouldn’t have enough room for me/friend/dog/luggage.
Given infinite money, I would definitely buy one and also a light-sport seaplane/amphibian. But I forgot to move all of my money out of stocks and into Treasuries in December 2007, so it looks like I will be sticking with the aircraft that I already have…
There is yet another interesting article about how TARP is being used at WSJ: http://online.wsj.com/article/SB123258284337504295.html
I think if someone were to map out a relationship tree between all the senior management the Fortune 500 companies you would find that they all pad each others pockets. They sit on each others boards and compensation committees. They’ve worked above or below each other at some time and so they take care of each other at all times to ensure they get taken care of themselves.
And I don’t think average stockholders can do a thing about it. Sure, board directors are normally nominated by stockholders, but most shares are held in big blocks by major investors, insurance firms, pensions, etc… And they’re part of the same relation ship tree.
Somebody should build a LinkedIn group for these guys so we can all see these big boys and how much they’ve padded each others pockets.
Mark: Board members for public companies are not nominated by stockholders. They are nominated by the existing Board. The stockholders can only nominate an alternative slate of Board members by mounting an expensive proxy fight and usually no single stockholder has a large enough percentage of the company to make it worth their while.