Bonus: The new bad word on Wall Street

30 January 2009

It may now well be the turn of the bonus, an annualised ritual on Wall Street, to be sacrificed at the altar amidst government bailout of global financial institutions.

Governments across the globe have been giving financial institutions a proverbial rap across the knuckles after bailing them out with taxpayer money. UBS AG was asked to shrink its bonuses after the Swiss government threw the country's biggest bank a $59.2 billion lifeline.

Across the Atlantic in the US, Bank of America is reported to be under pressure to reduce its payouts after New York Attorney General Andrew Cuomo subpoenaed bank executives earlier during the week asking for information pertaining to compensation.

Now, a day ago President Barack Obama too has termed bonuses awarded by banks as something that represent "the height of irresponsibility." Reports quoted Nassim Taleb, New York University professor and author of "The Black Swan: The Impact of the Highly Improbable," as opining that the present system of "asymmetric compensation" was detrimental to society and needs to give way to a new order. The present system, he says, rewards people when they do well, but does not ask them to return the rewards when they lose money.

Taleb was quoted as saying that people like Robert Rubin, who received over $100 million serving as chairman of New York-based Citigroup Inc.'s executive committee, need to be punished for their failure to understand the risks their institutions were taking. He said that unless Rubin and others like him are made to mandatorily return their bonuses or are given some other punished, the system that regrettably emerges is one "where profits are privatised and losses are nationalised."

Most of the admonishments do not seem at all out of order against the backdrop of the worst economic crisis since the Great Depression. After a $700 billion taxpayer funded bailout, and the failure of three financial stalwarts as Bear Stearns, Lehman Brothers, and Merrill Lynch, one would think that the least the financial services industry can do is behave responsibly.