Monday, August 10, 2009

Wall Street Entitlements

New York Times

Commentary

Wall Street seems to believe there is an entitlement of six-figure bonuses. It is this culture of entitlement that requires financial regulation. Clearly, a single regulatory body, such as the SEC, is insufficient. Multiple checks and balances are required to safeguard public interests against government agencies from being compromised by the power of Wall Street.

Excerpts

Reigniting a major controversy over Wall Street pay, a federal judge on Monday sharply criticized the bonuses that Merrill Lynch hurriedly paid out before it was acquired by Bank of America last year and pointedly questioned a federal settlement that had seemed to put the issue to rest.

Judge Jed Rakoff withheld approval of the S.E.C.-Bank of America deal.

A week after the Securities and Exchange Commission announced that it had settled the matter, Judge Jed S. Rakoff questioned whether the $33 million agreement with Bank of America was adequate. He refused to approve the deal, saying too many questions remained unanswered, including who knew what and when about the controversial payouts.

His ruling prolongs what has become a major embarrassment for Bank of America and its chief executive, Kenneth D. Lewis, and also deals a stinging blow to the S.E.C., which needs Judge Rakoff’s approval of its deal with the bank.

Judge Rakoff ordered the bank and the commission to submit more information to him within two weeks.

During a hearing in New York that was heated at times, the judge was scathing about the settlement, in which the S.E.C. accused Bank of America of misleading its shareholders. Bank of America neither admitted nor denied wrongdoing.

Bank of America and Merrill Lynch, Judge Rakoff said, “effectively lied to their shareholders.” The $3.6 billion in bonuses paid by Merrill as the ailing brokerage giant was taken over by the bank was effectively “from Uncle Sam.”

The Merrill bonuses, which were the subject of a state investigation and prompted an outcry in Congress, were paid even though Merrill Lynch lost $27 billion last year. Its deepening red ink later forced Bank of America to seek a second taxpayer-financed bailout.

“Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?” the judge asked.

Judge Rakoff, who took an active role in the S.E.C.’s case against WorldCom, is yet another voice in a growing chorus of critics of the Bank of America-Merrill deal, which was forged in the heat of the financial crisis last fall. Both the S.E.C. and Bank of America defended the settlement. The bank’s fine, however, represented a small fraction of the bonuses paid out by Merrill Lynch, a fact the judge and other critics seized on. In fact, at least one individual at Merrill Lynch collected a bonus totaling more than that amount.

The judge characterized the $33 million fine as “strangely askew” given the accusations made, the magnitude of Merrill’s losses and the subsequent bailout for Bank of America. The judge questioned the role of top executives at the companies, in particular Mr. Lewis and John A. Thain, the former chief executive of Merrill Lynch, both of whom signed off on a proxy statement to investors.

“Was there some sort of ghost that performed those actions?” Judge Rakoff said.

The S.E.C.’s complaint focused on a document that detailed the bonuses, but which was not included in the merger agreement or proxy statement that was sent to the companies’ shareholders, who voted to approve the merger on Dec. 5.

The S.E.C.’s lawyer, David Rosenfeld, said repeatedly during the hearing Monday that the agency had chosen not to make allegations against individuals in the case.

Mr. Rosenfeld spoke softly and was called up to the microphone after Judge Rakoff criticized the S.E.C. for the evidence it had presented — or failed to. The judge said the commission was remiss for not determining who at the companies decided not to disclose the bonus agreement. And he suggested that they should have interviewed the external lawyers for both companies.

“You filed a rather uninformative, bare-bones complaint,” Judge Rakoff said.

Lewis J. Liman, a lawyer representing Bank of America, told the judge, when prodded, that the bank believed it had not wronged its shareholders. Mr. Liman, son of Arthur L. Liman, the lawyer who led the Iran-contra investigation in the Senate, seemed at times dismissive, saying at one point: “My God! Bonuses on Wall Street? It is not a matter of surprise.”

Merrill had little choice but to pay many of the bonuses, Mr. Liman said. Of the $3.6 billion, Merrill had committed $850 million in the form of guaranteed bonuses. Mr. Liman said the rest of the money was shared among 39,000 workers who received average payments of $91,000 — though he did not mention that there were 696 people at Merrill who made more than $1 million in bonuses.

“I’m glad you think that $91,000 is not a lot of money,” the judge said. “I wish the average American was making $91,000.”

Mr. Liman agreed that $91,000 was quite a lot.

Judge Rakoff said he might hold another hearing to consider evidence of whether the bonuses were needed. He said he might want to know if Merrill’s management studied how many of the roughly 39,000 bonus recipients would have left had they not received their payouts.

Mr. Liman said the bank could prove in litigation that there were a number of companies that might have hired Merrill’s employees.

Mr. Rosenfeld of the S.E.C. said he had based the fine in part on a case the agency filed against Wachovia over disclosure issues in 2001. That case involved disclosure of a stock buyback program that cost $500 million.

The lawyer for Bank of America periodically whispered what appeared to be suggestions to Mr. Rosenfeld. One point that Mr. Liman emphasized was that the $3.6 billion was paid with funds other than the federal bailout money, and he said that if the bonuses were a problem simply because of the bank received aid, other banks that had received bailouts might face similar allegations.

The judge was unmoved. “Money is money, the last time I checked,” Judge Rakoff responded.

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