Bank Advisor

Archive for November 16th, 2009

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The 116 banks that are receiving billions in taxpayer-provided bailout money this year actually paid out $1.6 billion in compensation and benefits to their top executives last year – even though the results at some of these institutions were so poor that they would soon have to turn to Washington for a government-engineered rescue.

The $1.6 billion was paid out to nearly 600 executives at the 116 banks that have so far accepted federal money to bolster their financial foundations, The Associated Press concluded after a review of U.S. securities filings. In addition to salary, the compensation included bonuses paid in both cash and stock. The benefits reaped by top executives included the use of company jets for personal purposes, personal chauffeurs, home-security services, country-club memberships and professional-wealth-management services, the news service said.

U.S. Rep. Barney Frank, D-Mass., a longtime critic of the fat pay packages given to U.S. executives, said the bonuses and perks tallied by The AP review amounted to a bribe paid “to get [CEOs] to do the jobs for which they are well paid in the first place.”

“Most of us sign on to do jobs and we do them best we can,” Frank, chairman of the House Financial Services committee, told the news service. But “we’re told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!”

The AP review is just the latest in a series of media investigations that have questioned the effectiveness of – and banks’ commitment to – the so-called “Troubled Assets Relief Program” (TARP), part of an overall $700 billion bailout plan that was originally unveiled in late September.

The plan was originally conceived to boost the strength of U.S. financial institutions by having the federal government purchase non-performing mortgages and other bad assets. In November, the Bush administration changed TARP’s objectives, instructing the U.S. Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.

Ideally, TARP was supposed to jumpstart bank-to-bank and bank-to-consumer lending, helping to unfreeze a credit crisis that may be the worst the U.S. economy has experienced since the Great Depression. But that hasn’t happened. Instead, as a Money Morning investigation has shown, banks are using the money to buy other banks in a dual effort to build market share for when the economy recovers, and to perhaps make themselves “too big to fail” in the interim, many experts say.

TARP did set restrictions on some executive compensation for participating banks, but it did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from presenting so-called “golden parachute” financial packages to departing or ousted executives and from deducting some executive pay for tax purposes.

The AP study found that the 116 banks received $188 billion in TARP money. The study also discovered that:

The average amount paid to each of the 116 banks’ top executives was $2.6 million in salary, bonuses and benefits.
Lloyd C. Blankfein, president and chief executive officer of Goldman Sachs Group Inc. (GS), took home nearly $54 million in compensation in 2007. The company’s top five executives received a total of $242 million. On Oct. 28, Goldman received $10 billion in federal bailout money. On Dec. 16, Goldman reported a $2.12 billion quarterly loss, its first since it went public back in 1999. So for 2008, Goldman’s seven top-paid execs will work for their base salaries of $600,000 each, but will forgo any cash and stock bonuses, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan in a written report back in the spring as being essential to retain and motivate executives “whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels.” Goldman spokesman Ed Canaday would not elaborate beyond that written report.
Even where banks slashed pay, some executives still reaped a payday of seven – or even eight – figures. Richard D. Fairbank, the chairman of Capital One Financial Corp. (COF), which received $3.56 billion in bailout money back on Nov. 14, took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options.
Merrill Lynch & Co. (MER) CEO John A. Thain topped all banking chieftains with more than $83 million in total earnings in 2007. Thain, a former chief operating officer for Goldman Sachs, took over the top job at Merrill in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he landed a $15 million signing bonus, $57,692 in salary, and an additional $68 million in stock options. Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28. Merrill shareholders have approved its sale to Bank of America Corp. (BAC), though the value of the deal has plunged to $20 billion (from $50 billion at the time the deal was announced) as a result of the stock market decline. BofA will reportedly slash 35,000 jobs as a result of the combination.
JPMorgan Chase & Co. (JPM) CEO James Dimon ran up a $211,182 private jet travel tab last year, because his family lived in Chicago and he was commuting to New York. JP Morgan received $25 billion in bailout funds.
Bank of New York Mellon Corp., (BK) CEO Robert P. Kelly received $66,748 for financial services – on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said. At Goldman, the bill for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important because it grants executives more time to focus on their jobs.
Wells Fargo & Co. (WFC), which received $25 billion in bailout cash, gave its top executives as much as $20,000 each for personal financial planners.

When asked to justify the personal use of company aircraft for some executives, banks cite security as a key reason. But U.S. Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation’s security-conscious commercial air terminals.

U.S. Rep. Brad Sherman, D-Calif., a member of the House Financial Services Committee, said excessive pay and perks undermines the development of good economic policies at banks and fuels an already problematic pay spiral in the U.S. financial sector. And that’s especially difficult for shareholders and taxpayers to accept when virtually the entire sector needs bailing out [Check out this related story on the growing U.S. CEO pay controversy that appears elsewhere in today’s issue of Money Morning].

Sherman told The AP that he wants the banks to appear before Congress, like the automakers did, and spell out their spending plans for the bailout money.

Said Sherman: “The tougher we are on the executives that come to Washington, the fewer will come for a bailout.”

[Editor’s Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “The Golden Age of Wealth Creation.” But Fitz-Gerald brings more than a realization – and an understanding – to the table, here. After a decade of work, he’s also developed a new computerized trading model based on a mathematical concept known as “fractals.” This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and this new market environment.]

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A power struggle is brewing within the regulatory bodies and Congress. The issue concerns the very important question of how investors get the financial advice the need.

On one side are agents of banks, brokerage firms, insurance companies, and independent advisors who have a sales license to sell securities or insurance.

On the other side are professionally trained financial planners or investment advisors who often work for themselves or small boutique planning firms such as mine.

Brokers are regulated in their sales functions by the Financial Industry Regulatory Authority (FINRA), which is funded by the brokerage business itself and conducts the audits of their member firms. Yes there are many conflicts with this agreement but that is not a topic for this discussion. Just to be clear, Bernie Madoff’s firm was a FINRA member.

Professionally trained financial planners and investment advisors are regulated by the individual states or the Securities & Exchange Commission (SEC).

The general rules for FINRA brokers state that brokers must recommend only investments that are “suitable” for clients. The question is what does suitable mean? In plain English it means that brokers can sell you any investment they have “reasonable” grounds for believing is suitable for you. Reasonable means information based on your risk tolerance, investing objectives, tax status, and financial position.

Key factors missing from these guidelines are conflict & cost. Let’s say you tell your broker that you want to simplify your stock portfolio into and index fund that is suitable for you. He is under no obligation to tell you that the annual expenses his firm charges on their fund are 10x higher than an essential identical fund from say Vanguard. Brokers get no commission fro recommending Vanguard products.

If brokers had to take cost and conflict of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before selling garbage products that show up in portfolios today. Today’s standards do not require brokers to act as fiduciaries when making sales recommendations.

Advisers on the other hand are required to act out of a “fiduciary duty”, or the obligation to put their clients’ interests first. Advisers always have a duty to mitigate conflicts of interest when possible and if not possible to disclose in a formal notice the potential conflict.

Part of the fiduciary duty mean that the adviser is responsible for taking into consideration the cost of transactions and to recommend the most efficient structure. This is the reason that advisers acting as “advisers” cannot receive commissions when acting as an adviser. It represents a clear conflict of interest and you the public would not be represented by an objective or impartial adviser.

Would it not be refreshing to have someone (adviser) confirm to you that a transaction you are contemplating with a salesperson is structured in your best interest or not? Ask all those investors who are complaining about the misrepresentations made by Bernie Madoff or Sir John Stanford. Some of this, sadly, is the result of greed on the part of investors and they should have known better. Greed may be OK if you are warned that you are entering a Greed zone.

I don’t want to sound too harsh about the role of salesmen. These men & women have a role in the business world. I use a variety of professional salespeople in doing my work and value their comments. For the same reason that medical doctors cannot own the pharmacy that fills your prescription there should be a separation between advice and those who fill the prescription.

To ask human beings to voluntarily disregard financial conflicts of interest when giving sales/planning advice is just not wise. There exists enough empirical evidence within the medical, accounting & legal professions to make this point crystal clear.

To read more about Stanley Hargrave or Hargrave & Associates, LLC please visit http://www.hargave-lyons.com