Mind-boggling payouts
A deeper analysis reveals that New York-based Citigroup doled out $390.2 million to 21 people at an average of $18.6 million each. Charlotte, North Carolina-based Bank of America
, on the other hand, paid $227.8 million to 13 executives at a slightly lesser average of $17.5 million apiece.

The data does not include top-paid employees from 2008 who left the banks thereafter. The Average pay for managers at these two banks was close to double than that of the other five bailed-out companies reviewed by Feinberg.

Feinberg has already advised the Wall Street players to implement pay cuts in 2009 averaging more than 50 percent. Thus, the 136 executives at the seven firms which were reviewed by Feinberg, will take home a much thinner pay check.

Furthermore, most of the compensation will be in the form of restricted stock to persuade executives to work towards long-term performance.

The mandate from Feinberg came after President Barack Obama rebuked the colossal bonuses and said “it does offend our values” when company executives “pay themselves huge bonuses even as they continue to rely on taxpayer assistance.”

The slashed compensation
Bank of America will disburse a sum of $78.6 million to the top 13 executives in 2009. The disbursement represents a 66 percent dip from the compensation paid last year. On average, the executives will pocket an average of about $6 million each.

The cut for Citigroup executives will be higher in percentage perms. In all, they will get $272 million, or 70 percent lower than last year. They will, however, still get an average of $5.6 million each.

Meanwhile, chief executive officer of Citigroup, Vikram Pandit, has voluntarily decided to take $1 in pay for the current year. 52-year-old Pandit had pocketed $10.8 million in 2008.

Feinberg set “$0” in pay for Andrew Hall, the former head of Citigroup’s energy-trading unit. Hall was paid a mammoth $100 million in 2008.

Meanwhile, 62-year-old CEO of Bank of America, Kenneth Lewis, who will hang up his boots at the end of the year, is also working for free.

It was bad enough this past March when–after taxpayers had doled out a mere $180 billion to save AIG and took an 80 percent stake in the company–Americans watched in utter disbelief as the very division responsible for the insurance giant’s collapse received $168 million in so-called retention bonuses.

Now Nightmare on Wall Street continues–coming March 2010 to a theater near you, as AIG plans on upping the bonuses for its Financial Products division to $198 million, bringing the total to $426 million since December 2008.

This was just one of the mind-boggling chapters of the AIG misadventure on display during last week’s House Committee on Oversight and Government Reform hearing with Neil Barofsky, special inspector general of the Troubled Asset Relief Program.

Chairman Edolphus Towns, who has emerged as a leader in trying to uncover what really happened during the financial meltdown, noted that in response to the public outcry over the last round of bonuses, AIG at the time agreed to repay $45 million to the government.

“How much of that really was collected?” asked the chairman.

“As of the conclusion of our audit’s fieldwork in August, $19 million had been collected,” said Barofksy.

If you are hoping for a reason with some semblance of legitimacy, guess again. In fact, AIG just wants to see whether it will get the nearly $200 million this coming year before it makes good on its pledge.

“They want to see what they’re going to be getting after [pay czar Kenneth] Feinberg conducts his review of the $198 million [scheduled for] next March, before they commit, or fulfill their commitment, to pay back the bonuses,” said Barofsky.

Despite the fact that the American people now own 80 percent of AIG, Feinberg can only make a “recommendation” regarding the upcoming bonuses, since these contracts were signed before February 11 and therefore are exempt from any restrictions under the American Recovery and Reinvestment Act (ARRA). It really doesn’t matter one iota whether these bonuses are in the best interest of the public.

“Who could have had the power to insert that provision?” asked Ohio Congresswoman Marcy Kaptur. “It wasn’t in the House bill. How did that get in there?”

“My understanding is that Senator Dodd introduced the amendment,” said Barofsky. “The net effect…is that the TARP does not prohibit these types of bonus payments if the bonus plan was offered prior to that date.”

Maybe it was a fiscally sound move for Dodd, the Senate Committee on Banking, Housing and Urban Affairs chairman who was perhaps looking to replenish his war chest before a tough re-election bid. But it wasn’t so great for the rest of us.

“I think most members of Congress, if you surveyed them, don’t even realize that that provision was in the recovery bill that was passed earlier this year,” said Kaptur. “It takes a lot of power to insert a provision like that that literally puts the firewall up against us going after those bonuses.”

Towns pointed out that while the public and press were focused on the most outrageous of the bonuses–the $168 million in bonuses paid to the failed financial products division–the fact is that after the Fed extended the initial $85 billion line of credit to AIG in September 2008, it “learned that AIG had planned to pay over $1.7 billion in bonuses and retention plans” to its 50,000 employees worldwide.

Barofsky said those were the “approximate” numbers. The AIG compensation structures, he explained, were “a mess so sprawling that even as we concluded our audit late this summer, executives–at the Federal Reserve Bank of New York, at AIG–and the Fed’s consultants still did not have their arms wrapped around the entire AIG executive compensation structure.” In all, auditors have found “more than 600 different programs–some entitled bonuses, some deferred compensation, some, retention plans.” According to Barofsky, AIG never knew where all the money was going, and still doesn’t.

As for the $168 million in “retention bonuses” paid to “essential personnel” who otherwise would have walked out the door and shopped around their golden résumés–former employee AIG Financial Products division–it turns out those particular bonuses weren’t quite so limited in scope.

“I too was left with the impression after the hearings and all the public announcements that these payments were going to those who were necessary and involved, who unwind these complex transactions,” said Barofsky. “And it was one of the things that surprised me the most as I saw the audit work come in: that [bonuses were going] essentially to every single employee at Financial Products.”

Maryland Democratic Congressman Elijah Cummings, who in 2008 wrote and met with AIG for assurances that the bonuses would be limited, said, “AIG was disingenuous at best and outright deceptive at worst…. Somebody simply was not telling the truth.”

One would think that the initial discovery in September 2008 of $1.7 billion in scheduled bonuses might have raised an eyebrow or two at the Fed–or at Treasury–after the next $40 billion was handed over to AIG through TARP in November 2008.

But Barofsky said the Fed was looking at AIG from a creditor’s perspective, and the bonuses were “just a drop in the bucket compared to their overarching concern, which was paying back the debt. They were not concerned.”

Treasury, on the other hand, should have been looking out for the return the American people were getting on their investment. But Barofsky said the agency completely outsourced any oversight responsibility to the Federal Reserve Bank of New York–run at the time by now Treasury Secretary Timothy Geithner. (More on that later.)

“When Treasury outsourced its oversight to the Federal Reserve, Federal Reserve had a far different interest and approach to executive compensation than what Treasury had to do as an investor on behalf of the government people,” said Barofsky.

“There was a breakdown in communications between Treasury and the Federal Reserve regarding AIG’s plan?” asked Towns.

“I think that would be kind to [call it] a breakdown,” said Barofksy. “After Treasury invested the $40 billion, communications were virtually nonexistent.”

That’s why Treasury didn’t know about the $168 million in retention bonuses until two weeks before payment; and even then it took ten more days to get the news to Geithner, according to the audit.

“It was a failure of oversight by Treasury,” said Barofsky. “It was a failure of communications, and it was a failure of management.”

Congressman Dennis Kucinich wasn’t buying the notion that Geithner–who ran the Federal Reserve Bank of New York when this madness began–still didn’t know about the bonuses just four days before they were paid in March.

“Given Mr. Geithner’s heavy involvement in the bailout of AIG, as the president of the Federal Reserve Bank of New York,” said Kucinich, “it’s really hard to believe that he wasn’t informed of the retention bonuses for AIG-FP [Financial Products] employees prior to March 10, especially since they were awarded retention bonuses of $69 million in December 2008.”

Barofsky said there was “no evidence” that anyone informed Geithner of the “size and scope” of the bonuses.

Ranking Member Darrell Issa and his Republican colleagues smelled blood. “So we have a secretary of the Treasury who failed to know what he should have known, failed to do what he should have done and has failed to give us transparency,” Issa said. “I believe that it’s now time for us to bring Secretary Geithner here.”

Kucinich also said Congress should think twice before expanding the Fed’s powers as the single systemic risk regulator, as many–including the Obama administration–propose.

“We better look twice before we consider giving the Federal Reserve any more power,” Kucinich said. “They can’t keep track of small matters, let alone large matters. Time for us to start thinking about changing the direction we have with that institution.”

In the meantime, what to do about the next round of $198 million in retention bonuses? Despite owning 80 percent of AIG, the government has no one on the board of directors and can only offer the aforementioned recommendation. “I think sometimes it’s important for the federal government to recognize the leverage that is associated with having such a significant ownership interest when seeking to renegotiate these payments,” said Barofsky. “We specifically note one opportunity that was lost…was the fact that $30 billion more of taxpayer money was coming down the pike in March of 2009. And this would have been an opportunity to go back and compel a renegotiation.”

Compelling Wall Street to do something with the trillions of dollars we’ve handed them. Now there’s a novel idea.

In two weeks the pay czar will appear before the committee. Stay tuned, and consider letting your legislators know you’re watching.

GMAC is one of the seven firms that the Obama administration announced sweeping changes in executive compensation for last week.

Kenneth Feinberg, the White House’s so-called pay czar, said at the time that restricting executive pay at companies that received “exceptional assistance” from the government would give them more incentive to quickly pay back their bailout loans.

Easier said than done.

GMAC, along with AIG (AIG, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), Chrysler, Chrysler Financial and GM, Chrysler, must be eager to get out from under Washington’s thumb. Until they do, they are going to continue to be subject to more onerous rules on pay than their competitors.

But the reason they all needed “exceptional assistance” from the Troubled Assets Relief Program in the first place is that their business prospects are hardly exceptional.

“GMAC is clearly a debacle. Other companies like Citigroup and Bank of America would probably have disappeared if not for the grace of Uncle Sam,” said Barry Ritholtz, CEO and director of equity research at research firm Fusion IQ in New York.

GMAC, which provides financing to car buyers, GM and Chrysler auto dealers and also owns the online bank Ally, continues to struggle mightily. The company reported a net loss of nearly $3.6 billion in the second quarter of this year and has lost a total of $7.65 billion since the beginning of last year. (Privately held GMAC will release its third quarter results on Nov. 4.)

Until GMAC turns itself around, it may need even more government funding to keep it from falling apart. While all of us are sick and tired of bailouts, the Treasury Department has too much skin into GMAC — not to mention GM and Chrysler — to stop playing the role of loan shark.

The government owns a more than 35% stake in GMAC. Failure to keep propping it up could not only devastate GMAC but also lead to deeper problems for the auto industry given how much dealers and customers rely on GMAC for borrowing needs. That can’t be allowed to happen.

It may have been one thing for regulators to finally draw a line in the sand a few months ago and tell small business lender CIT Group (CIT, Fortune 500) that it wasn’t going to receive any more TARP largesse. Leaving Carl Icahn and other bondholders to haggle over the fate of CIT makes sense.

If CIT goes bankrupt, so be it. It would hurt but it would not qualify as an event that would jeopardize the health of the overall financial system. The government doesn’t have the luxury of being so cavalier with GMAC.

So assuming that GMAC does get another bailout, will it really be in a better position to pay back the government anytime soon? Probably not. And that’s most likely true for the other big bailout recipients — which some have cleverly dubbed the Not-So-Magnificent Seven.

In fact, Treasury Secretary Tim Geithner said Tuesday at a securities industry conference in New York that it will be some time before either GM or Chrysler are in a position to pay back their TARP loans.

What’s more, Citi and BofA both reported losses in the third quarter and analysts expect them to remain in the red for the fourth quarter. And even though these banks have raised more capital, why should Treasury allow them to return TARP funds just yet?

Neither company is in a strong position as say, JPMorgan Chase (JPM, Fortune 500), which paid back its $25 billion bailout loan this summer. Heck, Wells Fargo (WFC, Fortune 500) just reported record profits and the government still hasn’t permitted it to pay back its $25 billion TARP loan.

Don’t get me wrong. I’m all for taking steps to make sure that financial firms don’t make the same mistakes they did in the past. And it’s hard to justify the big paydays for most C-level executives and traders.

It’s good news that Washington is trying to encourage troubled firms to pay back TARP loans more quickly. But it’s comical to think that the crackdown on pay is going to help the Not-So-Magnificent-Seven return to health anytime soon. There has to be a better way.

“You need to give the government some control over these firms as a condition for giving them taxpayer money. But the real objective for regulators should be to turn these firms around,” said Joseph Mason, a professor at finance at Louisiana State University. “If you want to replace executives, just replace the executives. Don’t go around mucking with their pay.”

Instead, the government may be simply forcing companies to slash salaries and bonuses in the name of protecting taxpayers — while having to go out and lend these same companies more taxpayer money.

Senior international economics major Carolina Peguero asked him, “How do you feel about firms such as Goldman Sachs and JP Morgan Chase who took advantage of the bailout…and are reporting huge profits, ridiculous multibillion profits with money that taxpayers” provided?

“Well, mixed feelings,” Bernstein said, before launching into a defense of Goldman and JP Morgan’s big winnings. The firms, he said, were among those who had paid back their loans from TARP. “Once you’ve paid back the TARP you’re a private sector firm out there and you can set compensation wherever you see fit,” he said. But he tried to make Peguero feel better by arguing that her question alone was sign of a welcome heightened sensitivity about high executive pay. “I would argue we are in the midst of a period wherein compensation norms in financial markets are very much under scrutiny, under the microscope,” he said. “Even the fact that you are asking me that question suggests that assessment is correct.”

Several policies being proposed by the administration, he said, could help moderate executive pay in the future, he said, including bigger say for shareholders and more independence for executive compensation committees. But he concluded with another defense of the firms. “I wouldn’t cite any company out there and say ‘you’re good, you’re bad.’ I would point out that coming out from under the TARP is positive in terms of paying us back,” he said.

This answer did not satisfy AU psychology professor Stanley Weiss, who asked Bernstein moments later why Goldman should be able to keep its profits after it had been aided not only by the TARP loans but also by the taxpayer bailout of AIG, which held billions in insurance contracts with Goldman. Goldman and others are “very much indebted to the taxpayers and owe this country any profits they have,” Weiss said.

Bernstein stuck by his defense of the firm, saying the answer instead was to look forward to preventing the need for future bailouts. “There’s definitely some truth in there, but where that takes you is to financial regulation reform,” he said. “The point of financial regulation, which we’re deeply involved in now, is to avoid getting back to that place again…In Japan they say since we can’t stop earthquakes, we can build houses that can withstand earthquakes. Maybe we can’t prevent 100-year floods from happening every 100 years but we need the ability for resolution authority, for the government to take a firm like that offline without a taxpayer funded bailout.”

Weiss said afterward that he “did not think much” of Bernstein’s answer, especially since some White House advisers, notably Larry Summers, had previously been deeply involved in deregulating the financial industry.

Peguero was also left cool by the Goldman defense. “It did not give me peace of mind,” she said. “There should be some kind of repercussions.”

No bank would say that taxpayer and government help made 2009 compensation levels possible. Instead, all responding banks except one claimed that they didn’t use TARP to pay for compensation.

Wells Fargo, which still owes taxpayers $25 billion, told ABC News that it does not need TARP to pay for “routine operating expenses” — including bonuses — that it says it pays for “out of what we earn.”

Banks pointed out that compensation for 2009 has not been finalized. The Wall Street Journal, however, reported recently that compensation on Wall Street is expected to be higher than ever before. Financial firms are on their way to handing out a combined $140 billion in compensation, more than the annual budgets of the Department of Education, the Centers for Disease Control and Prevention, and the National Institutes of Health combined.

None of the banks contacted by ABC News addressed whether government actions besides TARP, like the bailout of AIG and debt-guarantees, contributed to this year’s compensation levels. These banks don’t fall under the authority of Obama administration’s pay czar Ken Feinberg.

Lost in the arguments over economics and political theory, however, is a more basic question: Was this action constitutional?

Mr. Feinberg’s ukase is the most prominent example (and not just by the Obama administration) of the exercise of power by an individual unilaterally appointed by the executive branch without Senate confirmation—and thus outside the ordinary channels of Congressional oversight. Earlier this month, the Senate Subcommittee on the Constitution conducted hearings into the constitutional basis for this practice, which many see as an end-run around checks and balances. The Obama administration declined Sen. Russ Feingold’s (D., Wisc.) invitation to send a witness to the hearing to explain the constitutional basis for its various “czars.”

So who is Kenneth Feinberg, and where did he get the power to set pay for executives at private firms?

As part of the hastily enacted and seldom-read legislation establishing the Troubled Asset Relief Program (TARP), Congress authorized the Secretary of the Treasury to “require each TARP recipient to meet appropriate standards for executive compensation.” To carry out this task, last June the Treasury promulgated an emergency “Interim Final Rule,” waiving ordinary requirements for a public comment period.

As part of this emergency rule, Treasury Secretary Timothy Geithner created the office of “Special Master” for compensation, delegated his TARP authority to set compensation standards to this officer, and appointed Mr. Feinberg (a lawyer and mediator) to this position, without obtaining Senate confirmation.

Therein lies the problem. The Appointments clause of the Constitution, Article II, section 2, provides that all “Officers of the United States” must be appointed by the president “by and with the Advice and Consent of the Senate.” This means subject to confirmation, except that “the Congress may by Law vest the Appointment” of “inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

There is no doubt that Mr. Feinberg is an “officer” of the United States. The Supreme Court has defined this term (Buckley v. Valeo, 1976) as “any appointee exercising significant authority pursuant to the laws of the United States.” Mr. Feinberg signed last week’s orders setting pay levels for executives at Bank of America, AIG, Chrysler Financial, Citigroup, GMAC, General Motors and Chrysler. They have the force of law and are surely an exercise of “significant authority” pursuant to an Act of Congress. He is not a mere “employee,” acting at the direction of a superior. That means his office is subject to the requirements of the Appointments Clause.

While somewhat more disputable, Mr. Feinberg’s is probably an “inferior” officer, defined as one subject to supervision and removal by a member of the cabinet. Although he has substantial discretion and independence, Mr. Feinberg reports to the secretary of the Treasury, who can fire him any time for any reason. This means that Congress could, if it wished, vest the appointment of the pay czar in the secretary, without any need for Senate confirmation.

But Congress has not done so. On the contrary, it vested the authority to implement TARP’s compensation provision in the secretary of the Treasury. The secretary may sub-delegate that power to someone else—but that someone must be an “officer” properly appointed “by and with the advice and consent of the Senate.”

The Supreme Court observed in Buckley v. Valeo that the provisions governing appointments under the Constitution reflect more than “etiquette or protocol.” They embody the Founders’ conviction that all power under U.S. laws must be exercised by officers with constitutional authority.

The Founders understood that the president and heads of the executive departments could not single-handedly carry out the law, so they required Senate confirmation as what the Federalist Papers call “an excellent check” on abuse or favoritism by the president. Yes, there are some offices so inferior that this check may be eliminated—but it is for Congress to judge which ones these may be. Congress and Congress alone has power to dispense with the safeguard of the confirmation process.

The power to set compensation at large American businesses is especially subject to potential abuse, favoritism, arbitrariness, or political manipulation. It is no reflection on Kenneth Feinberg, who has a sterling reputation and who appears to have approached these sensitive duties with a spirit of commendable integrity, to say that the checks and balances of the Constitution should be scrupulously observed. They were not. Because he is not a properly appointed officer of the United States, Mr. Feinberg’s executive compensation decisions were unconstitutional.

On MSNBC’s Morning Meeting on Friday, host Dylan Ratigan celebrated Halloween by donning a wig and dressing in revolutionary garb like his favorite Founding Father, Thomas Jefferson, channeling the former president’s trenchant criticism of big banks.

Ratigan pointed out that Jefferson was the first and most vocal opponent of Alexander Hamilton’s proposal for a federal bank. Jefferson’s greatest fear, Ratigan announced in comparison to our current economic crisis, was a “bank takeover of the government that would leave taxpayers as slaves to bank-run gambling casinos.” Quoting Jefferson directly, Ratigan said, “the banking establishments are more dangerous than standing armies.”

Around Ratigan’s neck hung a large padlock with TBTF written on it, signifying the government’s complicity in the “too big to fail” doctrine. The popular (and controversial) finance blog Zero Hedge alleged on Thursday evening that the Obama administration is seeking to turn TBTF into official canonized law and the blog attempted to quantify the TBTF subsidies by the government.

From Zero Hedge:

In essence it guarantees that the massive mega banks like Goldman Sachs, BofA, and JPM will take on so much disproportionate risk the next time around (and with a moral-hazard encouraging Federal Reserve as risk regulator virtually guarantees their implosion) that not only will they blow up spectacularly once again, but that their bailout next time around will surely force America, already strapped with trillions of new upcoming debt courtesy of stimulus after stimulus, into sovereign insolvency.

The article cites an analysis by the Center For Economic and Policy Research as proof that government contributions to big banks amount to nearly 50 percent of bank profits. The article concludes, “as profits are a function almost exclusively of banker [compensation] as the only substantial banking overhead (consisting of base and bonus), the sad conclusion is that the government directly is funding at least half the bonus pool for all the TBTF institutions.”

See the video of Ratigan as Jefferson below:

Will Citigroup rise again from its recent near-death experience?

Will Citigroup rise again from its recent near-death experience?

The answer to that question concerns not only the 276,000 employees who work at what was once the world’s largest bank, but the nation’s taxpayers as well. Even as Citigroup’s stock has soared from a low of $1.02 to its current $4.09 — and the company has eked out a $101 million profit in the third quarter along the way — it’s still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania. If Citigroup remains stuck, taxpayers will be on the hook for outsize losses.

Citigroup remains a sprawling, complex enterprise, with 200 million customer accounts and operations in more than 100 countries. And when people talk about institutions that have grown so large and entwined in the economy that regulators have deemed them too big to be allowed to fail, Citigroup is the premier example.

As a result, the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year. Through the Federal Deposit Insurance Corporation, a major bank regulator, the government has also agreed to back roughly $300 billion in soured assets that sit on Citigroup’s books. Even as other troubled institutions recently curtailed their use of another F.D.I.C. program that backs new debt issued by banks, Citigroup has continued to tap the arrangement.

Citigroup is also one of only two TARP recipients so desperate for capital that they’ve swapped government-issued shares into common stock, diluting existing shareholders. (GMAC, the troubled auto lender that may receive another government infusion, is the other.)

While Citigroup has written down tens of billions of dollars’ worth of mortgages on its books, there are looming problems in its huge credit card portfolio. Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines. A measure of the bank’s efforts to wrestle that problem to the ground is the interest it charges customers: in October, Citigroup raised interest rates on some credit card holders to 29.99 percent.

Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup “the queen of the zombie dance,” referring to the group of financial institutions that the government has on life support.

“They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive,” he said. “When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stable.”

VIKRAM S. PANDIT, Citigroup’s C.E.O., said in an interview that he was confident that Citigroup was on the right course, focusing on global banking and shedding segments of the company — like insurance and the brokerage business — that aren’t part of that mission. To date, he said Citigroup had sharply reduced its expenses, improved how it monitors risk, and established a management team that he said would return the bank to sustained profitability.

“Our distinctiveness is we connect the world better than anyone else,” he said, noting Citigroup’s global reach. “We have a great capability of building a business around that. And we are in the process of building a culture around that.”

Mr. Pandit said he was working with federal regulators on a schedule for paying back TARP funds, which he said was crucial to restoring Citigroup’s image among consumers. “It’s very hard to change perceptions in this marketplace,” he said. “We are not a troubled bank. We have a lot of assistance from the government. We can’t fight that.”

In trying to right itself, Citigroup plans to undo much of what it did during a period some insiders call the lost decade — with events that included merging with Travelers Group in 1998 and a huge, dizzying expansion of its asset base. To untangle the company, Mr. Pandit has split Citigroup in half. One part consists of operations that Citigroup executives consider central to the bank’s future; these include retail banking worldwide, investment banking and transaction services for institutional clients.

The other part contains businesses that Citigroup executives hope to exit or unload. This includes asset management and consumer lending, such as residential and commercial real estate, as well as auto loans and student loans. Citigroup is also selling some of the many companies it acquired in recent years. In the weak economy, however, buyers are few.

Complete Article

I do remember, in fact, when Sandy Weill, head of Travelers (which many of you may not realize actually evolved out of an old-style manufacturing company, American Can), proposed the idea of a financial supermarket. Naysayers and proponents butted heads, but Citicorp was born. (full disclosure: I thought it sounded like a nifty idea at the time)

Well, apparently the company has fallen on its face — correction: was about to fall on its face, except we taxpayers caught them — many times in the last decade. And while it’s profitable now, naysayers and fans are again butting heads about whether it’s a viable institution or one that is destined to fall again.

I have no opinion on that — I truly don’t know enough about CDOs and such to say whether Citigroup has a handle on them. And I have gone on the record a million times now, that I want to reenact Glass Steagall and to use existing antitrust legislation to break up any institution that is too big to fail.

But this Citigroup story also proves my point(s) about the sheer stupidity of retention bonuses at faltering companies.

Point one: Why do you want to pay extra to hold onto those executives who drove you into the ground in the first place? I love this quote from a one-time insider:

Still, the unfortunate truth about the bank during the last several years, according to analysts and former insiders, is that it was managed horribly. “They just blew it,” said one former Citigroup executive, who like many others interviewed for this article requested anonymity because of pending lawsuits and a desire to preserve relationships with former colleagues. “It’s really hard to drive the car if you don’t have the headlights on.”

Point two: Throwing money at people — which Citigroup has certainly done as much as its colleagues and competitors — makes them rich, but doesn’t make them loyal. Otherwise, how do you explain these statistics?

In the last decade, for instance, Citigroup has had four chief executives, six chief financial officers, seven heads of consumer banking and eight investment banking chiefs.

Bank of America, by contrast, has had two C.E.O.’s, four chief financial officers and one chief operating officer during the same period — though that relative stability didn’t spare the bank from mistakes and pain in the crisis.

Way I see it, Citigroup’s revolving door proves that retention bonuses don’t retain, and BankofAmerica’s stable executive suite proves that executive continuity doesn’t guarantee anything.
Time for a shareholder revolt!

But there is a concern that investors need to think about. It has to do with the human side of this equation. Consider this: if you’re an executive who has a contract that states exactly how you get paid and you meet those standards, you would expect payment. That’s why there are contracts. You and your department may have been one of the few groups that contributed to earnings, helping mitigate some of the losses other departments generated. While you may feel a twinge of “team” spirit and be glad that you’ve helped, you don’t feel it deeply enough to believe your contract should be violated.

This year, it doesn’t matter how you feel. If you’re a senior manager in one of the floundering banks, you won’t get what you’re supposed to. The bank as whole was in trouble so all personnel will pay the price. That means you can look at your contract all you want. You won’t get what it says you will.

So what do you do? You most likely will look for another job, particularly a job in a company that hasn’t taken TARP money, get a new contract and go to work, doing your best to beat the benchmarks that describe how you will be paid. Then, if you’re successful, you’ll make the money you earned at the end of the year.

When I was on Wall Street, the best and brightest weren’t held at the big firms with contracts. In fact, there were very few contracts. That’s because senior management always wanted the ability to pay anyone they wanted any amount of money. If one department did well, but the firm had a bad year, they still paid the top performers of the division that performed because if they didn’t, those superstars would simply walk away, to another big firm, set up their screens and make huge profits for a new firm. Sometimes the heads of departments that didn’t do well still got huge payments because their talent was unique, and management knew that the next year those people could make large profits. Those bonuses in bad years came from people who were promised (remember, no contracts here) certain payouts but then would not get them. Those who were “robbed” most often quit, having been cheated from something they earned.

People have a way of doing that, quitting when they feel an injustice has occurred. I have no sympathy for the Wall Street people since many made ten of millions in a very short period of time. The total amounts don’t matter. It’s the basic principle: if management stated they would be paid based on certain accomplishments that were met or exceeded, anyone would want to be paid as promised. Many times it didn’t happen. Sometimes just because senior management was greedy and didn’t want to pay a subordinate. Many of the big firms lost some great people due to their own greed.

Now we’re dealing with a similar circumstance. Very smart people have helped keep many financial institutions going during these tough times. They’ve done it not because they love their jobs, but because they have a contract that states they will be paid well for performance. With the new federal government overseer, those contracts make good wallpaper, but not much else.

If you were one of the hard working, profit making individuals at these firms and your salary and/or bonus was cut, what would you do? I know I’d be looking for another job because there have been many long days and nights worked this past year at many firms, even with the TARP money to help keep the doors open. It’s been difficult to keep morale up and perform when job security was always a major concern. With the hard work and the anxiety, most of these people will feel they deserve, have earned, their large salaries and bonuses. But they’re going to be disappointed.

From a greater good perspective, it’s the right thing to do. Just be aware, as an investor, many of the people who contribute to the well-being of the firm are even now looking for another job, one where the government isn’t part of the unknown. And when the best people leave, service deteriorates, new products aren’t developed, competition attacks and wins.

This is particularly true in banking. If you own one or more of the TARP banks or financial institutions, you’ll want to watch employment turnover next year. If you can find out during quarterly conference calls if key individuals are leaving, you may reconsider owning the stock. Many times newspapers and magazines will report on who’s leaving and how significant they are. Banking is a service business. Service means people helping other people. When the best ones leave, everything starts to come apart.

Sure, it’s a good thing that senior management at TARP aided firms won’t be getting outrageous payments. When the government gives a company money, there are strings attached. This was one of the ropes that came with the money. While we might feel it’s a good thing, there are two consequences obvious from this new tactic on pay days: one is that the best people who get less than what they contractually deserve will most likely leave. And second and maybe far more important: it’s a sign that the government is getting more and more involved with private enterprise. That may be even more troubling.