Loan boom paid off for Wall Street execs

Bloomberg News

Wall Street’s five biggest firms paid more than $3 billion to their top executives in the last five years, while they presided over the packaging and sale of loans that helped bring down the investment banking system.

Merrill Lynch & Co. paid its chief executives the most, with Stanley O’Neal taking in $172 million from 2003 to 2007 and John Thain getting $86 million, including a signing bonus, after beginning work with the firm in December. The company agreed this month to be acquired by Bank of America Corp. for about $50 billion. Bear Stearns Cos.’ James “Jimmy” Cayne made $161 million before the company collapsed and was sold to JPMorgan Chase & Co. in the spring.

Democrats and Republicans in Congress are demanding that limits be placed on executive pay as part of the $700-billion financial rescue plan proposed by Treasury Secretary Henry M. Paulson. The former Goldman Sachs Group Inc. CEO, who received about $111 million between 2003 and 2006, said in testimony to Congress on Wednesday that he would accept such limits as part of the plan, after initially opposing them.


“Shareholders and boards should have done something about this a long time ago,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “They justified these levels of pay on the idea that they’re all geniuses. I think that balloon has burst.”

Wall Street firms have shared profits liberally with employees. The five biggest -- Goldman, Morgan Stanley, Merrill, Lehman Bros. Holdings Inc. and Bear Stearns -- paid their 185,687 employees $66 billion in 2007, as problems with subprime mortgages mounted, including about $39 billion in bonuses. That amounts to average pay of $353,089 per employee, including an average bonus of $211,849.

The five firms had combined net income of $93 billion during the five years through 2007.

The $3.1 billion paid to the top five executives at the firms from 2003 to 2007 was about three times what JPMorgan spent to buy Bear Stearns. Goldman Sachs had the highest total, with $859 million, followed by Bear Stearns at $609 million. CEO pay at the five firms increased each year, doubling to $253 million in 2007, company filings show.

Executive-compensation figures include salary, bonuses, stock and stock options, some awarded for past performance. The options were valued at a third of the fair-market price of the stock at the time the options were granted, a method recommended by Graef Crystal, a compensation specialist and author of the Crystal Report on Executive Compensation, an online newsletter. The companies value the options using different methods.

Wall Street firms have paid employees a greater share of revenue than any other industry, about 50%, Crystal said. That tradition at investment banks comes from their history as closely held partnerships of investors who put their own capital at risk, he said.

“In Wall Street and Hollywood, the profits tend to come in great big packets, and everyone wants a piece,” Crystal said. “Whether it’s the movie ‘Dark Knight’ or a huge merger deal, he who can make it rain, he who can bring everyone to the theater, can earn whatever he wants.”