Bonus Points For Being Wrong

The Obama administration is taking on bank bonuses for the entire financial industry, not just bailed out banks.

The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.

Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay.

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government's ability both to monitor compensation and to curb incentives that threaten a company's viability or pose a systemic risk to the economy.

While this is certainly controversial, it's the following chart that actually is pretty mind boggling:

Which if I'm reading this chart correctly, with total bonuses pretty much matching the chart of average bonuses, it means the number of actual people making those bonuses hasn't really changed in years, and that number is roughly equal to 200,000 people.

It's those 200,000 people who are raking in bonuses totalling tens of billions of dollars. Since your bonus was only as good as your last year, you have every incentive to make that bonus as high as possible by selling as many financial products as possible. The "boiler room" mentality ruled Wall Street for decades and still does. To be good enough to make that list of 200,000 you had to be the best, otherwise you're just another wage slave.

And let's remember Pareto's 80-20 rule applied here: 80% of the bonuses were earned by the top 20% of the bonus earners. In a year like 2006 where $34 billion in bonuses were given out, Pareto tells us the top 40,000 bigwigs would have averaged $680,000, the top 8,000 titans would have avereaged out about $2.7 million each, and the cream of the crop, the top 1,600 financial geniuses, would have made out to the tune of ten million plus.

The true Masters of the Universe? The roughly 320 executives with Chief and Officer in their job titles? Those guys were pulling in $43.5 million a piece. The various CEOs and whatnot, the guys running the show? About 64 of them, Pareto's Law puts their take at $174 million each.

So yeah. Greed ruled. And it ruled us right into the ground. The more risk they took, the richer they got, the worse things got for the rest of us.

Absolutely. Change the system, Obama.