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The Rupp Report: Broken Financial And Bonus System

Jürg Rupp, Executive Editor

In the January 2008 Rupp Report, " From Monopoly To The Real World," I made several statements that are excerpted below:

"Making a lot of money is a new game: gambling at the stock exchange. Banks have become bigger and bigger and made a fortune by buying and selling shares. With the increasing income of the people more money has been available and the banks and private traders have encouraged people to do the same."

"In modern times, CEOs, COOs or managing directors are leading the listed companies working with somebody else's money. If they win, they get big bonuses; if they lose, probably a golden parachute is waiting. ... Who cares for the people?

"When I was a boy, my favorite game at home was Monopoly. It ... was a big pleasure for a whole weekend to buy and sell with fake money houses and hotels. Some time ago, people started to do the same, buying houses. But this time it was the real world. However, it seems that people and the banks forgot to consider that this time it was real money. The end of the story is very well-known. The global economic system is jeopardized."

"After wasting billions and billions, the same people are now crying for help. ... And who's paying the bill?"

Who Rules The World?
But today, it's worse than ever. Sometimes I think I'm in the wrong movie and follow this scandal with growing anger and frustration. Many years ago, a Swiss comedian was asked what is the most frightening thing for him. He answered then that he was scared to know that only maybe 50 people rule the world. In October 2008, the same question applies: How can a few people make so much money over the years in an obvious financial snowball system, selling and moving money and bad credits from one place to the next one?

Virtual Benefits
"Money" is probably the wrong term in this real world's game - "virtual money" might be better. And now, after the snowball system collapsed like every other snowball system in history, the same few people ask for governmental support without moral qualms or hesitation. "Few people" is probably inaccurate; more precisely, it should say "five firms" - Morgan Stanley, Goldman Sachs, Merrill Lynch, Lehman Brothers and Bear Stearns. One can add some "true" banks like United States-based Citigroup Inc. or Switzerland-based UBS. However, the five firms orchestrated the way, led by former Federal Reserve Chairman Alan Greenspan. He turned the world upside down with his ever-so-positive speeches and estimates, accelerating the money carrousel. Just before he realized that his strategy was totally obsolete, Greenspan left the sinking ship in glory.

Dominos Or Monopoly?
To make sure that everything's OK for the near future, the five firms succeeded in making Hank Paulson, an ex-employee of Goldman Sachs, the US treasury secretary. When the bubble exploded after the Bear Stearns fiasco, every banker in the world said "no problem." However, everybody knows what has happened in recent months: system failure. Now, Paulson has started another game - this time, let's call it Dominos, financial Dominos. By pumping billions and billions of US dollars into a rotten system, he started the worldwide Dominos game, pushing many countries to support their collapsed banking system too.

Employee Compensation Before Shareholder Value
It must have been all smiles these days on the faces of the leading bankers around the world, when Paulson started the Dominos game with the injection of $250 billion in cash into US banks, mainly to the firms. Morgan Stanley's stock market value has dropped to $21 billion, losing $34.7 billion since the start of the fiscal year. In spite of that, Morgan Stanley paid $10.7 billion in employee compensation this year, almost twice as much as its pretax earnings. However, the majority of this remuneration hasn't been paid yet. Goldman Sachs, Paulson's old firm, got $10 billion. Since the start of its fiscal year, Goldman Sachs has paid $11.4 billion in compensation expense; this is almost twice as much as its $5.9 billion in pretax earnings. During the same time, the firm's market capitalization dropped by $41.7 billion to the $57.7 billion. To sum up, the most benefited five Wall Street firms have lost some $83 billion since the start of fiscal year 2004. During the same period, they reported some $239 billion in employee compensation. So, for every dollar they destroyed, the staff got paid nearly three times as much.

And, especially for shareholders, don't forget the sentence mentioned above: "If they win, they get big bonuses; if they lose, probably a golden parachute is waiting." The parachute is reality: Goldman Sachs' CEO Lloyd Blankfein got a $70.3 million payment; and Richard Fuld, CEO of Lehman Brothers, got $34.4 million. However, Morgan Stanley's John Mack received only $1.6 million, officially.

Now there are only two firms left - Goldman Sachs and Morgan Stanley - not to mention Citigroup, another bank in trouble. Citigroup got an injection of $25 billion from Paulson, and reported $139.3 billion in compensation expenses since the start of 2004. This is more than double its $62.8 billion in pretax earnings. At the same time, the market value dropped by about $168 billion to $82 billion. Are you fed up with digits now? Me too.

However the injections will not have the slightest change, as long as the same people are on top of the world banks. Last year, ex-AAA Swiss bank UBS paid some 12 billion Swiss francs in so-called bonuses to its staff. Recently, the new president of UBS, a bank that also lost some double-digit billions of Swiss francs, was asked if with this bad performance he will stop making these payments. No, he said, we have to remain an attractive bank for hard-working bankers, and payments of double-digit millions of Swiss francs are still possible. And who's paying the bill? Now it's clear: Main Street.

October 28, 2008