Well, once again it appears that I am commenting on a topic that I talked about previously when Dr. Weyant said we could talk about anything. My last post was about CEO's that would take Pay Cuts to work their "dream jobs. So, here I am, talking about compensation and pay.
Investment Banks. A large factor in the financial crisis and one of the main victims of the blame game in the financial meltdown's aftermath, although most of that ire was deserved for their part in things like mortgage bundling and shady loaning practices. Also, the pay scale and bonuses of investment bank employees are very high, which leads people to think that these investment bankers are getting rich while the rest of the country suffers. This article from efinancialnews seems to back that up, as it reports that "Average compensation cost per employee at investment banks that provide comparable data was $405,777 last year, a decline of just 0.5% on the previous year. At the same time, revenues and pre-tax profits per employee fell by 7% and 8% respectively."
Articles like this will clearly not help the investment banks PR problems, as they're still seen by many as bastions of corporate greed and shady business practices.
http://www.efinancialnews.com/story/2011-03-14/pay-and-bonuses-clear-as-mud?mod=mostread-PE
Tom,
ReplyDeleteI found the following article I am posting below very fascinating. It explains in full details everything that was wrong with the mortgage/banking industry and what led to the Mortgage crisis fiasco!!
How did this lead to such a "melt-down"?
* Following the tech bubble and the events of September 11, the Federal Reserve stimulated a struggling economy by cutting interest rates to historically low levels.
* Thus, a housing bull market was created
* People with poor credit got in on the action when mortgage lenders created non-traditional mortgages: interest-only loans, payment-option ARMs and mortgages with extended amortization periods.
* Eventually, interest rates climbed back up and many subprime borrowers defaulted when their mortgages were reset to much higher monthly payments. This left mortgage lenders with property that was worth less than the loan value due to a weakening housing market. Defaults increased; the problem snowballed, and several lenders went bankrupt.
* Investors and hedge funds also suffered because lenders sold mortgages they originated into the secondary market. Essentially, the mortgages were bundled together and sold to investors as collateralized debt obligations (CDOs) and other mortgage-backed securities (MBSs).
* When the higher risk underlying mortgages started to default, investors were left with properties that were quickly losing value. In the wake of the meltdown, central banks released liquidity into the market place, which allowed struggling lenders and hedge funds to continue operations and make the necessary payments on their obligations.
* Thus, banks were forced to write-down billions of dollars because they had these worthless subprime mortgage securities left on their books.
* This led to depleted capital in most investment banks, and a loss of confidence in bank's lending and their ability to pay back their debts.
…thus, the subprime mortgage crisis was born!