If you missed it this morning there was an excellent interview with David Wessel, economics editor at the Wall Street Journal, on NPR about Wall Street bonuses ("Bonus, Is It Still A Dirty Word") – which have returned with gusto. Specifically the conversation focused on one oil trader with Citigroup who will receive a $98 million bonus this year. According to Wessel the trader had a contract with Citigroup that said if he bet correctly on the price of oil and made the company a lot of money, he’d get a slice of it. Evidently he did and he will.
But Wessel also pointed out that there apparently has been a change in thinking among Wall Street firms about risk and reward. The country’s financial system was nearly brought down last year because of a preponderance of risk-taking without appropriate safeguards should investments go badly. Wessel explains the fundamental problem that existed – investment professionals took large risks because of the potential for extraordinary individual gains. When they flopped in the extreme all the risk fell on the company, the financial system and ultimately the taxpayer – but not on them. That’s an arrangement that is changing, he says.
Of course a $98 million bonus is exactly the type payday that critics of Wall Street say needs to change. At a time when nearly 10 percent of the workforce is unemployed it just shocks people. But a deal is a deal. If that Citigroup trader was offered a contract that would pay him that much money if he did well, then that’s what he should get. My guess is he probably wouldn’t have signed that contract if it also stated that he’d be liable for $98 million if his bets went south.