Wall Street Will Not Give Up Its Martinis

I still remember the expression of complete disbelief on the face of the American banker. We were in a skyscraper in Hong Kong before the big boom of the crisis celebrating his princely bonus with cocktails with stratospheric prices. On his fourth martini he stopped talking about himself (rare occasion among financial wizards) and he asked me, “Did the newspaper take care of you this year?” In Wall Street lingo that means, “What bonus did you get?”

When I explained that journalists do not receive huge bonuses at the end of the year, that this tradition only exists among bankers, brokers and the like, he opened his mouth but was not able to make a sound (another extremely rare moment for those who follow big banks). After a few seconds, he looked at me incredulously and nearly whispered, “Then why do you do this job?”

I wanted to answer, “Because I like it,” but I knew he would not have understood. No successful banker would. To succeed in the cruel and Darwinian world of Anglo-Saxon finance, you must have one goal: to make money. And not a little bit of money, what would be enough for a “normal” person to live well without financial problems. Absolutely not. The motivation for the big bosses of finance is the possibility of earning millions, and maybe even billions. Ladies and gentlemen, welcome to Wall Street, the street where everyone has a price and no one is giving any discounts.

Until the crisis exploded this mentality and the financial system it created, this was one of the key components of the enormous success of American banks and their supremacy in the rest of the world.

Moral issues aside, it is easy to understand how the possibility of sheik-like earnings could create a cycle that made the bankers, their companies and investors all rich. It works like this: The promise of a six-figure bonus pushes the bankers and brokers to “sell” more and more products and services to their clients, increasing revenues for the bank. The shareholders, in turn, are happy because higher revenues are almost always transformed in growing stock prices and dividends.

There is a cultural reason why this gold rush has taken hold in America more than in any other country, pushing its banks to the top of the industrial world. Unlike the Calvinist and puritan tradition of England and Germany or the Catholic history of Italy and Spain, the new continent has never had a problem celebrating personal wealth. Actually, this was adopted as a style of life with the creation and perpetuation of the American Dream.

This is how the head of Goldman Sachs, Lloyd Blankfein, “earned” $68 million in cash and stocks in 2007, a year with millions of dollars in profits for his bank. The reaction of the pundits and even the people was, “What’s wrong with that?” (For the record, the reaction of other bankers was, “We’re underpaid.”)

Were it not for the “Great Recession,” this tendency toward huge monetary incentives would have probably continued for years. It was actually beginning to be copied by some international banks (like Deutsche Bank and UBS), whose top executives did not want to feel inferior to their American colleagues.

But like in “The Emperor’s New Clothes,” Andersen’s fairy tale, the devastating tumult of the last three years revealed all the defects in a payment scheme that, on close inspection, is more like Russian Roulette than a system to bring out the best in bankers and banks.

To begin with, paying millions of dollars in bonuses every year encourages bankers and brokers to risk everything on short-term bets — those same bets that brought the banks and world economy to the brink of the abyss. Moreover, the tendency of banks to divert half of their revenues to the salaries of bankers, an incredible percentage when compared to other industries, is only tolerable to investors in “good” years. When a bank like Morgan Stanley, which had no profits in 2009, decided to pay their bankers as if there were still a boom, the shareholders justifiably rebelled.

The real problem is public opinion. The rescue missions by the United States government, which put millions of “public” dollars at risk to save the banks while unemployment was growing and the economy was sliding into a recession, hurt the average citizen’s belief in the “American Dream.”

It is difficult to explain to those not living in America the dramatic and sudden change in the behavior toward Wall Street in the people, politicians and trade unions. Sometimes when I write about these topics for the Financial Times, I feel like I am sending dispatches from the front lines of a new war between social classes.

Even a calm person like President Obama attacked these bonuses, calling them “obscene” and reminding the financial gurus that he was not elected to help a group of “fat cats.”

The shock has already produced some results. Mr. Blankfein gave himself a bonus of “only” $9 million, even though Goldman’s profits were higher than in 2007. All the banks paid a large part of their bonuses in stocks instead of cash — an attempt to link the banker’s earnings to the long-term future of the company.

The question, however, is if the banks are serious, or if these changes are only a quick fix to answer political criticism. The first signs are not very encouraging: A couple of Wall Street bank managers have already whispered in my ear that next year they will attempt to reinstate the cult of big bonuses.

If they do they will have thrown away a historic occasion to improve the American financial industry. A payment system that paid decent but not huge salaries with larger bonuses in stocks would have two advantages for the banks: reduce costs, increasing profits for shareholders (in this case that would also include the bankers); preventing politicians, goaded by rebellious public opinion, from taking drastic measures that could hit the biggest asset of the financial industry: the workaholic brains that work there. I am not an optimist by nature, but I really hope that one day I will raise a very expensive martini to toast a reform like this instead of the fat bonus of a banker.