Explaining Southern California's economy

Reality check: why Wall Street bankers actually aren't that rich

A busy day on Wall Street

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Traders work on the floor of the New York Stock Exchange. Wall Streeters make a lot of money. But how far does it go?

The New York State Comptroller has just released a report surveying the condition of compensation on Wall Street. On its face, the news is good, if you're a banker: the average pay package (that's salary plus bonus, typically) is up more than 16 percent, to $326,950.

Rich!

Right? 

Well, that's where the news is not so good. That $362,950 is the average — some make more, much more, and some make less. But once you apply what I'll call "New York City math" to that figure, the average Wall Streeter begins to look...downright strapped!

First, taxes: Uncle Sam and his state and local pals take $362,950 down to $265,326 for a married couple, filing jointly, with two dependents.

Assuming the average Wall Streeter lives in a recently-purchased Upper East Side co-op and puts 50 percent down on a $2.2-million three-bedroom in a doorman building, there's a $9,723 monthly housing cost to contend with — $116,676 each year.

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The Federal Reserve is a hedge fund that pays its employees NOTHING!

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Federal Reserve Bank Board Chairman Ben Bernanke delivers remarks at the Fed Sept. 15, 2011 in Washington, DC.

The New York Times' Steven Davidoff — the Deal Professor — argues that the Federal Reserve is actually the world's most successful hedge fund. But it's not like any other hedge fund. It creates its own money and doesn't care about profits (hedge funds borrow lots of other people's money and are OBSESSED with profits). It also pays its employees squat for making about $77 billion in 2011. 

By the usual hedge fund rule of "2 and 20" — a 2 percent management fee plus 20 percent of the profits — the Fed's staff should be dividing up more than $14 billion on profits, exclusive of whatever it might charge to run $3 trillion in assets (2 percent of that would be $60 billion).

Here's Davidoff:

I call the Fed a hedge fund because it is operating like one, leveraging its balance sheet to earn huge profits. The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits. Remarkably, the Fed’s profits are also an afterthought. The Fed is trying to stabilize and increase the United States economy in the wake of the financial crisis, and its profits are a nice byproduct.

Still, these earnings blow away any other hedge fund profits.

The Fed employees who manage this operation receive a federal salary for their efforts. The money is well above the pay of the average American but still relatively modest compared with those in the financial industry. The top salary class at the Federal Reserve has a maximum of $205,570 a year. Ben S. Bernanke, the chairman of the Federal Reserve, earns $199,700 a year, while the other members of the Federal Reserve board earn $179,700.

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Wall Street pays bankers more to keep them from being unemployed

Mercer 3619

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Andrew Ross Sorkin has a good column today on banker pay, which has declined as the fortunes of big Wall Street investment banks have turned south. However, he insists that we look to a more opaque metric: the compensation-to-revenue ratio.

For publicly traded banks, increased profits from rising revenue is supposed to be returned to shareholders. But as Sorkin notes, there's a battle between shareholders and employees for the pieces of that pie. When the revenue-to-compensation ratio is out of whack — well above 50 percent, for example — it indicates that employees are winning. 

This becomes especially apparent when the economy is in a bearish mood and revenues are lower. The conventional wisdom says that this is no time to cut compensation at banks. Sorkin expresses some mild skepticism at this notion:

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