Could a banker be ever paid like an accountant?
The future of banking culture and ultimately, what banks of the future will look like won’t depend on the moral attitudes of a new generation of executives rising through the ranks, but the relative attractiveness of working in the financial industry.
Eight years after the global financial crisis, bankers are still reviled by politicians and distrusted by regulators. But does that necessarily mean that remuneration for bankers will actually experience a real decline? Certainly, a new breed of investment banker representing a generation who were hired after 2008 will have lower salary expectations as they understand what it means to work in a highly regulated, risk-averse environment.
But those bankers who experienced banking culture in the ‘good old days’ when risk and leverage were high and proprietary trading almost guaranteed big payouts will be wondering if it is worthwhile to remain in banking anymore. Maybe joining a bunch of programmers in a financial technology start-up doesn’t look so bad.
There was a time when no one spoke of compliance and regulations. The early days of banking deregulation in the 1980s showed an industry exploding with newly found leverage, technology and proprietary trading.
A firm like Drexel Burnham Lambert would be hard to imagine today. It was painful to stomach back in the 80s. It emerged from Wall Street’s second tier to become a major innovator in high-yield, or junk, bonds. But Michael Milken was truly a financial pioneer, whose junk bonds were the foundation for creating today’s media conglomerates. When Rupert Murdoch was asked who he thought was the most important banker of his time, he instantly named Milken.
Today, bankers would be stunned to hear about one of Drexel’s Christmas parties. Management would throw out gold Rolexes to a throng of traders, salespeople and analysts to celebrate another highly profitable year. Any bank CEO doing that today would most certainly be vilified by politicians as a public enemy.
Few bankers or asset managers epitomised the excess in bank pay than Milken. His indictment in 1989 shocked even the greediest Wall Street professionals because of its revelation of the income paid to the junk bond king. Milken’s compensation exceeded US$550 million in 1987 alone and exceeded US$1 billion during a four year period.
Few in American business history have earned anything as much in a year as Milken, head of the high-yield bond department at Drexel Burnham Lambert. Even JP Morgan, the famous financier of the early 20th century, had a total net worth of less than US$500 million when he died in 1913. And even his inflation-adjusted income never matched Milken’s.
Milken reached his agreement with Drexel in 1975, when high-yield was a non-existent business. By 1977, he had raised more than US$98 billion for clients. According to some estimates, Milken was paid 35 per cent of his department’s revenue.
Many Wall Street professionals criticised Drexel’s deal with Milken. They said once his salary began to exceed the budgets of many small countries, the firm should have altered the terms of the deal.
The New York Times presciently quoted a young Donald J Trump as saying, ”You can be happy on a lot less money”. His net worth at that time was estimated at only a US$1 billion. “I’m amazed that the firm would allow someone to benefit that greatly.”
Years later, Trump capped that benefit on his reality show, The Apprentice.
At the time Milken’s pay triggered vast and disturbing changes in the financial landscape and corporate America. Little did critics know that it signalled the beginning of a structural corruption that would eventually almost destroy the entire banking business along with the global economy in 2008.
Milken eventually pleaded guilty to six criminal charges related to securities transactions and paid US$600 million in fines, was sentenced to two years in prison and served 22 months. However, he remains the only banker to be able to write a cheque for such a record-setting penalty.
Today, regulators are limiting bankers’ salaries by preventing or making it more expensive for them to create more products and services that require risk. That doesn’t resolve the contradiction that banks by definition are in the business of taking risks. They can’t be de-risked. Perhaps everyone will feel better if banker pay returns to the same level as doctors, dentists, accountants and lawyers.
Peter Guy is a financial writer and former international banker