The pyramid principle

Font Size

Print

Feedback

Email

Discuss

: Judged by their giant compensation bills, Wall Street’s banks are in fine fettle. But pay is one of the few numbers in their accounts it is easy to make sense of. The investment banks may be booming but they remain black boxes. Both Goldman Sachs and Morgan Stanley, which reported a third-quarter profit of $498m on October 21st, continue to take high levels of trading risk.

The accounts of big, troubled banks—in particular Bank of America (BofA) and Citigroup—are awash with exceptional items, including tax gains and changes in the value of their own debt. After adjusting for the funny stuff, those two firms’ common shareholders still made losses in the third quarter. Transparency did at least take a small step forwards at Wells Fargo, America’s fourth-biggest bank by assets and its most taciturn. As well as unveiling a $2.6 billion profit, it announced this week (by press release) that it would start conducting conference calls for investors and stockmarket analysts from January.

Such gripes aside, there is a clear sense that things are improving. The big banks seem to think that the provisioning cycle for bad debts overall is at or near a peak. Meanwhile, they are writing up the value of some of the toxic securities whose prices have bounced along with almost every other asset in the known universe. There are still minefields aplenty: the latest Moody’s/REAL commercial-property price index showed another monthly decline, of 3%, in August, and credit cards remain weak for most firms. But the optimism that has prompted bank shares to soar (see chart) has a foundation. Better still, capital levels are improving as the biggest banks retain their profits, sell assets and exchange debt for common equity.

Still, as a policymaker or a taxpayer, it is hard to view the banking system with anything other than mild nausea. Most of the queasiness stems from the continued accumulation of bumper compensation packages. The Treasury’s pay tsar is thought to be considering imposing deep pay cuts on the 25 most senior executives at firms it still owns shares in, including Citigroup and BofA. But since the bigwigs probably account for under 1% of the total compensation at those banks this would be a largely symbolic move.