Profits Were Fake, Bonuses All Too Real

How risky schemes left bankers flush, banks broke
By Jason Farago,  Newser Staff
Posted Dec 18, 2008 8:36 AM CST
People enter Morgan Stanley headquarters, Tuesday, Oct. 14, 2008 in New York.   (AP Photo/Mark Lennihan)
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(Newser) – Dow Kim was one of the leading bond traders at Merrill Lynch, and in 2006 he bundled together $500 million in loans into a huge CDO with the charming name Costa Bella. Since the subprime collapse, Costa Bella has cost Merrill millions—but Kim had already cashed out, awarded a bonus of $35 million, or 100 times his salary. It's only one example, writes the New York Times, of how bonus culture drove traders to take big risks for short-term profits at the expense of long-term stability.

"Compensation was flawed from top to bottom," said one Harvard professor. Traders played down their risks until their bonuses were paid, while their superiors let the behavior slide to maximize their own bonus packages. While some banks have now instituted claw-back provisions to recall bonuses if profits vanish, many traders will still pull down seven-figure bonuses this year—despite the billions in taxpayers' money used to prop the banks up.