January 2010

By Jacqueline Simmons and Ian Katz Jan. 27 (Bloomberg) — The one-time masters of the universe may need to become masters of self-delusion if they hope to find happiness along with their paychecks. Bankers created “negative value” with innovations such as mortgages that homeowners couldn’t afford, said Nobel laureate Joseph E. Stiglitz , who is speaking today at the World Economic Forum in Davos, Switzerland, on the economics of happiness. “Most people try to see what they do as having intrinsic worth,” said Stiglitz, 66, a professor of economics at Columbia University in New York. “The fact that there’s no evidence doesn’t bother them. If you keep it to a high-level discussion, you don’t have to look at the gizzards of what you actually did, and you can feel better about yourself.” The psyche of bankers and the subject of executive pay will be on the examining table at this year’s gathering of the world’s power-brokers in the Swiss ski resort — as they have been in boardrooms and on newspaper front pages since the start of the worst financial crisis in 70 years. Two sessions related to compensation are scheduled for today. One panel, titled “Rethinking Compensation Models,” features Peter Weinberg , a founding partner of Perella Weinberg Partners LP, and Shumeet Banerji , chief executive officer of Booz & Co., a corporate consulting firm. Stiglitz, Matthieu Ricard , a Buddhist monk based in Nepal, and Nariman Behravesh , chief economist at IHS Global Insight in Lexington, Massachusetts, will speak at a dinner billed as “The Economics of Happiness.” ‘Demoralized Profession’ Two-thirds of Americans say they have an unfavorable view of financial executives, making bankers less popular than lawyers or members of Congress, according to a Bloomberg National Poll taken in December. More than half of those surveyed said big financial companies are only out to enrich themselves and shouldn’t have received government aid. U.S. banks that got taxpayer help through the Troubled Asset Relief Program, the $700 billion financial rescue plan passed by Congress in 2008, shouldn’t pay any bonuses, according to 75 percent of those polled. Of those, 51 percent say even banks that have repaid the government shouldn’t be rewarding their employees so soon. “This is a demoralized profession, where bankers are seeing themselves as stigmatized,” said Nigel Nicholson , a professor at the London Business School and a psychologist who advises banks on motivational techniques. “It’s gotten to a point where they don’t really want their kids going off to school saying, ‘Yeah, my dad’s a banker.’” Goldman, JPMorgan Some banks have responded to criticism about near-record compensation. Goldman Sachs Group Inc. set aside $16.2 billion to pay employees, the smallest portion of revenue since the firm went public in 1999. The New York-based bank subtracted $519 million from its compensation pool in the fourth quarter and made $500 million in charitable donations. JPMorgan Chase & Co. , the second-biggest U.S. bank by assets, slashed the proportion of revenue set aside for compensation at its investment bank in the fourth quarter to 11 percent, reducing the full-year portion to 33 percent from 62 percent in 2008. Morgan Stanley went the other way, allocating 62 percent of revenue for compensation in 2009, the highest ratio in more than a decade. With lower revenue and more employees than Goldman Sachs, it ended up paying less on average than its rival did — $235,193 compared with $498,246. Chief Executive Officer James Gorman was awarded deferred stock grants valued at about $8.6 million for 2009, when the shares rose 85 percent even as profit lagged peers. Gorman doesn’t plan to come to Davos. At New York-based Citigroup Inc. , the cash portion of employee bonuses has been capped at $100,000 and the remainder will be paid in deferred stock, Chief Financial Officer John Gerspach said. ‘Excessive’ Pay “We think excessive CEO pay is just a symptom that the board of directors is no longer doing its job,” said Richard Trumka , president of the AFL-CIO labor federation in the U.S., who was originally scheduled to be on the panel about compensation. “They’re allowing management to get off and actually control the company without any checks by them. It’s a symptom that the board needs to be brought back into place.” Trumka, 60, whose federation has 11 million members and who makes $260,781 a year, decided not to attend Davos so he could focus on the U.S. health-care debate, according to AFL-CIO spokesman Eddie Vale . Easterlin Paradox In recent months, politicians have targeted new fees and taxes at banks that got public bailouts. The U.K. said it will slap a 50 percent levy on 2009 bonuses of more than 25,000 pounds ($40,408), and France will impose a 50 percent tax on banks for bonuses paid out in 2010 that exceed 27,500 euros ($38,924). The Obama administration this month proposed charging a fee on all banks holding assets exceeding $50 billion to recoup costs for the bailout. It also called for limits on the size and trading activities of financial institutions to reduce risk-taking and prevent another financial crisis. “The objective is to have a conversation on whether executives are paid too much,” said Booz’s Banerji. “The vilification of bankers has gone too far. The bankers had a big role to play in this crisis, but as far as bringing the world to its knees, they’re good but they’re not that good.” The question of whether bigger bonuses can make bankers happier will be on the menu at the economics of happiness dinner. Behravesh, the IHS economist, cites the so-called Easterlin paradox, named for University of Southern California economics professor Richard Easterlin , who in 1974 wrote that after certain basic needs are met, happiness does not necessarily increase with wealth. Easterlin argued that income relative to those around you was more important to people than so-called absolute income. Stiglitz Report If a banker’s pay rises to $20 million from $10 million, “the increase in happiness is not twice as much as when he was making $10 million,” Behravesh said. “It’s probably less than 5 percent higher.” Stiglitz, who advocates a broader measure of gross domestic product that takes social well-being into account, studied the issue last year for French President Nicolas Sarkozy , who has said that relying on GDP to gauge the state of an economy helped trigger the financial crisis. In his report to Sarkozy, Stiglitz pointed to the inadequacy of statistics. A driver stuck in traffic would use more gasoline, increasing GDP without creating an improvement in well being, he said. Similarly, time spent doing household work can improve well-being without showing up in national output. Gross National Happiness Sarkozy, who ordered the French national statistics office , Insee, to come up with a new array of measurements, isn’t the only global leader who has questioned current metrics for wealth. Barack Obama raised the issue during his campaign for the U.S. presidency, and David Cameron , leader of the U.K.’s Conservative Party, has called for thinking about “general well-being” instead of just output. So far, some banks and at least one country, Bhutan, have used quality-of-life indicators as a measure of a nation’s success and as an alternative to GDP. Bhutan employs an economic model it calls Gross National Happiness. “After 30 years of applying this ancient principle, we’ve discovered it’s more important than gross domestic product,” former Prime Minister Kinzang Dorji said in a March 2008 interview. “GNH is a method of balancing sustainable growth against the often damaging results of rampant wealth.” The Happy Planet Index , compiled by the London-based New Economics Foundation, an independent group promoting alternative forms of economic thinking, ranks Costa Rica, the Dominican Republic and Jamaica as the countries with the highest happiness rankings among 143 countries surveyed in 2009. The U.S. ranked 114th and Zimbabwe last. The HPI takes into account factors such as life expectancy, life satisfaction and resource consumption. ‘Paid in Marbles’ Two economists at University of Pennsylvania, where Easterlin taught when he wrote his study, challenged the paradox in 2008, citing studies showing that people in richer countries were happier than the residents of poorer ones. Niall Ferguson , a professor of history at Harvard University in Cambridge, Massachusetts, and author of “The Ascent of Money: A Financial History of the World,” says the debate over whether money makes you happy remains open-ended. “It’s a closed game involving an elite group of people, and the satisfaction comes from winning the game,” Ferguson said. “Those with the most gain satisfaction from that. They could be paid in marbles, so long as they get more than the other guy.” To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net ; Ian Katz in Washington at ikatz2@bloomberg.net .