To understand why the American public is so enraged by Wall Street's bonus structure, one needn't look further than New York-based Morgan Stanley (MS). Despite a dismal year in 2009, the company paid out bonuses and salaries that are raising eyebrows.On Wednesday, the bank reported fourth quarter earnings of $617 million, or 29 cents a share, on revenue of $6.8 billion, missing analysts' expectations of 36 cents per share and revenue of $7.8 billion. In 2008, Morgan Stanley posted losses in the first two quarters and vastly underperformed Wall Street rivals in its core investment banking franchise.
Tomorrow, its number one adversary, Goldman Sachs (GS), is expected to report record profits for the year. Another competitor, J.P. Morgan Chase (JPM) recently reported that its investment banking revenue more than doubled to $28.1 billion in 2009.
By contrast, Morgan Stanley's investment banking business reported $12.8 billion in revenue for the year, a mere 15% gain.
Salaries and Bonuses Up By 30%
But its lousy performance didn't stopped Morgan Stanley from hiking salaries and bonuses by 30% in 2009 to $14.43 billion, or 62% of total revenues at the bank -- the highest level in a decade.
The disconnect between Wall Street performance and bonuses has become a lightning rod for outrage on Main Street, fueled by reports such as one released by New York Attorney General Andrew Cuomo. Cuomo concluded that bankers' compensation had become "unmoored" from its financial performance.
It almost seems like Morgan Stanley was thumbing its nose at Washington's calls to Wall Street to rein in bonuses. Usually, Wall Street banks' compensation hovers around 50% of annual revenue, a level that is already being questioned by many shareholders and lawmakers. Just last month, President Obama voiced his frustration at what he called "fat cat bankers" who "still don't get it," when it comes to handing out outsized bonuses even as more than one in 10 Americans remain jobless.
Colm Kelleher, Morgan Stanley's chief financial officer until last month, defended the compensation amount in a conference call with analysts: "We have to pay our people competitively and not only retain but also attract the top talent."
Mark Lake, a spokesman for Morgan Stanley, said the compensation amount was skewed by the fact that the bank lost some revenue due to an accounting adjustment related to improvement in its credit spreads. But "debt-related credit spreads," was a term that came up 16 times in today's earnings announcement.
"Debt-related credit spreads," seemed to be the chief reason cited for lower earnings and dismal performance in other units, such as its loss in fixed income sales and trading, in equity sales and trading and more losses in other sales and trading revenues.
CEO Gorman, who took over the reins of Morgan Stanley on Jan. 1, said he will not take a cash bonus. John Mack, who was CEO until December, said he wasn't taking a year-end bonus for a third year. But multi-million dollar packages will still be handed out to several Morgan employees, though when averaged out the compensation comes up to $235,193 per employee.
Kelleher said that Morgan Stanley had introduced provisions to "claw back" bonuses from employees if investment decisions go sour and that senior executives are being paid 75% in deferred stock.
An earlier version of this story incorrectly referred to the bonus amounts as a record. The bonuses were not a record, but were at the highest level as a percentage of revenue in a decade.
'Fat Cat' Bonuses at Morgan Stanley Despite Dismal Year