Can employee compensation of private companies deteriorate the real estate market even more?
Citigroup is scheduled to consolidate its brokerage operations with Morgan Stanley this month. Some say this is a wise move for the financial powerhouse that is still struggling to fix the toxic mortgage and other real estate-related securities that it has acquired. At the start of the year, Citi CEO Vikram Pandit began pursuing a determined capital funding to get his bailed out institution moving in a different direction. Never mind the gloomy forecasts in the economy; the bank has to survive. However, its top officials may feel the pressure to avoid another Lehman Brothers ending but a recent report from New York Post may surprise some readers.
Mark DeCambre writes, “Morgan Stanley and Citigroup are looking at setting aside between $2 billion and $3 billion to keep top brokers at the wealth-management shop the two banking giants are close to combining, The Post has learned… sources told The Post that already the two banks have identified nearly 2,100 Smith Barney and more than 900 Morgan Stanley top-tier brokers, with the top producers within that category contributing $1 million and $2 million each to the combined firm’s bottom line.”
Excessive compensations in crisis-hit banks are not new anymore. In fact, Pandit and his other managers have already announced that they’re planning to forego their bonuses set last year after receiving $45 billion from the government (although some have speculated that Pandit already received his through hedge funds). But the brokers’ compensations aren’t surprising for any matter. Pandit and his team have to create measures to keep their brokers in the company or else they’re bound to be pirated by other firms along with their network of investors. Lose one man and you’ll lose millions in earnings. For the management’s part, no one has anything to lose because they can recover their forfeited bonuses in a few years and their $3-billion expense for the brokers will just be a fraction of the potential losses had they canceled these perks. More so, the top men and women have earned a lot throughout their careers so the decision wasn’t a hard one at all.
But is it necessary in a time when the market is down and the mortgage industry still takes a long time to recover? Indeed, Citi has to face the bigger responsibility of managing sour mortgages including collateralized debt obligations. Remember however that a bank cannot unload toxic assets just by offering them without strong backing. Citi has to raise more capital to clean its balance sheets.
What could they have done is to provide alternative benefits to the brokers like extensive training and guaranteed job security. That would cost less than $3 billion and should be enough to allow brokers to stay in the company. If they insist on moving to other workplaces then the bank could use it as an advantage by clearing their human resource from profit-hungry employees who contributed to the mortgage crisis that we’re experiencing now. It’s impossible too not to find top-tier applicants who can fill in the vacated positions.
Citi needs to stand on its own after receiving a big chunk of the bailout package and it wouldn’t be able to do so unless it adopts cost-effective plans for the company. Otherwise, the bank may one day have a limited network that is far from its global image.