Andrea Orcel’s reported $33.8 million compensation for 2008, a year when his employer, Merrill Lynch & Co, had net losses of $27 billion, doesn’t come without a price.
Orcel, 45, Merrill’s top investment banker, has been subpoenaed to testify by New York State Attorney General Andrew Cuomo, who’s looking into the firm’s decision to pay $3.6 billion in bonuses to 700 employees just before it was swallowed by Charlotte, North Carolina-based Bank of America Corp on January 1. Orcel’s compensation at Bank of America, where he now heads international corporate and investment banking, probably will be capped as a result of new legislation. And it’s unlikely a rival firm would match his pay.
“Nobody can get paid $34 million in this environment,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in New York. “We are at a crucial juncture, where that sort of thing goes out the window.”
The worst financial crisis since the Great Depression has spread across the wider economy, lifting the US unemployment rate to 8.1 per cent, the highest in more than 25 years, and causing the biggest quarterly economic contraction since 1982. The US government is projecting that spending to stimulate the economy and rescue the financial system will lead to a $1.75 trillion budget deficit in the current fiscal year.
The five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007. Now, banks that received government funds, such as Bank of America and Citigroup Inc, which each obtained $45 billion from American taxpayers, are under new compensation restrictions imposed by Congress.
Sea-change
“Merrill Lynch was trying to get in one more year of bonuses before the system changed,” said John Challenger, chief executive officer of Chicago-based placement company Challenger, Gray & Christmas Inc “As the industry faces a sea-change, it will affect everybody.”
The American Recovery and Reinvestment Act of 2009 will force the top five executives at banks that receive at least $500 million of bailout funds, and the 20 most highly paid employees at those companies, to forgo cash bonuses. Bankers can still get stock bonuses, as long as the shares are restricted until their employers repay bailout funds.
Orcel, whose 2008 compensation outstrips the $9.96 million paid to Bank of America Chief Executive Officer Kenneth Lewis and the $4.02 million granted to Chief Financial Officer Joe Price, would likely be subject to those caps. He also will have trouble getting offers from other companies, say two senior executives at rival firms who declined to be identified.
Orcel’s payday
The two executives said Orcel and nine other Merrill bankers, whose combined $209 million in compensation was reported last week by the Wall Street Journal, wouldn’t be wooed by other companies, even those that didn’t take government money. Both said no firm would be willing to match the amounts Merrill paid to Orcel and his colleagues, and that public scrutiny makes them toxic.
“It’s obvious that the amount of money that these guys were able to generate in the past isn’t being generated now,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former partner at Goldman Sachs Group Inc “In the current market, no one is going to pay for stuff that isn’t happening.”
David Sobotka, who now runs global proprietary trading at Bank of America, was paid about $13 million for his work at Merrill last year, and David Goodman, co-head of commodities, received $16.5 million, the Wall Street Journal reported. The newspaper said that Orcel generated $550 million of revenue for the firm last year, up 45 per cent from 2007.
Tim Cobb, a spokesman at Bank of America in London, said Orcel and other employees won’t comment on their bonuses. Orcel didn’t return a call seeking comment.
Bank deals
Orcel, who graduated summa cum laude from the University of Rome, joined Merrill in 1992 as part of its financial institutions group. He has worked on some of Europe’s biggest bank mergers, including Banco Santander SA’s acquisition of Abbey National Plc in 2004 and UniCredit SpA’s 2007 purchase of Capitalia SpA. Former Merrill CEO Stanley O’Neal promoted Orcel to global head of underwriting in May 2007 and last month he was named by Bank of America to lead international corporate and investment banking and finance teams outside of the Americas.
Last year, Orcel advised Royal Bank of Scotland Group Plc on its $19 billion acquisition of Dutch Bank ABN Amro Holding NV, which was completed in April. Royal Bank of Scotland, once the second-biggest UK bank by market value, is now controlled by the government after reporting the biggest loss in the country’s history.
‘Something the matter’
“ABN Amro and Royal Bank of Scotland are both bankrupt and their leaders are disgraced, but the investment banker who put it together walks off with $30 million,” Paul Volcker, a former chairman of the Federal Reserve and now head of President Barack Obama’s Economic Recovery Advisory Board, said at a conference at New York University’s Stern School of Business last week. “There’s something the matter with that system.”
Tumbling asset values and lower demand for advice on underwriting and mergers has already driven banks and brokers to eliminate more than 270,000 jobs worldwide, according to data compiled by Bloomberg. Lehman Brothers Holdings Inc. and Bear Stearns Cos, two of the five biggest securities firms, are out of business. Citigroup, once the world’s biggest bank by market value, is being propped up by the government, which is getting a 36 percent stake in the New York-based company.
Merrill agreed to sell itself to Bank of America in September in a deal hatched over the same weekend that Lehman Brothers went bankrupt. A few weeks later the US Treasury gave $15 billion to Bank of America and $10 billion to Merrill Lynch, along with payouts to seven other firms.
Justifying bonuses
Bank of America has since received an additional $20 billion, as losses at New York-based Merrill Lynch mounted. Bank of America’s stock is down 78 per cent this year to $3.14, giving the company a market value of $20 billion.
For years, Wall Street justified big bonuses by saying they were aligned with revenue and represented a fair cut of the money employees generated. When Merrill became unprofitable in 2007, then-CEO John Thain argued that he had to keep paying market rates to prevent employees from leaving for still-profitable New York- based rivals led by Goldman Sachs and Morgan Stanley. In 2008, as Merrill’s losses widened and rivals cut their own bonuses, Merrill reduced overall compensation by just 6 per cent.
“What was shocking is that, after being under such a spotlight for so long, the bonuses were still given, even after there had been shareholder and taxpayer outrage about how executives were lining their pockets with money to the detriment of everyone else,” said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees in Washington.
‘Secretly and prematurely’
Merrill’s bonuses drew the attention of New York Attorney General Cuomo because the biggest US brokerage firm paid them a month earlier than usual, before Bank of America completed its takeover of the firm. Cuomo, who said in a February 10 letter that the bonuses were paid “secretly and prematurely,” demanded that Thain and Bank of America CEO Lewis disclose which employees got the big payouts.
Thain, whose request for a $10 million bonus was rejected by the board, cooperated with Cuomo’s request and testified for two and a half hours on February 23. Bank of America’s lawyers said last week the company will suffer “grave and irreparable harm” if the names of employees who received bonuses are made public.
Bank of America argued in a court filing that disclosing individual names would grant competitors a “road map” to hire their employees, cause “internal dissension and consternation” and pose security risks for the bankers and their families.
Last week, Cuomo asked a New York State Supreme Court judge to reject the bank’s “continued efforts to stymie” his investigation. A hearing is scheduled for March 13.
