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Wall Street investment banks generally defend their extravagant bonuses as "pay for performance." So we want to know why the nine megabanks that received $175 billion in federal TARP bailout funds last fall paid out nearly $33 billion in bonuses last year -- including bonuses of at least $1 million to around 5,000 employees -- while they were enduring huge losses or, at best, minimal profits that were lower than the amounts they paid in bonuses. These banks' top 5,000 employees alone collected more than $5 billion in bonuses -- or an average of $5 million apiece -- for 2008.

To put the billions in bonuses in perspective, look at it this way. The $32.6 billion paid in bonuses is, as The Wall Street Journal pointed out Friday, one-third larger than the budget deficit in California, a state of 37 million people whose economy, if it were an independent country, would be the eighth largest in the world.

More to the point, the nine banks reported combined losses of almost $100 billion in 2008. In many, their earnings were lower than they were five years ago. Their disastrous performance, driven largely by reckless investments in toxic securitized mortgage derivatives and supposedly insured by AIG's hollow credit default swaps, helped push global financial markets to the brink of a Great Depression-sized disaster.

Such a performance hardly merits bonuses at all, much less bonuses of the size the banks handed out. But there's no kidding about these bonuses. They are documented in a new report released Thursday by Andrew M. Cuomo, the New York attorney general, who is properly asking how the banks paid such big bonuses while losing so much money.

Goldman Sachs, his report showed, awarded bonuses of at least $1 million each to 953 top employees. Its top 200 highly-paid employees divvied up nearly $1 billion in bonuses. Of these, 78 received a minimum of $5 million, and six got at least $10 million.

Though the company earned $2.32 billion, it put $4.82 billion in its bonus pool, or more than double its earnings. It also took $10 billion in Troubled Asset Relief funds directly, and another $13 billion indirectly in TARP funds through AIG, the insurance giant that insured its investments of that amount in credit default swaps for which AIG had no reserves. It's pending collapse, in turn, forced the government to inject $180 billion in TARP funds to AIG alone.

Goldman Sachs, like several other large banks, recently rushed to pay back the $10 billion it owed in direct TARP money after Congress established a compensation czar to rule on future compensation packages for banks still holding TARP funds.

JPMorgan Chase's compensation packages, alone among the nine in the Cuomo report which also included salaries in its compensation figures, compensated 1,629 employees a minimum of $1 million each; 84 got total compensation of at least $5 million, and 10 received at least $10 million. It posted earnings of $5.6 billion, but put $8.69 billion in its bonus pool, and took $25 billion in TARP funds, which it also has now paid back.

Four of the nine banks that have not paid back their TARP loans had comparably sized bonus pools and numbers of highly paid employees. Citigroup and Merrill Lynch (now owned by Bank of America) each lost more than $27 billion in 2008. Still, Citigroup, which borrowed $45 billion in TARP money, gave 738 employees at least $1 million in bonuses, with 44 above $5 million, and three above $10 million. Merrill Lynch, which borrowed $10 billion in TARP funds, gave 696 employees at least $1 million, with 53 above $5 million, and 14 above $10 million.

Such stunning largesse prompted House Democrats on Friday to adopt a bill barring "inappropriate or imprudently risky" compensation packages at large banks, but it's not clear how well that legislation would work. It allows shareholders to vote on executive compensation, but their votes would be non-binding. It also would require banks' compensation committees to install outside, independent members, who would not be paid by management, to help steer compensation packages.

Yet the core challenge is to figure out how to frame rules that would base compensation on solid long-term performance and due diligence with regard to risk. That will require greater transparency in trading, and tighter regulation and rating standards for derivatives and credit default swaps to screen for the sort of toxic assets that inflated the bubble economy, and which burst with such disastrous consequences last year. Investment banks are lobbying strongly against such standards in apparent hopes of keeping huge bonuses for illusory short-term gains. That is the crux of the problem that remains to be solved.

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