The Importance Of Paying Citigroup (C) Bankers Bonuses

Citigroup (C) has gone to the Treasury to beg for bonuses for some of its most important traders, people who make the banks extraordinary amounts of money. The Treasury’s reaction will probably be that it wants to stay out of a fight with Congress and avoid negative public opinion and will turn the request down.

That would be a mistake.

Wall St.’s primary argument for keeping a high level of compensation for its best investment bankers and traders is that, if they leave, overall losses at banks could get worse.  People can be profit centers. The most successful ones help offset the red ink created by the series of poor decisions that big financial firms made about mortgage-backed paper and commercial credit loans. It is easy to assess the value of the best traders by looking at a bank’s books.

According to The Wall Street Journal, Citi is asking to lift “pay restrictions that could break apart its legendary energy-trading unit.” If the government turns the request down, it is indeed likely that many of these people will leave for hedge funds, start their own businesses, of join banks based outside the US. The bank is not making an idle statement. If critical people leave, so does critical income.

The government is going to have to come to grips with the fact that banks have to pay the best bankers even if the idea is unpopular. There is nothing new in this argument, but it is extremely urgent that it be resolved. The results of bank “stress tests” are about to come out and some firms will be asked to raise capital. One of the banks’ key arguments for keeping new investment to a minimum is that they have some divisions that are highly profitable and will contribute to earnings to help offset losses. Once the government takes away the opportunity for those business to be a success by helping to drive the people who run them out the door, it will insure that its investment in financial firms will only grow.

Douglas A. McIntyre