The New York Times has an excellent article on how fraudulent financial institution profits yielded real bonuses for executives and staff.  Bonuses were paid out based on faked valuations and appreciations in asset prices.  And the bonuses were paid out prior to reclassifying asset values to their real values, and prior to Wall Street firms begging for and receiving taxpayer funded bailouts.

In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.  But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.  Unlike the earnings, however, the bonuses have not been reversed..

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning…

…Traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.  “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group.