The president's speech today, which set out salary caps on Wall Street firms, seems to have been rushed to market, un-vetted by people who understand how Wall Street operates.
It's vague, open-ended and ready to be shredded by the greedy hordes who know that $500,000 is a fatal lifestyle blow.
It also has the potential of unfairly punishing banks that were forced into TARP by the autocratic stumbling of Hank Paulson.
This is the kind of turn-on-a-dime reaction that got Treasury so twisted up into policy pretzels during the Bush administration.
Let's parse it.
As part of the reforms we are announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 -- a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance.
Here is the Wiggle Territory:
• "Top executives...will have their compensation capped." What is a "top executive?" Is it based on a salary ranking? Is it based on someone's respective position in an organization chart? On the number of people who report into them?
This is too vague for comfort. It insulates entire areas of financial institutions from the ceiling.
As everyone familiar with Wall Street knows, salaries are very often non-hierarchical. A salesman who ranks low on the totem pole can pull down way more than $500,000 -- and in fact, isn't an "executive" at all.
Will their compensation be capped? What about a multi-million dollar trader who isn't an executive either, because they don't have management responsibility -which is generally how an executive is defined? There are hundreds of those well-padded predators still around.
Also, what about those who work on a low "draw" plus commission? Will their total compensation be capped, since commission isn't part of their base salary?
• The president limited the cap to "firms receiving extraordinary help." That's very different than saying "every company that's participating in the bailout." By doing this, President Obama appears to be creating a prospective taxonomy of beneficiaries.
Extraordinary help gives the government the flex to come back later and say that because American Express (which converted itself to bank status in order to belly up to the TARP trough) has a low ratio of bailout funds to total capital, it is NOT receiving any extraordinary help. Wiggle, meet room.
This also raises the fundamental question of whether every company in TARP should be capped equally -- or at all? Remember that Paulson forced many banks forced to seek TARP funds, even if they didn't need them.
In late October, Paulson forced the nation's nine largest banks to accept a total of $125 billion, regardless of their health.
Paulson allocated another $125 billion to buy stakes in the nation's remaining 8,000-plus banks. "To get these funds, banks were supposed to be financially strong, but Treasury never disclosed how it would determine a bank's health."
So in a fiscal Catch-22, some banks could be subject to strict government control because they were doing the right thing. Seems wrong and upside down. On the other hand, other banks whose behavior demands accountability could elide the cap.
Given how clever Wall Street has been in finding cracks, crevasses and tiny openings that allow it to feather its own nest -- while other nests wither and die in the winter of our crisis -- the White House needs to issue a definitive, follow-up statement with specific guidelines, written by someone who understands the structure and compensation practices of the finance world.
I would have no problem if healthy banks got a free pass from the cap, even if they were dragged into TARP against their will. We still do want to create incentives for intelligence, after all.