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Wall Street Pay Caps Are a Terrible Idea

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The government is edging closer to capping Wall Street pay -- and not just at firms that were bailed out with taxpayer money.

The Obama administration wants to limit "compensation" (which presumably may go beyond bonuses) at firms that have received two TARP handouts. It also, however, wants to enact "broad principles" that cover pay at all financial services firms.

For now, this is just a trial balloon. The devil will be in the details, and the New York Times leak provides no details. But suffice it to say that, beyond regulating outrageous gifts at the TARP banks, it's a terrible idea.

We clearly need tighter financial regulation, but capping pay shouldn't be part of it. Executive compensation should be decided by the shareholders and management of each individual company. The last thing we need is a government bureaucrat deciding how much is too much, especially on a case-by-case basis.

To be clear: The fact that the TARP banks took huge handouts and then turned around and paid deca-million-dollar bonuses to executives was outrageous, as was the pathetic defense that they had to do this or the execs would leave. Without the handouts, the banks would have gone bankrupt, and the execs would have left anyway. If the execs had to be paid, they should have been paid in restricted stock that vested over 5 years. That way, the companies would have preserved cash, and the execs would have had an incentive to stay (and the taxpayers wouldn't have been sucker-punched).

That said... the idea that the folks on Capitol Hill should routinely decide how much is fair to pay a commodities trader, investment banker, or stockbroker is a horrifying lurch toward socialism.

Why?

Three reasons:

It won't work. No self-respective Wall Streeter with any options would ever subject him or herself to Congressional vetting, so if this becomes the normal course of business, all the good people will indeed leave. And, in the case of the TARP banks, what taxpayers will end up owning is a destroyed, deflated brand. In the case of broader Wall Street, is the US planning on regulating pay at foreign firms, too? If not, they'll just hire our best people and destroy the competitiveness of US-owned firms.

It's preposterous.
How much should a trader who generated $100 million of profit take home? $50,000 -- because bus drivers get paid $50,000 and they create more value for society? $500,000 -- because that ought to be enough for anyone? $5 million -- because that's only 5% of what the trader brought in? $50 million, because the company is trying to build a long-term franchise around the trader and wants to keep him or her happy? One could support all these positions. So why don't we waste a few years talking about it. (Or, better yet, why don't we just leave it to the folks whose job it is to worry about this stuff.)

It's a colossal waste of time (witness the week of hearings on the AIG outrage). Doesn't the government have anything better to do?

Again, this doesn't mean that the banks paying themselves billions of taxpayer money wasn't an outrage -- it was. It just means that government pay caps on all of Wall Street aren't the answer.

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