Wall Street Pay Caps Are a Terrible Idea
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.
See Also: The Worst CEOs Ever
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I'm neutral on the isaue of a numerical limit to compensation, but HIGHLY in favor of regulatory requirements that bonuses be tied to the actual long term performance of the "financial services" being performed. There's an old fashioned notion called fiduciary reponsibility ... one of which the majority of those on Wall Street lost sight many years ago in their crazed lust for short term rewards. I have no problem if they are well rewarded for serving their clients responsibly, honestly, and well. And you know, as well as anyone, that this was far from the case. So, don't expect any crocodile tears from me if we cap their compensation ... you reap what you sow ...
OK, get paid if you make money, but IF YOU LOSE 100 million, will you pay back 50 million? What about if you lose many BILLIONS and the result is the US of A taxpayer has to bail out your company for BILLIONS plus interest for many years? Is that fair to some hard working guy earning maybe 35,000 or 50,000?
Seems contrary to human nature that a person would rush into a burning building to save strangers for around 50k a year. Or that a doctor, lawyer, nurse or a teacher would work in poor conditions for less pay to help those of less means. Hard to believe that so many people make choices in this world based not soley on how much they will make, but how much they can help. And then there's our moneychangers. The only group to come in for Christ's wrath.
Blodgett, no one deserves to make the money these people make. Not in a world full of want. Shame obviously has no effect on them. So we really aren't given much of a choice but to tax them or set their pay to some ratio of their lowest paid worker. Seemed to work for JP Morgan (the man, not the bank).
I love this entire concept of the trader generating profit by sitting in front of a computer. This entire concept is why our economic system is such a mess. If the trader were sitting at his desk and coming up with solutions to world problems, developing better technologies or even connecting people with the great ideas to actually generate value and profits with those with the funding I would buy into this concept. What this guy is talking about is getting people to trade in a speculative market and convincing people to pay more for a piece of paper than the last guy did. Seems to me this type of "profit" was generated in the billions of dollars when derivatives were devised, mortgages were bundled and credit default swaps were in vogue - look how well that worked out.
All our society's problems stem from our ignorance about the transcendent realities of life. As long as humanity harbors a shallow, materialistic, immature collective mentality, our world will be basically the same as it is today -- the same it's been for thousands of years. Plagued by deceit, violence and greed.
Let me get this straight. We're OK with paying auto workers...for not working...for years. We're OK with paying pensions and health care for retirees from day 1 of retirement...even if that retirement is at age 50...and even if there's another job involved during said retirement. We're OK with paying athletes millions of dollars to "play" a game. We're OK with paying actors millions of dollars to "play" a role on TV or in a movie. We're OK with paying rappers and other singers millions of dollars for busting our eardrums. We're OK with paying school administrators and teachers $100-300K/year even though our schools are failing to teach our children the basics (most of this group merits their pay...but a large portion do not). We're OK with letting our politicians pick up their paychecks or hop those free jets...and we know what we get for that. But when it comes to the people who drive the financial machine that provides our businesses with the capital to operate and grow....suddenly we want to get cheap. No, not the answer. Make businesses stand on their own and they will make better decisions. As long as Washington will step in to save the day...why would anyone not take more/too much risk..it's human nature.
"We're OK with paying athletes millions of dollars to "play" a game. We're OK with paying actors millions of dollars to "play" a role on TV or in a movie. We're OK with paying rappers and other singers millions of dollars for busting our eardrums. We're OK with paying school administrators and teachers $100-300K/year even though our schools are failing to teach our children the basics (most of this group merits their pay...but a large portion do not). "
First, you make a lot assumptions about what most people think is okay, which personally think is just a matter of YOU projecting on the rest what you're okay with; I can assure you that I and most people I know are not OK with the absurd figures most of the folks you cite make as salaries [just on the basic comparative value of the work required]. Secondly--and I know many would disagree with this assertion--but to me even the least among mediocre teachers are worth far more than the average stockbroker in terms of what they contribute to society at large.
I don't get "congressional vetting" of individual traders from "broad principles " of pay reform. What I believe the administration is getting around to addressing is the huge amount of money the people who work "where the money is made" so to speak, are skimming off that process. We, as a whole , have been generating enough wealth, but its been concentrated by those that hold unique positions within the monetary system.
Henry I disagree with you. Yes we do need pay caps. Greed is bad. It has ruined everything that was good about this country. The rich have legally stolen from we the people and our corrupt government passed the laws that allowed them to do so. Why do people like you feel you are entitled and deserve so much more than the rest of us hard working people? Your way of thinking is morally wrong and has harmed countless millions.
Why does "Atlas Shrugged" seem more and more applicable everyday of this administration?
because you don't understand the difference between using other people's capital to make a routine and obvious technical trade that you receive a percentage of, and starting a widget factory that uses your own design to create wealth.
Evidently because you haven't read the book, only the jacket.
I'm not sure why the people who wrecked the car think they should get to drive the tow truck.
I like the analagy
"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."
The financial "industry" needs to be radically deflated so the "good people" -- including the many dishonest operators -- can find jobs elsewhere. They are brilliant, no?
'It's preposterous.' What's preposterous is the current system where the super-rich award themselves ever more money, effectively nullifying our democracy. The best way to destroy capitalism is to maintain this kind of oligarchy. You want a class war? You'll get one.
"Wast of time.' Arrogant beyond belief.
The situation where these people can amass such wealth is inherently un-democratic. It offsets our votes with back room deals. We need to flatten our economic spectrum, which is headed toward third-world gaps between the superrich and most other people.
Americans have some 200 million guns. You want democracy, or do you want the people to take charge forcefully? Keep the cynical manipulations going, and you'll find yourself huddling in your gated communities, nervously eyeing the low-paid troops assigned to protect you.
Oh looky - the people who drove us straight into the ditch don't like things the grown-ups propose.
You really should just shut up now.
When was the last time we had grown ups in Washington? (hint, there still not there).
Is this the same Henry Blodget that wrote Merrill Lynch e-mails that gave assessments about stocks which conflicted with what his company publicly published? The same Henry Blodget that was charged with civil securities fraud by the U.S. Securities and Exchange Commission in 2003? The same Henry Blodget that paid a $2 million fine and another $2 million disgorgement? The same Henry Blodget that was barred from the securities industry for life?
Either way, this article sounds like elitist banker double talk. Using the U.S. government as a front, banks have already robbed the nation's treasury, so when I hear lame arguments for protecting the pay of the shysters of "financial services", it's pretty clear there's no remorse in the industry.
Moreover, the article's bogyman - jobs moving out of the country - is just typical globalization. So what Mr. Blodget is essentially saying is that it's okay for lowly manufacturing jobs to go overseas, but not for those special jobs of people that work in finance.
The amount of resources being squandered on financial institutions today is criminal and is destroying our potential to create the living environment we need for the future.
Thank you for a very good post. There should be some sanity in the pay and bonus system. The people who run the company day to day should be payed proportional amounts .
Your excellent post is much more enlightening than the convoluted arguments in this article - thank you! I've never subscribed to the theory about not paying the bonuses because the execs will leave. I would think that like any other industry these days, there are highly qualified people waiting to take those jobs once they are available, and willing to do it for a lot less money.
I believe all this financial Crisis started with collusion between wall street and some big corporate losers creating phoney profits, (umm anyone remember ENRON?) Is it greedy to want a fair wage? to want a home to call your own? to be able to survive on 1 paycheck? to have a pension to support you when you can no longer work?
I have a few friends that lost a lot in the market. They all claimed their Broker said it was a good buy, Duh! greed is greed, if you want a good "Investment" go to Vegas or Atlantic City. The Dealer makes the same no matter if you win or lose. (at least you get free drinks while playing in Vegas). A Broker, makes his commission if you win or lose for them it is a win win situation!
The government needs to get rid of Corporate Greed, and Bankers are the greediest, no matter if it is charging 35% on Credit Card Debt, or an investment broker making profits on Margin Calls, (talking an investor to average up and benefit from the cheaper cost) Or a CEO making a million dollar bonus for outsourcing 20,000 American Jobs to Mexico, Costa Rica, Phillipines, or China. if Americans are not working, they become AmeriCANTS. Keep American Jobs in America, get the Greed out of the Board Room.
The problem is that the more the few get the less the masses can get. Because wall street tycoons push the numbers around to initiate production, they think that the equation works the other way around. Finite resources / population (rich take muches and the many take littles) = average wealth. No, the number pushes are just hungry currency pigs with special access to the feeding trough with their limitless greed.
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