03/04/2011 06:20 pm ET Updated May 25, 2011

The Times' Wishful Thinking on Shareholders and Pay

The New York Times leads off its story on the Securities and Exchange Commission proposals on Wall Street compensation with a remarkable, and telling, sentence. "Lavish Wall Street bonuses, long scorned by lawmakers, have met a new foe: the Securities and Exchange Commission." I particularly direct your attention to the phrase, "long scorned by lawmakers and shareholders," positioned so snugly in the middle there. For in that phrase lurks a world of revisionism and dissimulation.

Start with lawmakers. It is true: Lawmakers in Washington did turn upon compensation after the meltdown and bailouts of 2008. And lawmakers, both in the White House and Congress, did adopt for a time the easy belief, long advanced by the Times itself, that one of the primary causes of this complex breakdown was excessive pay, which somehow -- via a mechanism as childlike as a Tinker Toy -- led Wall Street to take on too much risk and then blow themselves up. Indeed, in the full flush of the outrage over bailouts, stirred that day by the comp paid to the folks AIG hired to clean up the credit default mess, Congress rushed through some amazingly crude schemes to cap pay, only to pull them back as wiser heads prevailed.

But that was two years ago. Does that qualify for "long?" The truth is that lawmakers had no problem with Wall Street pay for many years -- like forever. Indeed, for many lawmakers, that pay could easily be channeled back into their campaign coffers, much as the bailout money to AIG poured right back into Goldman, Sachs & Co. And indeed, even Dodd-Frank, which did include language about cracking down on pay, dumped the actual rules on regulators, who now get to struggle to figure it out. If compensation was so central to the crisis -- an argument that has lost currency over time, though there are still true believers -- why wouldn't the wise heads of Congress have tackled it head-on? They can design a tax code, but they can't attend to the technicalities of pay and risk? (And they hand it off to regulators, who have never fully accepted the pay-equals-risk equation?)

Still, lawmakers are a sort of silly sideshow in all this. The real problem with that phrase centers on the notion that shareholders have "long scorned" excessive pay. Really? I'm not aware of a single shareholder pay insurrection, short of the usual mortar rounds of questions at annual meetings, before, during or after the crisis. Yes, analysts occasionally question expense ratios -- and pay is the single-biggest component of expenses. And yes, during the backlash over bailouts, the media and Wall Street's many critics howled when Goldman doled out the loot to its employees. But shareholders? In reality, the passivity of shareholders on everything from leverage, risk and, OK, pay, was remarkable. Shareholders were drinking from Charles Prince's punch bowl as eagerly as any trader. Their incentives were aligned like a straight edge. And it wasn't as if shareholders, particularly sophisticated institutional investors, were not aware that Wall Street firms were built every day on the hottest of short-term money or that they made a lot of money trading. They sold their shares and exited only when the party seemed to be over.

Today nothing has changed in that equation. The ultimate deconstruction of the notion of "scornful shareholders" goes to the wishful thinking the Times often indulges in that there really is a process called shareholder governance that works -- or, if it doesn't always work that well, it's the fault of stonewalling managers and boards, not shareholders themselves. This is the argument that there's nothing wrong with corporate governance that a little more democracy can't fix. The mistake the Times makes, of course, is that both lawmakers and shareholders really don't give a fig about Wall Street pay as long as they get the returns, or the contributions, they desire. Change that and you begin to change the system.

Robert Teitelman is editor in chief of The Deal.
For more from Robert Teitelman, check out The Deal Economy.