The Wall Street Oligopoly Rails on Compensation Controls
By Larry Doyle on October 25, 2009 at 5:00 PM in Economy, Sense on Cents (Larry Doyle blog)
Is there a hotter topic currently on Wall Street than compensation? I have to admit, I have a range of emotions on this issue. I pride myself on being a proponent of free market capitalism. As such, while the government needs to be actively involved in regulating the marketplace, beyond that I would just as soon see Uncle Sam stay out of the way. One may think I would be vehemently against the Wall Street pay czar Ken Feinberg getting involved in compensation on Wall Street. The Wall Street Journal reports on the far-reaching net cast by Uncle Sam on this issue and writes, “U.S. Unveils New Rules on Banker’s Pay.” Rest assured, the crowd on Wall Street right now is seething. Let’s navigate.
As I think more and more on the compensation topic, I have come to the following conclusions:
1. Those who work at companies in which Uncle Sam has injected life-saving levels of capital should be subject to compensation restrictions. Why? I would maintain that these employees are quasi-government employees and thus subject to having Uncle Sam involved in the compensation process. To the extent that people do not like working for Uncle Sam, then leave. They would not have a job without Uncle Sam in the first place.
2. Is it any wonder why Goldman Sachs and JP Morgan were so eager to repay the TARP funds? Lloyd Blankfein and Jamie Dimon certainly saw the handwriting on the wall. Some would argue that Goldman and Morgan should not be subject to compensation controls imposed by Uncle Sam. Others would argue that they should given the fact that Uncle Sam saved the entire financial system. To a certain extent, I am in the camp “to the victors go the spoils” and thus Goldman, Morgan and others should be free to compensate their employees accordingly.
3. To an ever increasing extent, however, I view Wall Street as nothing more than an oligopoly. The key problem in an industry that is oligopolistic is the issue of collusion amongst participants at the expense of the public. I do not think there is any doubt that Wall Street has experienced characteristics of an oligopoly and is experiencing them now to an ever greater degree.
How should this be addressed? The boards of the Wall Street firms need to practice real corporate governance in terms of compensation and all other business practices. Good corporate governance would implement quality compensation practices so Uncle Sam does not have to get involved. Regrettably, ‘Wall Street’ and ‘good corporate governance’ are mutually exclusive.
Thus, what should Uncle Sam do? I disagree that Uncle Sam should dictate compensation practices in private companies. What Uncle Sam should do is impose on businesses capital ratios that are so restrictive that Wall Street thinks long and hard about how much risk they take in those business lines. Those risk controls will restrict compensation along with addressing systemic risks while maintaining the integrity of the free market. In fact, if the capital ratios are as restrictive as I believe they should be, the firms would reconsider having the business at all.
Perhaps the business line would then be spun off or privatized and Uncle Sam and the taxpayers would be off the hook of supporting a business housed within an institution deemed ‘too big to fail.’
In my opinion, that approach is far better both in scope and practice.
What do you think?
LD
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I like your ideas. My entire family has sold everything in the market and won’t go back until these thieving crooks are snapped back into line. I’ve heard the same from many friends. Their greed has ruined everything. Also, they forgot about all of us “little people” who made them so rich.
I’m still wondering about the deal with Bank of
Ameica being forced to buy Merrill Lynch/take the bailout. I know BoA, once they found themselves suckered in, planned on paying that money back asap. However,when they were close to having the funds to do so, the gov. suddently decided that they were underfunded and needed to recapitalize. My suspicion is that the gov. wants to maintain control of certain banks/entities,and some may never really get away.
In the meantime, unions are being released from gov. scrutiny…
http://www.floppingaces.net/2009/10/24/why-no-union-pay-czar-it-helps-to-be-a-friend-of-obama/
The government should have made these decisions when it lent the money. Putting restrictions on accepting it months after it’s been accepted is wrong. Executive pay has gotten excessive, and it’s too often out of line with company results, but the government shouldn’t be able to right it’s lack of due diligence and thoughtful decision-making by deciding to put measures in place that were not agreed to when the money was lent.
When they start taking money back from defense contractors that over bill us and produce shoddy work or cover up illegal actions; or demand repayment of grants for social programs filled with embezzlement, fraud and misuse; or crack down on public officials who don’t pay their taxes or don’t report income and gifts accurately or use their offices for personal gain… then they can think about restricting pay for these executives. But, as long as they’re going to turn a blind eye to the huge waste of taxpayer funds in every other area — and rush to pass legislation without understanding or reading it or thinking about the long-term (in this case, less than six months!) consequences — they don’t have the right to point to excessive executive compensation as the problem.
How about if we cut every Senator and Congressperson’s pay — plus the President’s and the salaries of every person involved in pushing and writing the legislation — by 70-90%? They’re just as much to blame for not making sure there were adequate controls on how the funds were used. And, they clearly don’t deserve the $160K - $400K plus massive benefits and perks they make for what amounts to part-time work.
I just don’t see them pointing fingers at themselves and taking the same responsibility they’re now demanding from these execs. Until they do take responsibility and decide how to address — moving forward, not backward — they need to live with the mess they created.
Great points, DS. And a question: Didn’t GE also get a bunch of taxpayer money? Are O’s buddies there being forced to take a pay cut?
Let them eat cake.
let them be force fed cake like a goose is fed for fois gras
What do you think?
That you, Sir, are a clear voice of reason.
The government’s functions are to establish fair rules of play, keep the playing fields level, and to be a diligent and observant referee. All important areas need to be observed. Including the neglected area of derivatives trading.
I’m presently so skeptical of the honesty and safety of the markets that I don’t invest. In the long run, I’m not even sure about the safety of my bank or the integrity of the dollar. Like most Americans, I’ll need to be convinced that things are really changing.
You don’t know the half of it.
New World Ordering
http://powerandcontrol.blogspot.com/2009/10/new-world-ordering.html
Also this from California:
http://powerandcontrol.blogspot.com/2009/10/government-finance-reform.html
Look. It has nothing to do with banker compensation. They will figure another way to steal the money.
The problem is giving them any money in the first place.
See the videos at the links I posted above.
Cutting the pay of Congress Critters will just make them more corrupt. What we need to do is to pay them a million a year to do nothing. When the budget rises faster than inflation cut their pay by 10X the rise. And if the budget falls below the inflation rate increase they rate of pay by 10X the fall.
It is all about incentives.
[...] The Pay Czar’s Pay Cut Ruling: The Hype, the Hoax, Outrageous Compensation and Bonuses, The Wall Street Oligopoly Rails on Compensation Controls, and The Wall Street Economic Death [...]
Great post, LD. Your ideas are solid.
I would like to make one little suggestion for preventing these shenanigans in the future: END THE FED! Also, Congress should watch the Treasury Dept to make sure it doesn’t collude with private companies.
The idea is that companies should get back to focusing on the goods and services they produce (seems like a faraway concept, doesn’t it?). Produce quality things, sell them at a good price. Any risk taking should be at a FREE MARKET rate, not some magical pixie dust number the Fed pulls out of a hat at its whim. The consequences of risk taking should be shouldered by the company itself, not spread among taxpayers. They don’t share profits with taxpayers, why are they allowed to share losses? (And why are taxpayers forced to bear them?)
The Fed is a collusive banking cartel. Their control over our money supply is unConstitutional and wreaks havoc on us. Strike the root. End the Fed.