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David Callaway
Oct. 22, 2009, 1:57 a.m. EDT · Recommend · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- Going after outrageous executive pay may be a fool's errand for President Obama. It's likely never to catch on and it won't help improve the economy at all. But it's the right thing to do.
After nine months of fumbling and frustration on issues from Afghanistan to the auto industry, Obama finally wielded Teddy Roosevelt's big stick on Wednesday and slammed it down on overpaid executives of the seven biggest companies bailed out by the U.S. taxpayer.
The stock market promptly tanked. Message received.
Big banks are easier targets to whack than Afghanistan, and we're better for it.
It's a symbolic gesture. None of the 175 top executives at the seven companies -- Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 4.42, -0.01, -0.23%) , Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 16.51, -0.50, -2.94%) , American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 39.03, -1.40, -3.46%) General Motors, Chrysler or either of the car companies' financing units -- will be losing any of the millions they earned in the past. And there's little chance many of them will stick around long enough to see their compensation packages severely cut in years to come.
But it was important that Team Obama send a message to Wall Street right now that it's prepared to take radical measures, such as getting involved in setting compensation, to show that it's serious about financial reform.
U.S. pay czar Kenneth Feinberg is expected to slash compensation at seven firms. WSJ's Dennis Berman tells The News Hub that's exactly what these firms don't need. Plus, the search-engine wars heat up.
Only one month after the anniversary of the collapse of Lehman Bros., which turned the economic downturn into a true global crisis last September, many Wall Street firms are comfortably back to business. Goldman Sachs /quotes/comstock/13*!gs/quotes/nls/gs (GS 179.26, -5.70, -3.08%) is readying at least $16 billion in bonuses for staff. Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 34.08, +1.56, +4.80%) is back to profitability. And the market itself is up more than 50% from its March lows.
Calls for financial reform have moved to the inside pages of newspapers and disappeared almost entirely from cable television finance channels. Washington is back to in-fighting and the media is chasing a balloon around Colorado. Obama himself is on the defensive on several foreign-policy fronts, as well as on health care. It would have been easy to just let financial reform slide and hope the markets keep up their run.
In the span of just one week, however, we've seen the Securities and Exchange Commission reveal one of its biggest insider-trader cases in years, going after hedge-fund kingpin Raj Rajaratnam of Galleon Group. We've seen influential financial voices on both sides of the Atlantic call for the breaking apart of banks from investment banks. And now comes Obama's pay czar, Kenneth Feinberg, going after the pay of top executives.
It was the audacity of claims on these executives that sent the message. A 50% cut in total compensation for the 25 top executives at each of the seven firms. A 90% cut in salary. And the toughest pill of all to swallow, according to leaks to the media on Wednesday: A requirement that all perks over $25,000, such as regular limousine services or private jets, must be personally approved by Feinberg himself.
Talk about a nanny state.
The demands are certain to prompt howls of outrage from Wall Street. Not because there's any chance that these restrictions will be expanded to the private, non-bailout sector. They won't. But they indicate that Obama and his team aren't as toothless as the press might make them seem to be when it comes to taking action against excesses in the corporate world.
Yes, Wall Street is an easier target to whack then say, Afghanistan, or Iran. And yes, Obama has the benefit of the support of most of the American public when he rails against the greed of the banking and investment banking industries, unlike with say, the health insurers and other health-care industries.
And no, we don't want the state involved in micro-managing private businesses like finance, health care, or steroids in sports for that matter.
But the boldness of the government attacks on financial services this week shows that financial reform is still very much on the national agenda. And we're better for it. This is the best chance the world has had in 60 or 70 years to set the global financial industry back on a truly productive course for everybody, not just the elite. Just last week, it was in danger of being squandered. The Feinberg plan isn't a power grab and won't lead to a government takeover of banking or finance.
It's just meant to send a message. Despite what Wall Street would like to think about going back to business as usual, a new form of Teddy Roosevelt's stick-swinging, trust-busting, bull-moose roaring, corporate overhaul is suddenly not out of the question whatsoever. Message received.
David Callaway is editor-in-chief of MarketWatch.
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