With public outrage over Wall Street pay again reaching fever pitch, I have a simple piece of advice for the White House: Level the playing field.
From my perspective, whatever the specific remedy is for Wall Street’s excesses, it should apply equally to all financial institutions. This approach would recognize that it wasn’t just American International Group, Citigroup, Bank of America and other direct recipients of bailout billions that benefited from them.
Federal officials have said repeatedly that their goal in making specific bailouts was to prevent systemic collapse of the banking and financial systems. Firms including Goldman Sachs have acknowledged to me that had the system gone into cardiac arrest, as it came close to doing, they would have expired, too. That Goldman and other AIG counterparties were paid in full is thanks to the AIG bailout and the American taxpayers. And all financial institutions continue to benefit from the extraordinary remedies put in place by the Federal Reserve.
So why should government pay czar Kenneth Feinberg be dictating salaries and bonuses to AIG but not to Goldman Sachs or other firms who either paid back their money or never got any?
All that will accomplish is a mass exodus of talent from AIG to firms that don’t face such restrictions. Several high-ranking AIG executives, including the firm’s general counsel, have already threatened to leave and other employees have left. No wonder AIG’s current CEO, Robert Benmosche, has reportedly been apoplectic and even threatened to quit if he couldn’t pay competitive salaries and honor AIG’s commitments to its remaining employees. At this rate, the government is going to manage AIG into the ground and lose any hope of recouping the billions in taxpayer dollars that have already been poured into it.
The same phenomenon seems to be playing out at Bank of America and Citigroup. Bank of America paid back its billions and is in theory freed from the pay czar’s oversight, but it’s still fretting about how to compensate its most talented employees without upsetting Washington. Bank of America needs to recruit the best chief executive it can and pay him or her accordingly. Otherwise taxpayers will be looking at another B. of A. bailout down the road. Meanwhile, despite reaching an agreement to pay back — perhaps prematurely — its $20 billion in Troubled Asset Relief Program money, Citigroup must continue to wrestle with having the government as a big shareholder for some time, since the Treasury will retain a stake for months. Citigroup, too, faces a competitive drain. This is bad public policy and patently unfair.
President Obama and his advisors say Wall Street doesn’t “get” it. Maybe not — but does the administration get it? Obama officials don’t seem to recognize that you can’t have it both ways. You can’t selectively punish bailout recipients while leaving their rivals unfettered. If administration officials want to satisfy public demands for accountability and retribution, then they should muster the political courage to do so across the board. If they can’t or won’t intervene in the free market for compensation and talent other than for a handful of bailout scapegoats, then they shouldn’t. In that case, Feinberg should be thanked for his valiant efforts and dismissed.
You have to hand it to the British and the French. Their bold plan to tax financial bonuses (at 50% in the U.K. plan) is at least intellectually honest, applies to all financial firms, and avoids the meddlesome intervention of a pay “czar.” The Obama administration and Germany responded coolly, which means London and Paris might face an exodus of high-priced talent. If Britain and France have to go it alone, London can forget its dreams of supplanting New York as the global financial capital. The level playing field needs to be global.
I don’t believe Americans want the government setting pay for Wall Street or any other industry. But in the wake of the biggest public bailout ever, we’re entitled to some accountability and restraint. And notwithstanding occasional “voluntary” gestures like Goldman’s recent decision to pay its top executives in restricted stock rather than cash, it will have to be imposed if it’s going to apply across the board. Taking Wall Street executives to the woodshed may be good political theater, but it’s no substitute for real reform. And speaking of theater, the failure of three top banking executives to even show up at the White House due to fog at Reagan National Airport only underscores the point. Didn’t they check the forecast?
But the White House, Treasury and Congress still hold most of the cards. The political winds are still at their backs. They can still impose rules that promote fair competition while protecting taxpayers.
I’m not a compensation expert. I’ve previously articulated some pay reforms that I thought addressed the underlying causes of the crisis, would eliminate the worst pay excesses, and weren’t needlessly punitive. (See “Putting Sanity in Wall Street Pay.”) Perhaps others have better ideas. But a coordinated global initiative is needed to curb excesses and deter the reckless risk-taking that got us here. It’s time to stop demonizing a few scapegoats like AIG. The Obama administration should show some leadership and confront the issue honestly and head on.
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