Will Compensation Controls Move Wall Street Overseas?

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As this column has regularly argued, government investment is never passive. Once federal bureaucrats slip under the private tent with aid masked as “investment”, all manner of controls are part and parcel of a private/public future. And as this column stated last October, compensation controls are never far behind.

So in the above sense, we shouldn’t be surprised in the least that the alleged stimulus plan being signed by President Obama today includes executive compensation limits for TARP beneficiaries at $500,000. That was inevitable, and as Nicole Gelinas of the Manhattan Institute has so astutely observed, if corporations want the presumed good that comes with government handouts, they must also accept the bad, which has to do with the fact that government employees aren’t paid in the way that private sector workers are. Let this be an indelible lesson for future failed enterprises naïve enough to think that government aid doesn’t come with strings attached.

What’s scary is that with the federal government now more than a rent-seeking partner in our financial future, it’s easy to imagine how our Washington minders might seek to impose compensation controls on financial firms already weakened by TARP as though they “benefited” from it, but who wisely chose to refuse funds. Indeed, given the growing consensus among the chattering class that Wall Street compensation practices somehow led to the financial meltdown, what’s to keep Washington from changing compensation for all finance firms as a pre-emptive move with the taxpayer in mind? For the skeptics out there, how many predicted even a year ago that two major investment banks would vanish, followed by a $700B (and counting) bailout?

The problem for taxpayers is that since they’re now partners of sorts with Wall Street, it’s hard to imagine how their unwitting investment in same could aid their cause. Indeed, the value of Goldman Sachs, Morgan Stanley, Citi and others has very little to do with plant and equipment, and everything to do with the people who show up for work each day. Legendary investor Gordon Crawford once said he bet on employees riding up the elevator, and with Congress seeking to impose compensation limits, will future Wall Street employees be worth betting on?

The new rules become ever more obtuse when we consider those who benefited from an $18 billion dollar bonus pool in 2008. As anyone who has ever worked on Wall Street knows well, the employees that lose money are most often terminated quicker than the time it took to read this sentence. The remaining employees who benefited (remember, Morgan Stanley’s John Mack and Goldman’s Lloyd Blankfein did not take bonuses in ’08) were likely the ones who were actually profitable for the firm, but who saw their profits erased thanks to the mistakes of others.

For the federal government and an electorate seemingly out for blood to decry the process whereby a firm’s best and brightest are compensated at levels 40 percent below the previous year is the equivalent of cutting the pay of every New York Giant because Plaxico Burress shot himself and ruined the team’s Super Bowl chances. In truth, the remaining Wall Street employees were kept around most likely because they did not lose money for their respective firms.

Also lost in the Wall Street witch hunt is an issue that was very prominent in the minds of Republicans and Democrats not long ago. Specifically, in a Wall Street Journal op-ed from November of 2006, Senator Chuck Schumer (D- New York) and New York City Mayor Michael Bloomberg decried the fact that “In 2005 only one out of the top 24 IPOs was registered in the U.S., and four were registered in London.”

While Bloomberg and Schumer acknowledged that the happy process of globalization was a factor (they neglected, however, the falling dollar’s role in making investment in entrepreneurs less attractive) in the internationalization of public offerings, they added that unwieldy regulations and the difficulties that came with Sarbanes-Oxley’s passage in 2002 had made going public in the U.S. less appealing. In particular, they cited “auditing expenses for companies doing business in the U.S.[that] have grown far beyond anything Congress had anticipated”, along with “a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators.”

Where finance is considered, the simple reality is that dollars are fungible, and just as a dollar is a dollar everywhere in the world, so is finance simply finance. Assuming creative accounting can’t help Wall Street firms get around the federal government’s latest attempt to curb pay, finance as we know it won’t disappear, but we shouldn’t be surprised if some of Wall Street moves to London, Shanghai and Tokyo in order to avoid excessive regulation in the United States. Such is the good and bad of globalization.

So while it’s hard to feel too sorry for certain financial firms that eagerly accepted federal aid, it’s not a reach to assume that the federal government will compound already evident weakness in the financial sector with rules certain to drive good financiers elsewhere, or finance overseas altogether. At this point all we can hope for is that having seen the horror that comes with federal largess up close, that financial firms with an eye on the future will follow the lead of Goldman Sachs and seek to pay every cent back to federal government in order to free themselves of rules that don’t reward enterprise, and that foretell their certain emasculation.

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