Saturday, February 14, 2009

Stimulating a Bank Brain Drain

According to the New York Times, U.S. Senator Chris Dodd (D-CT) embedded a provision in the Economic Stimulus bill, which passed both houses of Congress last night, that "would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department."
The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
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“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”
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In addition, the Congressional rules would affect not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.
Good for Dodd.

But the restrictions were opposed by the Obama White House. Why? The Times claims:
Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments.
Or, as more succinctly stated by an "independent compensation consultant"who talked to the Times, the pay restrictions "won't work." He claims:
"Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”
There may be a potential legal problem with the Dodd salary restriction; most notably, if true, that it applies retroactively to executives who took TARP money from the Bush administration when the governing rule was "anything goes" for Wall Street miscreants and nincompoops. Whether that part survives court review heavily depends on the exact wording of the retroactivity provision.

But the suggestion that pay restrictions are bad because CEOs will pay back taxpayer money early is hardly persuasive. If anything, that's devoutly to be desired. The earlier Wall Street bankers get off the TARP money train, the better. Out here in the rest of America, normal people would see the prospect of lifting the bonus restriction as an incentive to speed the clean-up of balance sheets.

As for 'getting another job' -- who in his right mind could complain about that? Any Wall Street exec or trader who quits because he can't soak the taxpayers for a bonus "exceeding one-third" of annual pay should go into another line of work -- one more suitable to their character, like robbing banks.

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