And We Thought the “Me” Generation Died in the 1970s?

There are lots of words for it – rainmaker, master of the universe, senior managing director – and we even have polite words for making money by feeding on failure and misery – turnaround specialist, reorganization expert, distressed properties specialist. Strange thing is that at some level, we need this senior level financial expertise to make American business work. The anachronism, as today’s thedeal.com points out, is the underlying compensation system in our financial institutions, not the services we need to continue.

The problem is that the “Street” encourages “deal flow,” almost at any expense and exorbitantly over-compensates the originating dealmaker (sometimes the deal-making team). Congress is looking at pay levels for CEOs and maybe the top ten most highly-paid executives in publicly-traded companies that have been and will continuing feeding at the Federal trough; it is struggling with Wall Street bonus pools, even in recessionary times, that can fund the governmental budgets of small nations. Sometimes the seven and eight figure pay levels can extend way beyond the “top 10” in any one company. When one person can get an eight or nine-figure payout from “deal flow” alone, something is terribly wrong.

Today’s thedeal.com put it this way: “The practice of giving outsize rewards to big-time risk-takers based mainly on their results in a given year is one of the main reasons we have a financial sector that's too big and too self-serving. As financial firms become more and more focused on maximizing compensation for employees, they get more and more distracted from their basic reason for existing: managing society's wealth and directing it to productive purposes.”

The solution isn’t so easy. If you significantly reduce these deal-related mega-bonuses by taxation or fiat, the smart traders and rainmakers simply will move to a jurisdiction where such caps do not exist. You can try and regulate them when they deal in U.S.-based assets, but these loophole experts can easily navigate around that barrier. As damage mounts from the derivative asset meltdown and the crass manufacturing of toxic securities that have sucked the life-blood out of many middle-class American dreams, it is very clear that the federal government, whether dealing with industries that require federal licenses or simply applying the “commerce” clause of the Constitution, has the power to regulate this compensation trend and limit if not stop the madness.

This becomes an even bigger problem as we allow, even encourage, huge financial institutions to swallow smaller, under-performing structures, amplifying their long term power and reducing free market competition – literally giving single companies the ability to create macro-economic impacts on global markets by themselves. With that increase in size and power, there needs to be a concomitant increase in oversight, regulation and responsibility.

The problem is that the United States cannot accomplish this task without the full cooperation of those nations who also operate global financial centers – but I would suspect that there is a global appetite for change. The upcoming November “Group of 20” economic summit, hosted by the United States, is an excellent forum to begin solving this issue. The list of attendees is impressive: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, Britain, the United States and the European Union.

The underlying issue, however, is whether financial institutions can literally afford to anger entire nations, inflict catastrophic financial damage on the global markets, and continue to reward individual deal effort at the expense of everything else.

I’m Peter Dekom, and I hope someone is listening.