Begrudging Wealth

"This is America. We don't disparage wealth. We don't begrudge anybody for achieving success… But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers." Barack Obama. According to the Associated Press, publishing on February 4^th, the Obama administration is imposing the following restrictions on financial companies that in the future receive “exceptional assistance” from the Treasury Department:

—$500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money (firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds).

—The expansion to 20, from five, the number of executives who would face reduced bonuses and incentives if they are found to have knowingly provided inaccurate information related to company financial statements or performance measurements.

—An increase in the ban on golden parachutes [excess benefits – beyond normal pensions – when executives leave or retire] from a firm's top five senior executives to its top 10. The next 25 would be prohibited from golden parachutes that exceed one year's compensation.

—A requirement that boards of directors adopt policies on spending such as corporate jets, renovations and entertainment.

Additional proposed restrictions, even on companies not receiving federal bailout cash, would require more shareholder involvement in executive pay, longer holding periods (time before stock could be sold) for executives who are rewarded with stock incentives, and an overall reexamination of how executives are compensated in the first place. Aside from the obvious resistance from laissez faire, free market conservatives, these programs have a few fairly obvious limitations:

1. While the programs might work reasonably well for non-financial companies, they do not really address the practice of Wall Street financial institutions of paying lower salaries but compensating the majority of their investment bankers and traders with large annual bonuses – a practice that is often applied to hundreds if not thousands of company employees who will not be affected by the above compensation caps because they are “too low down on the totem pole” to matter, even their compensation wildly exceed the above limits. Senior players will be impacted, but the structure of paying big bonuses in big loss years is likely to continue.

2. Expect to see a massive defection of “hot traders” to private boutique firms that are not on the radar screens of the regulators and legislators focusing on this compensation conundrum (see the quote below).

Try this perspective from the February 5^th Los Angeles Times: “‘Over the past 15 years there have been a number of efforts to put some sort of restriction on executive pay, both through legislation and through shareholder activism, and yet we see CEO pay continuing to rise,’ said Sarah Anderson, an executive-pay expert at the Institute for Policy Studies in Washington. ‘Wall Street has the best, shrewdest lawyers in the world looking to maintain these outrageous pay levels.’ " If there are tricks and loopholes, these guys will find them fast – they found stock options in the 1990s when President Clinton tried to cap salaries, and this is just one more “create jobs for lawyers” act.

Or how about this one? In a February 4^th article subtitled “how to live on $500G’s in Sodom,” theDeal.com observed that the best and the brightest in the salary-capped companies are likely targets for headhunters: “How many calls will be pouring into Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co. and Goldman, Sachs & Co. inquiring of rainmaking investment banker A or equity chief B or prop trader C -- none of whom had anything to do with mortgages -- whether they might discuss relocating to an institution that won't get public money? And it's not just an individual choice. Every banker accustomed to (or anticipating) a tad more than 500Gs per annum will not only be pondering his situation, but wondering about every colleague in the place and whether they'll jump, leaving him behind like the loser at the high school dance. Don't stand near the revolving doors. There could be a run.”

Houston… okay, New York, Washington, Los Angeles, Chicago, Dallas, etc… we have a problem. It’s like trying to transport water in a badly leaking tanker. Clearly, senior managers are trying to preserve their perks and compensation levels. They don’t even seem to realize how bad this looks to just about everybody. Wells Fargo was planning an expensive “recognition” ceremony for key employees in Las Vegas – luxury all the way – until the press picked up on this on February 3^rd and forced a cancellation.

But there are dark sides to the obvious salary cap: theDeal.com continues: “In New York City, 500Gs ain't what it used to be, particularly given the cost of housing and private schools. You can scoff at private schools, but the president, who gets free housing, uses one in D.C., and they cost a pretty penny. But not only won't a cap add new jobs and get lending going again, its effect, on that Sodom-on-the-Hudson, New York City, will be clearly anti-stimulative.

“More importantly, not only won't it whip the banks into shape, it will arguably accelerate their decline as competitive institutions. Now I can hear the voice from the back of the room: Well, they did a pretty good job screwing themselves, didn't they? Indeed they did. But for better or worse, not only do we need these banks functioning well, but -- this is the important part -- we, as paid-up taxpayers are putting our hard-earned and diminishing money into them. We own them! Why would we hasten their demise?”

Common sense seems to be a quality not particularly treasured or cultivated in those tony financial circles. The “free market” seems to live in denial. The cumulative impact of this massive trend on Wall Street to ignore common sense appears to me to be begging, pleading on their knees if you will, for equally massive regulation. Bottom line: the financial sector appears to be totally incapable of self-regulation. They had their chance, but will our regulation help or hurt or recovery?

I’m Peter Dekom, and my patience is also running thin.