Wall Street Adds Insult to Injury

Bailed-out bankers don't deserve million-dollar salaries, no matter how much they complain about limits on executive pay

Most people would have little difficulty getting by on $200,000 a year. Most people who had badly messed up on their job and put their employer in bankruptcy would be absolutely delighted to find themselves still earning $200,000 a year. That's not the way it works on Wall Street.

When Kenneth Feinberg, Barack Obama's compensation tsar for bailed out companies, issued his edicts last week on executive compensation, it prompted howls of outrage in the financial industry. The New York Times quoted one person who it identified as being "close to the board" at AIG as saying that the pay caps that Feinberg imposed were "insulting".

The specific pay cap in question was a limit of $200,000 on the salaries that could be paid out by the financial products division of AIG. This was the division whose shenanigans bankrupted the company and required a $170bn infusion from the government. This limit also only applied to cash compensation. AIG could still pay out five or 10 times this amount in stock. And, the limit just applied to 2009. Who knows what these high rollers will earn in 2010?

The sense of entitlement of this Wall Street gang is truly incredible. If AIG had been left to market forces, the company would have been out of business with its building and computers sold for scrap. It is still alive today solely because of a government umbilical cord. The justification for this umbilical cord was that AIG's collapse, the day after Lehman Brothers went down, would have jeopardised the entire financial system. So the only reason that AIG still exists is that its bankruptcy would have done too much damage to the economy.

Rather than being thankful that they still have a job, at a time when millions of others do not (partly as a result of the AIG boys' incompetence), the AIGers think that a $200,000 cash salary is an insult. This AIG salary (not including stock) would be enough money to buy healthcare for more than 60,000 kids through the state children's health insurance programme. An AIG salary would be almost enough to pay for 40 maximum-value Pell grants, which pay for college for low-income kids.

But rather than use money for these purposes, the AIG crew thinks the government should be giving them even more money. Otherwise they will just leave and go to work for another company. It is not clear that there are many financial companies with job openings at this point, but why should the rest of us care if the high rollers move on? They didn't do a very good job in their current position.

More to the point, why would we want these big risk takers at an institution that is effectively operating with government insurance? Hedge funds and other institutions that do not play a central role in the financial system should be free to take big gambles. But the banks and financial institutions that the government explicitly supports through deposit insurance and access to Fed borrowing and implicitly supports through a "too big to fail" policy should not be making big bets. As AIG and Citigroup and the rest showed us, these bets are being taken with our money but without our permission.

This fact is important to keep in mind in debates over compensation at banks and other financial institutions. In most cases, the really big earners are traders - people who bet successfully on oil futures or some other financial asset. This sort of speculative trading should not be taking place at a government-protected bank, and until the deregulation of the last two decades, it would not have been.

The threat that "top performers" will leave banks if serious limits are placed on their compensation is not a threat. It is an excellent reason to impose compensation caps. We should look to re-establish the separation between normal commercial banking (taking government-guaranteed deposits and issuing loans), the more speculative activity of underwriting stocks and bonds that was traditionally done by investment banks and the straight-out speculation that is done by hedge funds.

If pay caps will cause the high flyers to leave the commercial banks and possibly even the investment banks (insofar as the distinction still exists), then it will be a welcome side effect. We don't have to pay bankers tens of millions of dollars, and certainly the ones that are working at institutions that rely on government protection should not be getting these salaries. Feinberg's crackdown is a good first step, but we have a long way yet to go before salaries in the financial sector are brought down to earth.

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