Obama pay cap puts overdue squeeze on bank CEOs
Posted
Feb 04 2009, 02:28 PM
by
Anthony Mirhaydari
Rating:
Throwing down the gauntlet on the villains of this downturn, President Obama has imposed a $500,000 cap on executive pay at financial institutions receiving federal bailout funds. Noting that American taxpayers are angered over "executives being rewarded for failure," he announced the limit ahead of next week's expected announcement on the future of the $700 billion financial rescue package.
Obama's move will help quell political backlash against the bailout after Wall Street paid out more than $18 billion in bonuses last year as the six largest firms mounted losses of $42 billion and received $90 billion from taxpayers. It also comes as traditional arguments for high pay (talent retention and performance encouragement) are ringing hollow in an environment rich with idled financial talent.
Still, this hasn't prevented JP Morgan (JPM) CEO Jamie Dimon from shedding crocodile tears. He said that it's "unfair to talk about us as one," referring to his bank's robust health compared to fallen competitors like Lehman Bros. and Bear Stearns. "Not every company was responsible."
Well, actually Mr. Dimon, the mortgage-related bad debt problem is systemic. Everyone was involved and everyone was responsible. The reason all the banks were forced to receive funds from the bailout package was to prevent the bad banks from being identified. This would have prevented counterparties from trading with or lending money to the troubled firms -- thereby precipitating the crisis.
Last month's grilling of Federal Reserve Vice Chairman Donald Kohn by Congress was related to this. Citizens are outraged that the entire financial industry is being bailed out with lax oversight and no accountability. This prevents the worst of the bunch from being identified and publicly shamed.
Naturally, some are running to the defense of financial executives with warnings that the cap will keep firms from accessing bailout funds and prevent top talent from staying in troubled banks. This is wrong for a number of reasons. First, banks have no choice but to accept bailout assistance whether it comes in the form of increased equity capital, insurance against further asset losses or purchases of the most heavily marked-down credit instruments. Attempts to recapitalize in the private market failed miserably earlier, and as the housing crisis deepens, there is no reason to think global investors want more exposure to toxic American mortgages.
Second, what alternatives do these "smart executives" have at this point? Oppenheimer's uber-analyst Meredith Whitney believes that the people attracted to the industry because of the pay will have no reason to stay if the feeding trough runs dry: "No one goes into Wall Street to save the world." What she left out, most importantly, was what other industries could accept an influx of ambitious derivative modelers, brokers and traders and match the $145 billion in bonuses earned between 2003 and 2007. The answer is none.
Image credit: SEIU
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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