Caps On Wall Street Compensation

In this post, we cite Citigroup (C), Bank of America (BAC), J.P. Morgan (JPM) and Goldman Sachs (GS).

In response to the public outrage over Wall Street bonuses from companies that got billions of TARP money, the Obama Administration is proposing limits on executive compensation. The details of this appear that it is mostly about the theatrics and image than about the underlying solvency of the banking system.

Under the plan, compensation caps would apply to only firms that require “exceptional assistance” from the government in the future.  While this term has not been defined, it appears to mean firms like Citigroup (C) and Bank of America (BAC) that had to come back to the trough a second time, not to firms like J.P. Morgan (JPM) that just took the initial TARP allocations.

It would not even apply to Citigroup, unless they have to come back for a third dip into the pond of liquidity, since past “exceptional assistance” is grandfathered. It also applies to only a relative handful of top executives, and on Wall Street, the biggest paychecks do not necessarily go to those in the top boxes on the organization chart.

The $500,000 limit would apply to only cash compensation; firms could pay unlimited amounts in the form of restricted stock, although the executives could not sell the stock until after the TARP funds are paid back. At best, this is a first step in rolling back the excesses of Wall Street.  At worst it is a way of co-opting the stronger measures being proposed by Senators Clair McCaskill (D-MO) and Bernie Sanders (I-VT).

The core problem that the TARP attempts to fix is the under-capitalization of the banks. A million dollars paid out to someone on the bond desk is a million dollars of capital the bank does not have. Billions of dollars paid out in common dividends are billions of dollars that the bank does not have in capital.

The country needs the banking institutions to survive; it does not need the executives of those institutions to become wealthy beyond the dreams of Croesus, and it does not need for common shareholders to be protected.

Those who argue that cutting compensation will cause all the talent to leave must answer 2 questions: Leave to go where? There are tens of thousands of very experienced financial people on the street right now and several major firms are no longer in the business. Are people going to leave Goldman Sachs (GS) to go the Lehman Brothers?  To Bear Stearns?  And secondly: What “talent”? Could 2,000 people picked at random out of the phone book and put into the top jobs in the banking industry have screwed up the system more than the current crew has? I doubt it.

Let us hope that this is only the first step.

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