Controlling Banker Compensation

TW: I thought financial industry compensation was messed up years ago, nothing in the past year has changed my mind. I have met many talented people in my life and career including many in finance. I assure you those in finance are no more talented than the rest. This latest gig where but for the grace of massive governmental intervention every damn banker would have ended up like Lehman partners. And where due to the horrible under-capitalization of banking entities throughout most of the world, the yield curve is being held low at the short end so that banks can mint money like crazy but the bankers now feel entitled to record bonuses is f'ed up. Why these folks think it is their own freaking brilliance that is driving their now highly profitable situation is beyond me although given their pervasive arrogance it is hardly surprising. Yet...

Yet...what to do. Without the government intervention and low rates, your ATM card would have failed to work at some point last October and the economy would be at best in a depression.

The pieces below deriding the latest moves to limit pay are more or less accurate. Folks sense (rightly) something is wrong but I do not believe anyone really knows what to do about it. The tea baggers march against "Wall Street" but raucously oppose "government intervention". The left generally has no clue on how to deal with finance other than to "protect consumers" which usually translates into marginally useful to mostly useless regulations which have little to do with how power is accumulated and money disbursed on amongst financial oligarchs.

I certainly have no suggestions.

From Marginal Revolution (via Pethokoukis):
"There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?"

From Naked Capitalism(also via Peth):
"The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.


If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments."