"The latest plan tries to satisfy public demand for controlling excessive pay while not spooking Wall Street, which the administration is relying on to help buy the troubled mortgage-backed assets at weaker banks." (NYT, June 11)
We're seeing things I thought we'd never see. The public is so outraged at outrageous Wall Street salaries that Congress jammed a provision into the stimulus package that mandates the Obama Administration to issue rules to curb compensation. While the effort targets troubled financial institutions that have gorged themselves at the government bailout trough, many Democrats want these controls to apply "at all companies, not just those receiving federal money." (NYT June 12 )
As a result, Treasury Secretary Timothy Geithner is appointing a salary czar, Washington lawyer Kenneth R. Feinberg, who will be in charge of clamping down on compensation packages at AIG, Citigroup, Bank of America, General Motors, Chrysler and the two auto finance arms. If these failing companies keep salaries at $500,000 or less per year, Feinberg will automatically approve them. If not, he is empowered to take a closer look... and change them.
How the mighty have fallen!
To the average American, $500,000 a year is an enormous sum. But on Wall Street it's peanuts. When you're accustomed to hauling in seven or eight figures, how the hell are you going to get by on a half mil? The maintenance on your Fifth Avenue condo might be more than that! So you can well imagine that the rest of Wall Street does not want that pathetically paltry wage control idea to spread anywhere near them.
What can they do about it? Plenty. Wall Street has bargaining leverage over the Obama Administration and they are using it right now.
To get lending going again to the real economy, the Obama administration believes it must settle the toxic assets problem once and for all by removing the garbage from banks' balance sheets. But the Administration doesn't have enough TARP money to do it, and it doesn't want to ask Congress for more money, not least because Congress probably wouldn't supply it. So the Treasury Department has devised a complex "public-private" partnership plan that insures private investors against loses if they bring capital into the game to buy up this junk from the ailing banks. It's a sweetheart deal that could deliver enormous profits to private investors. (Advertisement: If you want to understand how $300 billion of troubled subprime loans exploded into several trillion dollars of toxic assets, you'll find it spelled out clearly in my book, The Looting of America.)
Both the buyers and the sellers of these toxic assets have basically gone on a capital strike. The sellers - the ailing financial firms - are not eager to sell because they don't won't to book the losses. Also recent changes in accounting rules that modified "mark to market" pricing have made it less onerous for financial companies to hold on to the junk and wait for better prices.
The potential buyers -- like hedge funds and private equity firms -- don't want to get involved because they worry, and rightfully so, that the public may wonder why the government is guaranteeing profits for rich firms with even richer executives. They dread the thought of public hearings that might expose how they make money hand over fist while the economy is in tatters. So both the buyers and sellers are walking a quiet picket line to "encourage" the Obama administration to put a lot of wiggle room in those compensation controls. The blackmail involved is not very subtle.
We're going to hear a lot about compensation reforms to line up risk and reward, get shareholders involved, create more independent compensation committees and avoid bonuses based on phony profits. But the proof is in the caviar: When all is said and done, how much moolah are they taking home? I'd wager that their strike doesn't end until Wall Street executives get what they think they're worth.
And there's the rub. What they think they're worth and what the public thinks are very different. Most people don't understand why the captains of finance should make so much money, especially after wrecking the economy. With nearly 30 million unemployed and underemployed , and growing, there's not much tolerance for sky-high compensation packages.
When the word leaks out about how much these folks will get paid this year and next, there could be hell to pay... right around election time.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It. (Chelsea Green Publishing, June 2009)