Three things about the Obama administration’s publicity-seeking move to curb executives’ pay at bailed-out companies: It is inevitable, it is stupid, and it is inevitably stupid.
Even as President Obama was stumping to provide a bit of job security to former Goldman Sachs boss Jon Corzine, the president’s minion, Kenneth Feinberg, was preparing to “collect scalps,” as Wall Street critic Yves Smith aptly put it. Mr. Feinberg has decided that dramatic cuts are in order for the seven largest recipients of TARP funds: AIG, Bank of America, Citigroup, GM, GMAC, Chrysler Group, and Chrysler Financial. The cuts will be restricted to the 25 most highly paid employees at each firm. The average reduction will be 50 percent, and some cuts will run to 90 percent.
The measures are bound to please a certain type of bloody-minded populist, but they amount to pageantry. Many of the executives that Obama wishes to blame for the financial crisis already have left their positions, and some already have suffered financial ruination. (Weep not for Dick Fuld, but he did lose a billion dollars or so.) For those executives who accept Feinberg’s terms, these pay cuts probably will in fact amount to pay shifts: Clamping down on cash salaries and bonuses, Mr. Feinberg encourages firms to reward their top executives with restricted stock instead. That means that shareholders’ interests will be diluted while the shift does nothing to secure shareholders’ interests. The most highly sought-after talent surely will exit the targeted companies and, short of giving some presidential czar or another the power to reduce executives to indentured servitude, there is nothing that the government can do to stop them from taking very lucrative positions at firms free of the TARP taint. Wall Street is powered by financial innovation, and we are willing to bet that billion-dollar performers will be able to connect with multimillion-dollar paychecks, even under the stern gaze of the people’s tribunes.
A certain amount of political interference was inevitable, given the structure and politics of TARP, but the executive-pay opera is a distraction from more important questions of reform and oversight. There is little reason to believe that an AIG laboring under political restraints on compensation will make better investment decisions than an AIG not operating under those restraints. There is some reason to believe the opposite will be true. On questions of risk, leverage, and the threat posed by firms deemed “too big to fail”– firms either implicitly or explicitly backstopped by the United States government — these symbolic measures achieve nothing. They may in fact prove harmful: Who wants to do business with a firm that cannot pay top talent what it commands on the open market?
If this were simply a case of politicians’ grandstanding upon the misfortunes of seven deeply troubled firms, that would be one thing. If the ruins of General Motors are the rooftop from which you wish to shout your critique of capitalism, the very best of Motor City luck to you. But the Democrats wish to see these czarish pretentions extended over most of the American economy. Senator Schumer, the New York grandee renowned for his ability to squeeze campaign money out of Wall Street, wishes to see Mr. Feinberg’s pay restrictions extended to every publicly traded company in America: not every financial company, mind you, not every TARP recipient, not every bailout basketcase, but every single American company with shares trading on an exchange. Those aspirations are authoritarian, and remarkably so. Further, Mr. Feinberg intends to demand a number of structural changes at these firms — changing the way board elections are structured, forbidding CEOs to serve as chairmen, etc. — which Senator Schumer and others may well be tempted to insist upon generalizing. Wall Street’s problems are real and they are deep; Wall Street redesigned by Obama’s czars and congressional Democrats is unlikely to be an improvement. Shareholders can fire managers, but a government bureaucracy is unassailable.
TARP was an emergency measure. The emergency has subsided, and the first order of business is restoring at least some separation between Washington and Wall Street, between political power and the private economy. The love of power can prove at least as corrupting as the love of money, and the American political class does not seem likely to resist either temptation, much less both at once.