Wall Street and its allies are in a tizzy over the Obama administration’s proposed $500,000 limit on executive pay, saying it will threaten their ability to attract and retain executive talent. I do not mean to deprecate Wall Street executives when I point out that the far higher level of compensation they received in recent years has not exactly elicited talent — at least not talent for much of anything other than the accumulation of personal wealth at the expense of millions of investors and of the economy overall. Wall Street compensation has been geared to short-term bets on high-leveraged investments, after which players quickly collect any winnings and run for cover. Many Streeters grew rich in the process but most of the rest of us are undeniably poorer. One additional pernicious side effect over the years has to lure many of America’s most talented young people into prestigious MBA programs leading to jobs on the Street at starting pay higher than most Americans ever dreamed of and, with luck and hard work, subsequent shares in the firms’ Ponzi-like pickings.
If one is looking for silver linings in the devastation of Wall Street it may be that this sort of talent will henceforth be less demanded and less rewarded — not because of Obama’s plan to limit pay of executives living off public bailouts but because the Street has imploded. The plan itself is a bit of a ruse. If truth be told, the $500,000 seems little more than a symbolic gesture designed to reassure the public that the large amounts about to be asked for the next stage of bank bailout — likely far more than the $350 billion remaining in “TARP” (more on this in a moment) — will not simply feather the nests of those who created the mess in the first place. The guidelines don’t actually put a cap on total pay but only on salaries (usually a small portion of total pay), and even then apply only to firms receiving “exceptional assistance” — presumably especially large bailouts in the tens of billions of dollar range, such as went to Citigroup and AIG — rather than to those receiving run-of-the-mill bailouts amounting to, say, under ten billion. Most firms getting bailouts may continue to pay their executives whatever they want to pay them as long as they disclose it to their shareholders and give shareholders an opportunity to express their views about it.
So why is Wall Street so upset about the faux $500,000 limit? Precisely because of its symbolism. It’s as if the administration is planning to subject executives of the banks that take the next dolop of bailout money to a kind of public shaming — the equivalent of a scarlet G, for greed — when the executives don’t view the bailout that way at all. Few if any of them think they did anything wrong in the first place; they don’t even view the bailout as a “bailout” but rather as a necessary injection of liquidity to keep credit markets going.
By the way, get ready for some really horrifying bailout numbers. Goldman Sachs — not one to exaggerate the overall problem — recently estimated the total value of troubled U.S. bank assets to be $5.7 trillion. Hence, do not be surprised if the next stage of the bank bailout dwarfs the cost of the stimulus package. My guess is that’s reason the administration wants the stimulus bill approved before it fully unveils the price tag of the next bank bailout.