Obama’s Second Biggest Test: Reforming Wall Street, and Why Early Indications Aren’t Hopeful

fingerCitigroup — the giant Wall Street bank still on life-support courtesy of $45 billion from American taxpayers — wants to pay its 25 top executives an average of $10 million each this year, and award its best trader $100 million. Whaaaaaat?

Second only to healthcare reform as a test of Obama’s toughness and resolve is reform of Wall Street. And like the healthcare industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. So what can we learn by what’s going on now, regarding pay for the top brass at big “too big to fail” banks?

After the bonus plan for AIG executives blew up last year, a law enacted last February requires that any “too big to fail” institution that’s received bailouts get Treasury’s approval on pay for their top earners. Companies are supposed to file their pay proposals no later than today. So far, most are seeking around $7 million each for their top 25.

As you can expect, Citi and the rest argue that $7 to $10 million is necessary in order to keep and attract “talent.”

Tragically, Treasury has already given in on this one. In judging whether a proposed pay package is appropriate, Treasury has decided to be guided by “comparable” pay packages in the industry. This means Ken Feinberg, appointed as special master to decide on a case-by-case basis, will be the flak-catcher. He’ll take the heat when he approves pay packages that, while perhaps not as ridiculously exorbitant as the ones the banks seek, are still bonkers because they’re roughly “comparable” to the wild pay on the rest of the Street — thereby protecting Geithner and Geithner’s boss from the public’s outrage about bailing out these bankers and then having them earn princely sums at a time when most peoples’ jobs are at risk and their earnings are shrinking.

“Comparable” pay is a ridiculous standard to begin with, and the argument that $10 million, or even $7 million, is necessary to keep talent is absurd on its face. I needn’t remind you that over the last several years Wall Street has exhibited a truly astonishing lack of talent. So why do any of Wall Street’s big banks have the audacity to offer this sort of pay? Because the Street is back to the same, relentlessly untalented tactics that made it lots of money before the meltdown — which also forced taxpayers to bail it out, caused the world economy to melt down, and tens of millions of people to lose big chunks of their life savings. Goldman Sach’s chief financial executive asserted recently that its business model hadn’t changed one bit from what it was before the meltdown. Goldman is making big money again, but its business model got it into such deep trouble it needed a multi-billion dollar taxpayer bailout as well as a bailout of AIG, which owed it money. Without these bailouts, there’d be no “talent” because there’d be no Goldman, no Citi, no Street.

Even if you believe Wall Street needs “talent,” I suspect that firms such as Citi can get all the talent they need for far less than an average of $10 million each. Maybe even $1 million? The whole system of “comparable” pay is propped up by a zero-sum self-perpetuating competition in which the price of so-called “talent” is determined by how much every other bank is willing to pay for “talent.” If every bank decided to pay $1 million, that would be the “comparable” price of talent on the Street. I mean, it’s not as if this economy has so many other $1 million-a-year positions begging for Wall Street executives and traders.

[ad#write-better-468×60]There’s a more basic issue here. The fact that these big banks have been judged “too big to fail” means their top executives and traders know they can take even bigger risks now, because we taxpayers will bail them out. So inevitably part of their firm’s earnings, based on such risk-taking, now come as a result of this public insurance policy. When risks pay off, as many are doing now that the stock market is showing signs of life, they reap large rewards. When the risks turn really bad, you and I and other taxpayers will pick up the pieces.

The insurance these “too big to fail” banks are receiving makes them more like public utilities than private firms. As such, not only is it entirely appropriate for government to review their pay but also to make sure pay is kept within strict bounds — not $100 million, not $10 million, not $7 million, but far, far less. As long as you and I are cushioning them, their top brass should be earning just about what the top brass of any public utility earns (which, when I last looked, ranged from $100,000 to $600,000).

The big banks have a choice, of course. They could opt out of the “too big to fail” system. They could break themselves apart (or invite antitrust agencies to do the breaking for them) so they were no longer too big to fail and won’t be bailed out the next time they make hugely stupid mistakes. Then they could award their executives and traders as much money as they wanted and as the market would bear — because then they’d be part of the free market instead of wards of the state.

robert_reich.jpgWill this happen? Don’t bet on it. Note how easily Treasury caved in on the “comparable” pay standard. In coming months, other financial regulators will decide appropriate pay guidelines for the institutions they supervise. Two weeks ago, the House passed legislation giving regulators even greater authority over compensation packages. Given what’s happened to date, there’s no reason to suppose Wall Street pay will be reined in at all.

by Robert Reich

This article first appeared on Robert Reich’s Blog. Republished with permission


  1. says

    Nice commentary on Wall St. talent. The freakout last year over losing this precious commodity in a “brain drain” was hilarious. Oh, dear god, no! Less BS financial innovation and profits at the cost of municipalities, individuals, and small businesses? What ever would we do?

    It would be an insult to used car salesmen to compare some of these guys to them.
    .-= Adam´s last blog ..Links: Iceland, housing bubble, and Hubble =-.

  2. says

    As long as Treasury is populated by Wall Street types who continue to genuflect at the feet of the mega-banks and who treat the heads of those banks as the oracle at Delphi, no change will ever happen. The administration (or the next one) has to be brave enough to break the chain and bring in real reformers who will make the necessary changes and “common wisdom” be damned.

    Then comes the real job . . . convincing a Congress that has gone to Delphi regularly (and been richly rewarded for it) to consider working for the people who elected them, for a change. Good luck on that one!!

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