The bankers and the bureaucrats

Members of AIG’s financial-products unit should take heart. Yes, Obama administration pay czar Kenneth Feinberg is coming down on them with the awesome power of his czardom, dictating that their pay not exceed $200,000 a year. In Wall Street terms, this is so draconian, they might as well be forced to earn whatever they can get by begging on street corners and finding leftover change in pay phones.

Feinberg’s compensation crackdown on the country’s seven most bailed-out firms is foolhardy yet understandable. Since all employees of Bank of America and Chrysler owe their jobs to the government, Feinberg is justified in bending them to his whim. And whim is the right word — Feinberg is not omniscient enough to know what traders or executives should ideally be paid. The most talented employees in Feinberg’s fiefdom will pick up and depart for better-compensated pastures. Banks like JPMorgan Chase and Goldman Sachs, as well as hedge funds, will reap the talent windfall.

Besides placating the aroused gods of anti-Wall Street populism, Feinberg’s crackdown is motivated by the belief that out-of-control compensation rewarded recklessness and caused the financial crisis. It’d be nice if this were true. Then we could limit pay and derive not just psychic satisfaction from it — take that, Masters of the Universe! — but tell ourselves we’re making the system sounder. Alas, it’s not so simple.

By and large, executives didn’t blow up their firms in the hopes of grabbing world-shaking bonuses and then leaving; they blew up their firms because they got caught up in the bubble mentality and thought their risks weren’t as dangerous as they proved. Jeffrey Friedman, the editor of Critical Review, points out that bankers were usually compensated in stock as well as bonuses, and had no interest in seeing their stock wiped out. They managed to flush it anyway.

In general, it’s not a good idea to run a financial system on the basis of inflamed popular sentiment. For a while, Citigroup was saddled with an employee on track to become America’s mosthated man, Andrew J. Hall. A standout in Citigroup’s trading division, Hall was due a $100 million bonus after earning $2 billion for Citigroup over five years. That’s a deal most any firm would want to take, but not TARPed-up Citigroup. In a senseless business decision but shrewd PR move, it simply sold off the entire trading division that had at one point been responsible for 10 percent of its net income.

All that said, it doesn’t take Barney Frank to find it unseemly that Goldman Sachs and others are already back to boom-time levels of compensation. Things wouldn’t look so cheery at firms like Goldman if it weren’t for all the direct and indirect government aid. The Economist writes: “They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties.... Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail.”

If the bankers have a secret plan to spread ill-considered Feinberg-like rules throughout their industry, it’s progressing nicely. 

— Rich Lowry is editor of the National Review.