A $500,000 cap on CEO pay at banks that have taken billions in taxpayer money?
It's not enough.
"Off with their heads!" yelled Wonderland's Queen of Hearts. Why isn't there ever a bloodthirsty sociopath with dictatorial powers and no regard for legal niceties around when you need one?
And heads do need to roll. Not just to satisfy a widespread desire for revenge on the masters of the financial universe who got the world into this mess -- although that's certainly a plus. But because the greedy, shortsighted and, in some cases, downright crooked people must be punished this time. That includes everyone from middle-class speculators who lied to get mortgages they couldn't afford to CEOs who took extreme risks because they thought they'd be out the door before the pyramid collapsed.
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And I mean punished by more than just a slap on the wrist. If they aren't, we're just asking for a replay of this mess in five to 10 years, and, worse, we're telling the investors of the world that they shouldn't trust the U.S. with their money. Those aren't good messages to send when you plan to borrow $1.5 trillion to $2.5 trillion this year alone, as the U.S. Treasury will do.
The emperor has no clothes
The Obama administration's plan to cap CEO compensation at $500,000 got its share of headlines. With the Treasury about to unveil Troubled Asset Relief Program II, a second $350 billion-plus (hundreds of billions of dollars in "plus," in my estimation) plan to bail out the financial system, the move is an attempt to build political support for a deeply unpopular effort. The White House and Congress are being buried under a mountain of protest at any further bailout.(For the likely contents of Bailout II, see my Feb. 3 column, "On the way: A bigger, broader bailout.")
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But the deeper I dug into the details, the more inadequate the cap seemed. By the time I'd finished, the plan was insulting, a paper cut delivered when Madame Defarge is demanding the guillotine. Here's why:
- The cap won't apply retroactively. If your bank has already received its $45 billion in taxpayer money, there's no cap on pay.
- The cap won't even apply to all banks that take taxpayer money in the future. A bank that takes billions in "normal" bailout money from TARP II could get around the cap by disclosing pay and by holding a nonbinding shareholder vote on the pay. (It's nonbinding, so why wouldn't a company that wanted to pay more hold the vote? Because they'd be too embarrassed to pay the higher salary if they lost the vote? These companies, embarrassed? Remember the Citigroup (C, news, msgs) $50 million jet?) Only if your bank took "exceptional" assistance from taxpayers in the future would the cap be mandatory. It's not clear how the proposal would separate "normal" from "exceptional" bailout billions, but however the term is defined, the cap clearly affects fewer companies than it seems.
- The cap doesn't apply to all compensation -- just to salaries. Banks could still give CEOs huge bonuses, but the bonuses would have to be in the form of restricted stock that couldn't be sold until after the company had repaid taxpayers.
- And finally, and this is perhaps the most troubling, the cap, if finally triggered, would apply only to the top 25 or so executives at any bank. In other words, some Wall Street rocket scientist in charge of slicing and dicing subprime mortgages could make $5 million as long as he or she was far enough down the corporate ladder. Makes a lot of sense, right?
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But don't take my word for it. Consider that Wall Street breathed a sigh of relief after the Obama administration announced the plan: "It's not as bad as we thought," one banker told the Financial Times. "We were all fearing a comprehensive cap on all bonuses."
That's it? That's the punishment for the reckless risk taking that pumped up the housing bubble, turned a decline in home prices into a global financial crisis that could shake banks and governments to the core, set off a credit crunch that brought the global economy to a standstill and has necessitated a tidal wave of taxpayer bailouts that will saddle generations to come with a mountain of debt and lower economic growth?
Doesn't somebody in the new administration know that this crisis has severely damaged global confidence in U.S. financial markets and that we have to take extraordinary steps to restore confidence in the system? (Certainly, no one in the previous administration acted as if they understood that.)
Continued: The view from outside
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