— Not many stories this year have touched a nerve with readers as much as executive compensation.
To many, it seems perfectly reasonable that companies which were bailed out with billions in taxpayers' money should pay their top executives by the government's rules.
The handful of generously compensated men who run these broken enterprises seem to feel differently.
Take, for example, the guy now in charge of AIG, the insurance behemoth clinging to life thanks to a $90 billion taxpayer-funded bailout.
It seems that AIG's CEO Robert Benmosche has told colleagues he’s fed up with the government’s moves to limit pay packages for top executives at his firm.
This at a time when Goldman Sachs reportedly is ready to divvy up $23 billion in bonuses and amid word that Bank of America CEO Ken Lewis abruptly resigned because he just couldn't take having Uncle Sam as a boss after $25 billion in taxpayer funds kept his bank afloat.
The leaders of these giant corporate welfare recipients have been arguing that they need to pay managers of government-owned banks and other bailout beneficiaries extremely well to compete for their talents in the cutthroat global financial services industry. If they don’t attract such talent, this argument goes, taxpayers will lose their investment.
The guys have a point — up to a point. It’s not uncommon for top money managers — people who make a living by taking a big pile of money from over here, slicing off a little piece for themselves, and then moving it over there — to make 10 times Mr. Benmosche’s $10.5 million annual pay package — which includes $3 million in cash. Even after the worst financial downturn since the Great Depression, there are enough of these folks to fill several large country clubs.
But taxpayers have provided the big pile of money being shuffled around, so readers seem to think it is reasonable to apply a different set of rules.
Relying on an all-volunteer army of bank managers to clean up the mess Wall Street made probably won’t get the job done.
But the argument that we need to continue to overpay the overseers of what are, essentially, government-owned banks falls apart on several levels.
First is the assumption that talented bankers only come with gigantic price tags. It turns out there are thousands of banks — including pretty much any bank still standing that didn’t get bailed out — that are being run by reasonably competent people who don't make enough in one year to buy a Major League Baseball team. If you’re managing a bank that's survived the crisis this far, you must be doing something right.
Some of the too-big-to-fail banks are in worse shape than most of the too-small-to-bail-out ones that didn't blunder into disastrous pools of risk. Big paychecks, it turns out, have little to do with performance. Worse, spending hundreds of billions of tax dollars to prop up the biggest banks may have only masked deeper problems and postponed the day of reckoning for the weakest of the biggest.
Further, there are thousands of very talented people who work for the biggest bank of all — the Federal Reserve — for a fraction of what the best-paid bank executives make. Government bankers know they leave money on the table when they go to work for the government. But they’re motivated by something more than the desire to make the most money they possibly can. In a quainter era, this used to be called “public service.”
The idea that a highly talented, seasoned executive would take on the job of turning around a troubled, government-owned bank is not a flight of idealistic fantasy. In fact, that’s exactly what happened the last time the nation’s banking system succumbed to crisis in the late 1980s.
The late William Seidman, after making his fortune running one of the top 10 accounting firms, was appointed by President Ronald Reagan to clean up the mess made by bankers who made hundreds of billions of dollars in bad bets on commercial real estate. As chairman of the newly created Resolution Trust Corp., Seidman quickly shut down the worst thrifts, sold off what assets they had left and is widely credited with having the saved taxpayers hundreds of billions of dollars. He did all this on a government salary. (Full disclosure: Seidman was a colleague of mine at CNBC.)
The argument also is being made that we need to lavish big salaries on bailout bankers because unwinding the complex mess created by the wave of securitized lending behind the housing bubble requires top-notch (read: the highest-paid) professionals.
But generating bank profits today is easier than it’s been in modern history, thanks to the unprecedented move by the Fed to shove overnight interest rates down to zero and keep them there indefinitely. If you can’t make money borrowing at zero and charging 29.99 percent on a credit card, maybe you’re in the wrong line of business.
There’s an even bigger problem with the argument that too-big-to-fail banks need the freedom to offer colossal pay packages to the managers of these behemoths. Bank bloat was a fundamental cause of the financial meltdown. As the government removed the barriers to bulking up, it forgot to create firewalls to protect the broader financial system from the tremendous concentration of risk. (Or, multiple attempts by some members of Congress to do so were blocked by the financial services industry. Take your pick.)
We don’t need another round of rocket scientists to build these banks up to their former glory. We need to come up with a new set of rules to prevent giant banks from sinking the global economy again. So far, two years after the collapse began, progress on that front has been painfully slow.