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Caps and change

By Daniel M. Ryan
web posted February 9, 2009

The proposal that salary caps be a price of additional bank aid was almost unique amongst the ones issuing from D.C. last week: it got solid bipartisan support. The more-ballyhooed stimulus package has gotten Congress squared off by party lines, not to mention the pundit circuit. On the other hand, President Obama ordering a $500,000 per year salary cap on top officers in to-be-aided banks only drew objections claiming impracticability. Since there's a gut-level moral argument for it, those criticisms ran a little hollow.

Corporate Welfare…For Real

Yes, the various TARPs are corporate welfare. Like all welfare programs, it's been subject to a means test: only banks in serious trouble get aid. It's like a welfare program in a more twisted sense, too: in order to preserve the dignity of the recipients, at least one recipient was, er, encouraged to apply. The ones that are truly needy thus felt fewer stigmas in applying.

More seriously, there has already emerged a certain stigma in the banking community. Many smaller banks have refused TARP aid. This refusal is a change from right after the program was unveiled: some financial institutions, like E-Trade, applied because they thought it would bolster their fortunes. This march is now a march in reverse; financial institutions that didn't get any TARP money, like E-Trade, haven't suffered all that much from being turned down. 

The moral basis for the salary cap results from the similarity between TARP and welfare, or unemployment insurance. The salary cap, as well as the effective suspension of dividend payments on recipient banks' common stock, does resemble the various responsibilities that welfare recipients are enjoined to assume. Just the announcement of the cap prompted the CEO of Goldman, Sachs to pledge to pay off its TARP preferreds as quickly as practicable. Last Friday, in a CNBC interview with Maria Bartiromo, Ken Lewis said flatly that Bank of America will not be asking for any more assistance. The salary cap has obviously had a real deterrent, making the critics of it right in their own way.

Loophole and Change

What if one or more needy banks have to take more aid, though? Will the cap have the talent-draining effect so widely predicted?

Common sense says "yes" to both questions, and there would be no reason to disagree had there not been a loophole. An aided bank can go over the half-million mark, but only if the overage is in the form of restricted stock. Any stock bonus issued while under the constraint can't be sold until the new TARP money is paid back. As long as this condition is followed, the compensation cap can be compensated for.

This loophole didn't deter the critics, and would likely slow but not staunch the talent drain. Nevertheless, it contains an intriguing possibility if one or more banks use it and recover.

Wall Street could be described, if lightly, as an environs of highly-paid nomads. Talent shuttling from firm to firm is not only customary, but almost expected. Only Hollywood's professionals are more nomadic.

The underlying reason is the same for both otherwise discordant groups. Some time ago, both Hollywood and Wall Street professionals discovered that loyalty cost; the price of single-company security was a lot higher than previously realized. Pro athletes, of course, have discovered the high opportunity cost of security too.

It seems a permanent change has been effected: that shift even has a revolutionary tinge, in the attitude that only a stupe would sign a long-term fixed contract and stick around for its duration. Nevertheless, Wall Street nomads and bonus structures tailored for them have at least failed to stop the current bank mess from erupting. There's a case to be made that an industry of nomads causes bigger bubbles because the restraint of the stakeholder is gone.

George Will was right to observe that statecraft is a kind of soulcraft. If the salary cap does go through, then the remaining nomads in the firm will have to set down real roots if they want comparable compensation. They doing so will induce a longer term orientation which will have both good and bad effects for their firms. On the one hand, long-term thinkers tend to be more bureaucratic and cautious. On the other hand, they have more incentive to be careful and prudent.

The result will presumably be suboptimal, even adjusting for the sands the aided firms will plow through. The Wall Street loyalist tends to be the slow horse; that's the way to bet. What if, though, the longshots pay off? We could see a return to the Organization Executive, updated for all the change we've been through since the real articles packed in their wingtips. ESR

Daniel M. Ryan is an irregular columnist for LewRockwell.com, and has an undamaged mail address here.

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