Goldman Sachs Hatred
Might Cost You Your Bonus: Jonathan Weil
Commentary by Jonathan
July 30 (Bloomberg) --
Put away your pitchforks. The business of bashing banker
bonuses has swerved into dangerous territory.
It’s one thing to curse
Goldman Sachs Group Inc. for setting aside $11.4
billion, or 49 percent of its revenue, for employee
compensation during the first half of this year. Taking
a huge Wall Street investment bank’s name in vain, for
better or worse, has become socially acceptable
behavior. Heated words are understandable.
taxpayers would bear the costs if a behemoth such as
Goldman, JPMorgan Chase & Co. or Morgan Stanley were to
blow up one day after paying its employees billions of
dollars to take risks that they ended up misjudging.
This is why many Americans want the Federal Reserve and
other regulators to start scrutinizing employee-compensation
incentives at too-big-to-fail companies. The point
isn’t to protect the companies, but the public at large.
reasonable, if mildly populist, message must have spun
out of control by the time it reached
Barney Frank, chairman of the House Financial
Services Committee. While lots of people got angry about
the bonuses paid by American International Group Inc.
and the like, there has been little demand for lawmakers
to respond by subjecting every pint-sized financial
institution’s pay practices to government review. If
Frank and his fellow Democrats have their way, though,
this is what we soon might have.
Under a bill approved
this week along partisan lines by Frank’s committee,
seven regulatory bodies -- from the Fed down to the
National Credit Union Administration Board -- would be
required to enact new rules prohibiting “any
incentive-based payment arrangement,” that “the
regulators determine encourages inappropriate risks.”
The rules, with details
to be determined later, would cover every U.S. financial
institution with at least $1 billion of assets. In
addition to banks, credit unions and other financial
companies, it also could wind up covering hedge funds.
bill, which goes further than the Obama
administration’s proposals to regulate compensation,
defines an inappropriate risk as one that “could
threaten the safety and soundness of covered financial
institutions,” or that “could have serious adverse
effects on economic conditions or financial stability.”
Hedge Funds Too
Each of the various
regulators, including the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corp.,
would be charged with enforcing these rules at companies
under their respective jurisdictions. Hedge funds would
fall under the Securities and Exchange Commission’s
oversight, should Congress approve a separate White
House proposal requiring them to register as investment
Perhaps some investors
might enjoy watching the SEC order their fund managers
to stop charging them 2 percent of assets and 20 percent
of profits for achieving the remarkable feat of matching
the Standard & Poor’s 500 Index. Let us remember,
though, that hedge funds didn’t threaten to bring down
the global financial system, at least not this time.
Those companies, to
name a handful, were Bear Stearns Cos., Lehman Brothers
Holdings Inc., Merrill Lynch & Co., Fannie Mae, Freddie
Mac, Citigroup Inc., Wachovia Corp., Washington Mutual
Inc. and AIG.
The average American
doesn’t care if the guys who ran no- name shops such as
Downey Financial Corp. or
Temecula Valley Bancorp Inc. turned their banks’
stocks into donuts and got carted away by the FDIC. It
was the regulators’ job to prevent their lending
practices from getting out of control in the first
place, whether they got that way because of perverse pay
incentives or for other reasons.
The regulators blew it.
Failures happen. That’s what the FDIC’s insurance fund
is for. The government shouldn’t overreact to its own
gross negligence by imposing systemic-risk controls on
companies that don’t pose systemic risk. There’s also no
reason to believe the regulators would be better at
evaluating future risks, just because they have new
powers to wield.
That this legislation
casts such a wide net means its impact would be spread
across too many places where there’s no need.
Bureaucrats would be authorized to pass judgment on the
intricate details of some small-fry lender’s Christmas
checks for junior loan officers, even if the company
didn’t have public shareholders and never took money
from the government’s Troubled Assets Relief Program.
It wouldn’t matter if
the company posed no risk to the financial system, or if
the adverse economic effects of its failure would end at
the county line, or if the civil servant assigned to
mind its pay practices wasn’t qualified to do more than
complete a checklist. Judging by the hundreds of zombie
banks the government isn’t bothering to seize now --
many of them still classified as “well capitalized” --
there aren’t enough able regulators to go around as it
This unabashed reach
for wage controls was tacked onto a perfectly good
proposal that investors have been fighting for years to
get enacted -- a requirement that all publicly owned
companies hold non-binding shareholder votes each year
to approve their executives’ compensation packages.
Public shame is a powerful weapon. As badly as many
shareholders want so-called say-on-pay, though, this
isn’t a fair exchange.
The next compensation
package the government goes after might be yours.
Weil is a Bloomberg News columnist. The opinions
expressed are his own.)
To contact the writer
of this column: Jonathan Weil in New York at
Last Updated: July
29, 2009 21:00 EDT