“SHE ASKS ME WHAT I MAKE…”

9/19/09

The Fed has come up with a plan to review, and maybe veto, the compensation plans of U.S. banks. The plan extends far beyond the pay packages of CEOs and COOs and extends far down the organizational (but not necessarily the compensation) ranks of bank personnel to include traders, lending officers, and other bank personnel. Further, the Fed’s oversight power would extend well beyond the mega-banks, the downfall of which would supposedly create so much havoc for our economy, to reach every Fed regulated bank in the country.

This proposal is being advanced partially in response to international pressure to impose even tougher scrutiny over bank pay, a subject bound to arise in the upcoming G-20 meeting in Pittsburgh, partially out of genuine concern about another financial “meltdown,” partially as part of an ongoing turf war with other government agencies over regulation of banks, and partially out of desire of the Fed, which, under Obsequious Ben Bernanke has become little more than an arm of the Bush/Obama administration, to extend government control even further into our nation’s financial sector.

As regular and longtime readers know, my stance on government regulation of pay in the private sector is that the whole notion is appalling, but once the banks and other financial institutions took the government’s money, they opened the door to such oversight. Until this proposal, such financial equivalent of a colonoscopy by the gentle hands of the federal government could have been avoided simply by refusing to take bailout money. Given the pusillanimous leadership of the financial sector, however, such testicularity was out of the question. So the whiners and the criers who run our nation’s financial sector took the money and, implicitly, accepted the scrutiny that came with it, and so were in no position to complain.

However, this latest Fed proposal is not tied to federal bailout money, and the proposed control over compensation would not be justified by the old, and understandable, “he who pays the piper calls the tune” adage. Instead, the Bernanke Fed is justifying this massive expansion of government power by invoking its powers as the “safety and soundess” regulator for banks. The Fed argues that it merely wants to avoid situations in which bank personnel are compensated for engaging in excessively risky activities that might result in imperiling banks that would then have to be bailed out in a redux of the “capitalism on the way up and socialism on the way down” approach to the financial system of which the Bush administration was so fond. Thus, the Fed argues, this micromanagement of bank compensation levels is essential to keep our banking system safe and sound.

This explanation of its rationale for expanding the government’s already far too intrusive role in the financial system is clearly a rationalization rather than a genuine explanation. If the Bush/Obama administration, and its lackeys at the Fed, were so concerned about the safety and soundness of the banking system, it could advance that salubriousness by announcing that the next time those tough guy champions of free market capitalism on Wall Street come begging for a bailout, the approach the federal government will take will be executed through an expanded version of the RTC of the late ‘80s and early ‘90s. The new RTC would seize those banks that get into trouble, fire their boards and their executives, and break the banks up into good banks and bad banks, auctioning off the assets of the bad banks to real capitalists rather than the faux free marketeers who speak so admiringly of the virtues of the marketplace while remaining comfortably ensconced in their government coddled multi-layered leviathans. Further, the mechanisms necessary to quickly implement such a new RTC approach should be put in place now in order to show the banks that the government is serious and to obviate the explanation given for not employing such an approach when things got messy a few years ago; i.e., that we simply did not have time to deploy a new RTC and thus our only alternative was to ladle out seas of spondulicks to the very scoundrels and mountebanks who did so much to aid and abet our self-immersion into the soup of financial dystopia from which we are, according to the experts, currently emerging.

Faced with the prospect of losing their lifetime sinecures, the people who run these financial goliaths will suddenly become very assiduous about keeping their institutions safe…and the taxpayers protected. Of course, I am assuming here that the people who ostensibly run these institutions actually understand what their traders, investment bankers, sales people, and loan officers are doing. This is perhaps a far too brave assumption.

This solution, like most of those I propose, will never be implemented because the Bush/Obama administration, and most of Congress, essentially sees its role as coddling Wall Street rather than protecting the taxpayers. The idea of actually throwing their paymasters out of the very positions from which those paymasters can dispense such abundant largesse to their puppets in Washington would be the political and financial equivalent of matricide to a career Washington politician.