The financial crisis is now more than a year old, and Americans are still angry — angry that the economy tanked, angry that they’re out of work. But mostly, people seem outraged by Wall Street bonuses.
Seeking to assuage that ire, the Obama administration’s “compensation czar,” Kenneth Feinberg, last week announced plans to cut the pay of top executives at the seven companies receiving federal support. He has suggested that the cuts, which slashed pay for top executives by an average of 50 percent, should be a model for the rest of Wall Street and corporate America.
In outlining the change, Feinberg has had to grapple with several misconceptions about Wall Street bonuses.
● The Wall Street bonus culture led to the financial crisis.
There is absolutely no evidence to support this. The crisis was caused by a combination of lax monetary policy, loose regulation and yield-chasing by investors craving decent returns in a weak market.
The bonus system may have encouraged risk-taking by major banks, but it also encouraged risk management and other corporate governance discipline. In a number of cases, however, these risk-management systems were totally inadequate in the face of the market tsunami that enveloped mortgage-backed securities after home prices began to drop in 2006.
● Wall Street is totally indifferent to Main Street.
For people to get past their bonus rage, they will have to accept that Wall Street professionals are not out to get them and that they actually do some good for the world. Collectively speaking, Main Street is Wall Street’s client and generally has been very well taken care of. In this crisis, Wall Street professionals, through carelessness or errors, lost a lot more money than Main Street did. Probably more of its people, proportionately, lost their jobs too.
● With the job market like it is, Wall Street doesn’t need to pay huge bonuses to retain key people.
Traders make up much of the top talent on Wall Street, and even now, the best ones who can produce a lot of income are being lured away by big offers from other firms (including foreign banks). Even injured firms must stay competitive or risk losing more than they already have.
● Wall Street pay is so out of line, only the government can fix it.
There is no reason to think that the government could devise a better compensation system for Wall Street, even if it could leave out the politics of its intervention (which it cannot). Feinberg’s actions, though well- intended, are not going to improve either the government’s chances of getting its money back or the prospects of repairing these damaged companies.
Wall Street bonuses didn’t cause the current crisis, and reining them in dramatically isn’t a cure-all. It’s time to give it a rest.
Roy C. Smith is a professor of finance at New York University – ajc.com
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