Executive Pay Caps are a Sham

The government’s theory is that compensation plans at the big banks were responsible for the banks’ excessive risk taking. To curb the risky behavior, the government wants to limit pay to $500K per year. I guess the idea is that the bankers will engage in risky behavior until they’ve made their $500K, then they’ll pack up their beach chairs and go on vacation until January.

This is obviously a very indirect and gutless way to deal with a major problem, and for starters, it won’t work. The best managers and technicians in these risky endeavors are simply going to move on to banks that aren’t covered by the provisions of the law, or they’ll start up their own firms. Let's face it, if you make $5 million a year, you’ll move to London if you have to. Some sacrifice! The trouble is, the banks they leave will keep running their risky businesses, but they’ll just run them with less talented people; i.e., those who are willing to work for less than $500K a year. How’s that for an unintended consequence? We might as well let teenagers manage our nuclear arsenal as well.

The fact of the matter is that we don’t want our banks engaging in risky activities AT ALL, other than normal lending activities, which have historically been challenging enough for our bankers to manage. We need to restore banking to what used to be called the 3-6-3 principle: borrow at 3%, lend at 6%, and be on the golf course by 3 o’clock. As holders of the public trust, we want our banks to engage in simple, transparent activities. The days of banks using depositor money to speculatively trade in exotic derivatives and foreign currencies for their own accounts need to come to an end, as do the days of banks making loans and then selling them off with no further exposure to risk. If you make a loan, you need to be prepared to stand by the risk of that loan. You’ll then be more careful making the loan in the first place.

We’ve already seen plenty of evidence that Obama and his team are as corrupt as any group of politicians we’ve had in the White House. The payoffs to labor unions, special interest groups, and corporate bigwigs started as soon as Obama took office. So, it’s no surprise that his administration is pussyfooting around with implementing much needed reforms. It’s no surprise, but it’s inexcusable. (Full disclosure: I voted for Obama, but suffice it to say, I’d like my vote back.)

We don’t need indirect, half-hearted approaches to solving major problems. We need to identify root causes, and aggressively rebuild the systems that will serve the public’s interests and restore trust in our financial system. That’s what was done following the Great Depression, and the regulations that came out of that era served us well for many years until our politicians succumbed to lobbyists’ payola or to their own ill-conceived notions of how to create a "great society" that were completely oblivious to unintended consequences. We must return to basics. Restoring the Glass-Steagall Act would be a great place to start.