Fed to Wall Street: Take a pay cut

Obama's first pick at the central bank leads an effort to crack down on out-of-control compensation

Published September 18, 2009 1:33PM (EDT)

As of around 9 a.m. EDT, only the Wall Street Journal has the story, but it appears to be a doozy: "Bankers Face Sweeping Curbs on Pay."

Damian Palleta and John Hilsenrath report:

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees -- from chief executives, to traders, to loan officers -- to take too much risk. Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.

Wall Street lobbyists, naturally, are outraged, and we can assume that Republican politicians will shortly follow suit as they decry this unwonted interference by big government in the free market. And judging by the headline, "Wall Street's 'Death Panel'?" from the Journal's Mean Street opinion columnist, Evan Newmark, I initially assumed that the newspaper was going to fire the first salvo in the upcoming propaganda war. (Newmark, a self-described free market libertarian, has made several appearances in HTWW, blaming Obama for unemployment and the stock market's performance.)

But here's how low banker reputations have sunk. Even Evan Newmark won't defend them. After clicking through to the column, one finds the actual headline is "Wall Street's 'Death Panel'? Yeah, right."

The natural instinct of any free-market believer is to look to the banks' boards of directors for this oversight. They should set comp to protect the shareholder's interests. They should protect the bank.

But let's face it. Many of these boards don't know what they're doing. Look at the Bank of America board. It both grossly overpaid for a failing Merrill Lynch and then permitted Merrill to pay out $13 billion in year-end bonuses.

And let's not kid ourselves that Wall Street has truly learned its lesson about crazy incentives. The multi-year guarantee is back. The expensive and destabilizing game of Wall Street executive musical chairs is back. And compensation ratios are soaring again.

But here's the funny part: Newmark takes heart in the fact that all this is the sage and sober Ben Bernanke's doing, and not, say "Rep. Maxine Waters and the House Financial Services Committee." So it's not political.But the Journal's own reporting indicates that the pay initiative is being led by Daniel Tarullo, who is Obama's first appointment to the Federal Reserve's Board of Governors. Which means that the White House's fingers are all over this plan.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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