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Sunday, February 1, 2009

Proposed compensation caps at federally funded banks

True story.  Guy works for a big bank – in 2007 he grossed over 20 mil for the firm and received 1.5 mil as year end comp.  The following year, 2008, his production was down 10%.  The bank told him he’s going to get 10% of what he received the prior year.  Production down 10%, compensation down 90%.  Furthermore, he won’t receive his bedraggled bonus until 2010/2011 – if his bank even survives the carnage.

An ignorant politician has proposed that no federally funded bank official should receive more than the president -- $400k a year.  Straight off, the president receives 400k a year while in office.  Once leaving office, though, the president carries significant cache and an astounding ongoing income.  Bill Clinton pulled down $5.7 mil in speaking fees last year.  In 2004, he received $10 million dollars for “My Life”, his autobiography.  In 2002, he pulled down $9.5 million in speaking fees.  This is just a cursory review of a quick google search.  The ongoing revenue stream from the presidency is far more significant than the office itself pays. had a great piece talking about some of the other perks compensation caps should include – private planes, multiple personal body guards, use of a 55,000 sq foot mansion, personal chefs and servants.

Barack Obama comes to the podium careening into the worst economic situation any president has faced in nearly 100 years.  His inauguration cost $160 million dollars all-in according to press accounts.  One might call that the height of irresponsibility, too.  One might say that this is not the time for the most expensive presidential inauguration ever.

By socializing our financial institutions, we the people have become shareholders and apparently have appointed ourselves chief financial officers too.  At a time when we are shareholders, we should be encouraging profitability at the banks, not discouraging the top producers from trying.  Much of the disasters at banks have originated in the fixed income department – this time around.  In prior cycles it’s been the commodity trading and currency operations.  Sometimes accidents happen.  When they do happen, the hope is that a bank will be diversified enough that they can offset the losses in one department with gains from another.

There is nothing like the guarantee of limited gain to encourage mediocrity.  By capping compensation, we would foster apathy and disloyalty.  What capping compensation is likely to do is pull out the main supports of the struggling institution house of cards.  If the top producer at a federally funded bank knows he can’t make more than 400k no matter how hard he works, why would he stay there?  He will either a) not try or b) leave and go somewhere that can pay him more in line with his contribution.  Aren’t the individuals who have been making money for the firms the ones we really need to incent and not castrate?

Credit Suisse paid their bonuses out of a pool of mortgage assets the firm wasn’t able to sell – irony AND karma!  It allowed Credit Suisse to get rid of a few billion dollars worth of headache and save themselves yet another write-down. Now that is lemonade from lemons.

Trust me, the clowns in fixed income that blew up aren’t the ones taking big checks home.  Most of them don’t have jobs.  The banks, not the legislators, need to find a way to tie compensation to the recovery of the bank’s profitability.  They should be tied to the same paper we are, perhaps.  Maybe the banks need to write a special option that is tied to the same preferred shares the government has received – they get their money if we do.  I don’t know the solution… but I do know that the last thing we want is the people we need to work hardest in a desperate and dire situation giving up or jumping ship.

Wall Street is a boom and bust industry.  Right now, its busted.  Sure, the bonuses seem big in the rear view mirror.  They seem really tiny in on the horizon, though, whether compensation is officially capped or not.  In my opinion, the secret to an equitable and fair compensation system is in tying it to the future health of the bank as opposed to the past performance.  And maybe paying them with bad mortgage paper for last year.  It’s too appropriate to pass up.

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