Guaranteed Bonus!
August 10, 2009, 8:16 am
Posted by Margaret O'Brien Steinfels
The excellent Kenneth Feinberg, who organized and carried out the post-9/11 settlements with the families of those killed, is in charge of reining in Wall Street. Here’s what he’s up against: http://www.nytimes.com/2009/08/10/business/10pay.html
“Pay for performance is our standard,” Ms. Oppenheim [of Bank of America] said. “It’s a competitive marketplace, and we will take the necessary steps to attract and retain top talent.”
Indeed, we can all agree that pay for performance should be the standard — for doctors, teachers, subway workers, farmers, window cleaners, bond and derivative salespeople. Politicians, too (no, just kidding!)
That’s the easy part. The hard part, which neither Ms. Oppenheim nor the NYT seems to speak to, is how one defines “performance.” If it means simply the number and the size of the deals made for a particular bank or financial house, even when those deals might bring the economy to its knees, and throw millions out of work, then we have a problem.
Why does anyone need tens of millions a year? apart from fueling testosterone levels, that is.
Why does anyone need tens of millions a year?
To keep up with all the other people making tens of millions per year! You can’t show up to the party in last year’s private jet…
I have no problem, in principle, with companies that accepted bailout money being subjected to additional government scrutiny – the government, as steward of our tax dollars, should be making sure that their bailouts aren’t being pillaged to line the pockets of those with access and clout within the firms.
Having said that, though, the article seems to draw a classic illustration of human nature, as it manifests itself in economic behavior, as well as the the limits and unintended consequences of government’s attempts to regulate the market.
It seems we now have two classes of Wall Street banks – those that are beholden to the government for bailouts (and consequently have various regulatory strings attached) and those that aren’t so beholden and thus can operate string-free. Now we are seeing the string-free firms raid the strings-attached firms with impunity and glee to snap up the strings-attached’s best talent.
If Wall Street is right in its operating philosophy – that these rainmakers are worth their gargantuan wages – then we can expect the string-free companies, over time, to significantly outperform the strings-attached. Whether that would lead in turn to orderly industry consolidation, or further worldwide economic instability, or future rounds of bailing out the strings-attached, or some combination of the above, is TBD.
Two macro questions here, not taken up in the story, are:
1. Should the government regulate the models, maneuvers, and calculation that lead to gigantic profits for the banks and hedge funds and can be in themselves sources of global economic instability?
2. Should the federal government have a 50-60-75 percent tax rate for those making more than $5 million in cash, stock, and options?
Feinberg was interviewed on NPR’s “Marketplace” shortly after he was appointed “pay czar” in June. I was impressed with his responses to the host’s questions. He’s very well spoken, and I sensed that he’ll bring large doses of fairness and integrity–two essential traits in an effective mediator/arbitrator–to his latest herculean task. I was also impressed that he’s working pro bono as the pay czar. If I’m not mistaken, he also worked pro bono as the administrator of the 9/11 victims compensation fund. True, he’s a very successful NYC lawyer who probably doesn’t need the money, but the 9/11 fund, in particular, required thousands of hours and years of effort, and I remember reading somewhere that Feinberg, despite having the benefit of a sizeable staff, was personally involved in each and every hearing and claim determination.
Feinberg does seem to be a very impressive person and an estimable citizen. His account of the 9/11 work is here: What Is Life Worth?: The Inside Story of the 9/11 Fund and Its Effort to Compensate the Victims of September 11th by Kenneth Feinberg. He is a skilled negotiator and arbitrator. Will corporate executives be a greater challenge than the 9/11 families?
“1. Should the government regulate the models, maneuvers, and calculation that lead to gigantic profits for the banks and hedge funds and can be in themselves sources of global economic instability?”
The government should enact regulations that create a fair, open and stable financial marketplace for banks and hedge funds, just as it does on the trading of stocks. The regulations proposed by Geithner strike me as sensible in that regard. Perhaps by “models and calculations” you’re referring to a story I saw recently that Goldman Sachs has faster computers than everyone else and so consequently can execute its trades a fraction of a second faster? It’s an interesting problem.
“2. Should the federal government have a 50-60-75 percent tax rate for those making more than $5 million in cash, stock, and options?”
I would say, No. We had those levels of tax rates for many years, and the economy has grown much bigger since they were reduced. In addition, tax rates at that level lead to tax-avoidance behavior that is not productive for the economy as a whole. Ideally, people making millions of dollars a year are investing that money in ways that create new jobs and wealth for many people.
Peggy mentioned Kenneth Feinberg’s book. Here’s the Amazon link:
http://www.amazon.com/gp/product/product-description/1586484516/ref=dp_proddesc_0?ie=UTF8&n=283155&s=books