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The Wall Street Oligopoly Rails on Compensation Controls

Posted by Larry Doyle on October 22, 2009 3:48 PM |

Is there a hotter topic currently on Wall Street than compensation? I have to admit, I have a range of emotions on this issue.

I pride myself on being a proponent of free market capitalism. As such, while the government needs to be actively involved in regulating the marketplace, beyond that I would just as soon see Uncle Sam stay out of the way. One may think I would be vehemently against the Wall Street pay czar Ken Feinberg getting involved in compensation on Wall Street. The Wall Street Journal reports on the far-reaching net cast by Uncle Sam on this issue and writes, U.S. Unveils New Rules on Banker’s Pay. Rest assured, the crowd on Wall Street right now is seething. Let’s navigate.

As I think more and more on the compensation topic, I have come to the following conclusions:

1. Those who work at companies in which Uncle Sam has injected life-saving levels of capital should be subject to compensation restrictions. Why? I would maintain that these employees are quasi-government employees and thus subject to having Uncle Sam involved in the compensation process. To the extent that people do not like working for Uncle Sam, then leave. They would not have a job without Uncle Sam in the first place.

2. Is it any wonder why Goldman Sachs and JP Morgan were so eager to repay the TARP funds? Lloyd Blankfein and Jamie Dimon certainly saw the handwriting on the wall. Some would argue that Goldman and Morgan should not be subject to compensation controls imposed by Uncle Sam. Others would argue that they should given the fact that Uncle Sam saved the entire financial system. To a certain extent, I am in the camp “to the victors go the spoils” and thus Goldman, Morgan and others should be free to compensate their employees accordingly.

3. To an ever increasing extent, however, I view Wall Street as nothing more than an oligopoly. The key problem in an industry that is oligopolistic is the issue of collusion amongst participants at the expense of the public. I do not think there is any doubt that Wall Street has experienced characteristics of an oligopoly and is experiencing them now to an ever greater degree.

How should this be addressed? The boards of the Wall Street firms need to practice real corporate governance in terms of compensation and all other business practices. Good corporate governance would implement quality compensation practices so Uncle Sam does not have to get involved. Regrettably, ‘Wall Street’ and ‘good corporate governance’ are mutually exclusive.

Thus, what should Uncle Sam do?  I disagree that Uncle Sam should dictate compensation practices in private companies. What Uncle Sam should do is impose on businesses capital ratios that are so restrictive that Wall Street thinks long and hard about how much risk they take in those business lines. Those risk controls will restrict compensation along with addressing systemic risks while maintaining the integrity of the free market. In fact, if the capital ratios are as restrictive as I believe they should be, the firms would reconsider having the business at all.

Perhaps the business line would then be spun off or privatized and Uncle Sam and the taxpayers would be off the hook of supporting a business housed within an institution deemed ‘too big to fail.’

In my opinion, that approach is far better both in scope and practice.

What do you think?


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