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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?


  • fiscalliberal

    It would be my hope that we put in all sorts of rules if you ask for government bailout. In short making a government bailout very undesirable. This would be the hope that managers would pay attention to risk and manage it or go to voluntary bankrupcy first before getting any governement money.

    I still go back to the idea that if you go to the government bailout, the bond and stock holders have access to previous and future corporate management and board earnings for renumeration. Of course this should be in the courts. That takes the issue out of the government and into the courts where the bondholders and stock holders have some standing.

    Again make it as messy as possible to make management assess, take and manage risks. One might question who would take the job. I would respond – honest people who know the business.

  • david Umlauf

    I am in total agreement with you Mr. Doyle! If you run to the government for help, then you get it with all of its strings attached. This also means that you have dictated to you the comp schedules. This also means that you won’t be able to attract the caliber of talent that you need to run a profitable enterprise.

    But, I suspect that the intent of the Federal Reserve, the Treasury department and the Obama are considerably more sinister than the simple requirement that rescuees submit to the government pay plan. There is a desire on the part of this government (and I suspect this is true of most governments) to control the pay plans of all “publicly held” enterprises. This would essentially be a usurpation of the authority of the boards of directors of these companies, in whose trust the stockholders of the companies place their trust. As such, it represents a “taking” by the federal government of private property, specifically, the right of self-determination by the owners of the company. This “stake-holder value” bull-roar is in itself a usurpation of the rights of ownership, suggesting that a non-stockholder has just as much right to determine a company’s future as the people who put up their risk capital to own the institution. The Federal government is making a concerted effort to insinuate itself into the management of these firms by trying to convince the world that 1) the company has “stakeholders” whose “rights” are as compelling as those of actual stock-holders and 2) that many of these companies are part of an “oligopoly,” that they act in consort, and, as such, illegally, to benefit themselves at the specific expense of the public. Yet, the assertion of the oligopolistic practices has not been demonstrated in court and, therefore, no legal remedies can be enacted. Remember, the due process clause of the 5th ammendment requires that there shall be no takings without “due process of the law.” As such, this is a usurpation of the rights of shareholders and management.

    There is a practical consequence to this too. Companies looking to raise money will raise it elsewhere where there won’t be such restrictions on the day-to-day operations of the businesses. If a company lists itself publicly, it will do so on an exchange that will be non- US so as to avoid these silly regulations or, they will operate as privately held entities, where the benefits of stock ownership will not be made available easily to US investors either on a retail or institutional basis. Given the success of the federal government in running enterprises like a retirement system, a health care system, a post office, and a railroad, it’s hard to see how they’ll run a financial service system with any competency. We won’t become like France, we’ll get to the point where the French system will be an upgrade.

  • Twice Bitten

    All the above sounds wise and true and might even work in an honest open system of government and finance, but we are enmeshed in a corrupt society of lobbyist, politicians and corporate governance. The management at most large financial institutions show a gross disregard for their fiduciary responsibilities to their shareholders. The shareholders have lost control of the companies they own.

    New mechanism must be wrought to once again allow the owners of the company to control it. Outrageous compensation packages do nothing for the bottom line, nor do they help the shareholders, in truth they diminish profits and reward stupidity and greedy behavior by the management.

    Until the widespread corruption in our society is addressed we are merely tilting at windmills. Nothing will change other than appearances and the system will collapse over and over until the Treasury defaults by destroying the currency. This is our future without real change.

    A simple metric is the maximum compensation should be a multiple of the lowest paid employee’s wages, and the number should be widely published and approved by the shareholders.

    It is obvious by the state of the economy that most of those in power and in control of the state and the financial industries do not know what they are doing and are not worth what they are paid.

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