The pay czar, the Fed and regulatory capture – where are the avengers?

mike10152009_ritholtzIt would have been so much simpler if the White House had asked the acerbic economist Nassim Taleb what to do about the Wall Street bonus babies. Taleb, the great rebuker, says the bonus problem is easy, EASY to solve. Just ask this question: “Is society subsidizing your risk-taking or not?” If so, no bonus!

It’s a simple message. The public could sip it with their morning java; re-tweet with glee; enjoy at the water cooler or in the unemployment line: No Bonus For You!

Instead we have formulas and the language of bureaucrats. That’s not what we need! We need an avenger, someone to give voice to the pain of the past two years; an angel of justice who can give voice to the millions who lost jobs, homes, and hope. We need a brilliant general, a strategist who can make us feel that no one bank or financial product can put the system at risk ever again. We need the bulwark of capitalism restored. We need to know that a bank can fail and the system will barely hiccup.

Kenneth “I-am-not-a-czar” Feinberg, alas, is an unsatisfactory avenger. He is more bureaucrat than bearer of justice. And he’s touchy, bristling at his informal title: ” ‘Czar sounds as if I’m issuing imperial edicts that have to be followed without question. I think overall it was a very healthy degree of cooperation. And I’m grateful to these seven companies for working closely with me on a voluntary basis,’ he said.”

Grateful to the wards of the state? Can anyone here say regulatory capture? Once more, an old Washington hand has negotiated in private with the people who nearly brought down the economy. It is small satisfaction that 175 people on Wall Street who may or not may not have been responsible for the Great Recession will make half as much money as they did when 7,000 people a month are watching their unemployment benefits run out or when taxpayer-owned banks like Citi are raising rates to long-time customers to 29.99%.

That is part of the unfinished business left behind by former Treasury Secretary Henry Paulson, Timothy Geithner and Ben Bernanke. It’s astonishing that they didn’t think to do what any shrewd Wall Street investor would have done: Put a hefty price tag on assistance. Wah, wah — the TARP babies whined that they paid about 15% on an annualized basis on the billions that taxpayers lent them to save their butts. That is a stink-o return-o. (And not all the money has been returned, so the bottomline is far from settled.). Geez, if you study credits that look to be on the brink of bankruptcy, returns for senior debt run about 40% or so.

In other words, taxpayers got hosed.

And now 175 top Wall Street execs will have to dial back on their wealth. (Make that 174. The new CEO At AIG is exempt form the rules.) A true avenging angel would have paraded the likes of former Wall Street Titans like Robert Rubin and Stan O’Neal, announcing clawbacks from the tens of millions they reaped because they looked the other way as their firms built up unconscionable risk. Now wouldn’t that be satisfying?

And General Bernanke? He gets to keep the job he lobbied for (and quite brazenly) last summer. As he vacationed at one of the priciest playgrounds on Martha’s Vineyard, President Obama re-anointed the Princeton professor who clearly understands how to get tenure.

And now, the Federal Reserve, currently in line to become the systemic uber-regulator, is reaching for more power: Compensation consultant. (The anonymous Epicurean Dealmaker suggested on Twitter that the proposal would probably kill the compensation consultant industry. I disagree. I think the smart ones would find life-long contracts at the Fed.)

Obviously the Fed’s previous regulatory failures are yesterday’s news. The new rule proposals are either a piece of realpolitik or an instinctual reaction: Bureaucracies just want to grow. It is their raison d’etre.

But more bureaucracy isn’t the answer per se. And the one person who seems to really understand this and have a real-life regulatory experience — Paul Volcker — doesn’t have the ear of the White House. Too bad. Now Volcker, as anyone who went through the 1980s knows, is one helluva general and would make a fine avenging angel. He understands you need to undo the changes of the past decade or so, de-fang the too-big-to-fail monsters; break ’em up; stop them from investing in every cockamamie product the rocket scientists invent, and let the entrepreneurs migrate elsewhere, and pay themselves how they please. And if they go out of business, it should be their tough luck — not ours.

Wouldn’t it be nice if Volcker and Taleb could stage a regulatory coup and get us some real payback?

For all you Taleb fans, here’s an interview August; he discusses bonuses at about 24 minutes. Harsh words for the Administration regulatory reform come at about 18 minutes (h/t The Big Picture).

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Nassim Taleb on bonuses, bailouts and other boondoggles with David Cameron

Cartoon by Mike Luckovich via Atlanta Constitution (h/t The Big Picture)


4 thoughts on “The pay czar, the Fed and regulatory capture – where are the avengers?

  1. We need far more regulation and have far more worries than bonus clawbacks…the entire economy is under threat until we get to the core of the problem…Too Big To Fail making secret deals and strange magical brews of unregulated instruments, but the obvious is something that seems to escape the three stooges of the Financial industry.

    The current solutions for preventing another crisis reminds me of how the government solved the last great crisis to our country: 9/11.

    The core of the problem was in tracking terrorist threats to our country. It was evident that 9/11 could have been prevented if the FBI and CIA where able to share information.

    So the solution to our leaders was simple: Homeland Security. One giant bureaucracy that folded together agencies including the United States National Guard, the Federal Emergency Management Agency, the United States Coast Guard, U.S. Customs and Border Protection, U.S. Immigration and Customs Enforcement, United States Citizenship and Immigration Services, the United States Secret Service, the Transportation Security Administration, and Civil Air Patrol.

    Great idea…it just didn’t include the FBI or the CIA, who may or may not be talking to one another. Or if the CIA or FBI are talking to Homeland Security whose first big test in New Orleans did not work out well.

    • The moves as symbols are inadequate. And as you say, the Fed pay proposals skirts the fundamental issue of risk in the system and its source. I don’t care if people make a lot of money — that’s capitalism. I don’t want to tear down the banking industry — it plays an essential role in this country. just don’t want to subsidize the risk others take without my explicit permission. I think Feinberg missed an opportunity to make a clear statement about values — he was secretive, talking only to Wall Street. I think we needed a catharsis and the Administration missed the opportunity. Instead, this story will just grind it.

  2. Ms. Miller,

    Excessive executive pay, in and of itself, is of no real importance. It is a matter of symbolism rather than substance. People have been talking about executive compensation for decades but of course no one has done anything.

    The problem is that the gigantic salaries and bonuses of top executives is a really problem when compared to how the ordinary working American is doing. Over the last generation, well paying jobs, particularly blue-collar jobs in manufacturing and elsewhere have disappeared. The average American worker is earning less and less every year and the prospects for their children is not better. Now of course the irony is that there is now more manufacturing occurring in the world than ever before, just little of it is happening here. It is the these super-paid executives who have “off-shored” the well paying jobs here in the US. They did this to create much greater profits, which of course allowed for much greater executive compensation. Executive compensation is a metaphor for the impoverishment of the rest of the United States. Metaphors are just that and so long as these giant corporations were profitable, metaphors be damned.

    With the economic collapse and bankruptcy of these same corporations, of course the metaphor becomes even more powerful. The argument that these executives were “special” and “exceptional” and thus deserving of tens of millions of dollars in pay was made a lie. Now they were “Rich Guy Welfare” but still making the same excessive pay. It is pretty hard the CEO of AIG to say he deserves 10 MUSD a year when he is laying off employees, hasn’t paid a dividend in three quarters, and is selling off the company’s assets as fast as he can.

    Nonetheless, it is still only a metaphor. If every executive’s pay was cut by 90% it would not change any of the real problems facing this country. It would just be a little less salt in the wounds.

  3. Pingback: Tweets that mention Nancy Miller - The New Wall St. – The pay czar, the Fed and regulatory capture – where are the avengers? - True/Slant --

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