Endgame Over Bankers' Pay

Months of vitriol over regulating Wall Street comes to a head as the Fed considers a pay haircut for thousands of bankers

After months of hand-wringing and fulmination, the screws are finally tightening on bankers' compensation. Three big recent stories suggest that government may finally try to regulate Wall Street paychecks:

• Citigroup CEO Vikram Pandit admits that a $100 million bonus is too much to pay his top energy trader.
  
• EU leadership is planning to demand global regulation for banker pay at next week's G20.
  
• The Fed is considering whether to use pay caps as a way to curb risk-taking at over 5,000 banks.
  

Reactions from some financial analysts are predictably irate. But a few writers have come to believe that it's time for some form of regulation:

• The Time Has Come, writes Evan Newmark at The Wall Street Journal: "Here is what an ardent free-market libertarian like me has to say to them: Too bad. It could be much worse...Let's not kid ourselves that Wall Street has truly learned its lesson about crazy incentives. The multi-year guarantee is back. The expensive and destabilizing game of Wall Street executive musical chairs is back."

• A 'Phenomenally Bad Idea,' says James Pethokoukis at Reuters. "Of course, this is a lousy idea. Banker pay didn't cause the financial crisis. The government should not be micromanaging private-sector compensation. Also, the more the Fed is involved in the regulatory process, the more it is open to political scrutiny."

• Congress is Letting the Fed Do its Dirty Work, writes Lita Epstein in Daily Finance. "The Fed believes it already has the authority to take action through its existing supervisory powers, which include overseeing a bank's soundness. Even if those powers have been questioned by some in Congress, I doubt they would try to stop the Fed. I think Congress would prefer to see the problem to go away so they don't have to try to get a bill passed."

• Good Idea, if the Fed is Serious, says Yves Smith at Naked Capitalism. "It is hard to believe the central bank's heart is in this. The Fed has thrown an extensive safety net under the banking industry and has proposed zero in the way of measures to combat the moral hazard and bad incentives creative by such massive subsidies of risk-taking....The proposed measures are not extensive or intrusive enough to deal with the fact that we now officially have a system of socialized losses and privatized gain."

• A Cosmetic Change? wonders the Atlantic's own Daniel Indiviglio. "The Fed's compensation oversight might not reduce compensation levels by one penny -- it could just change the mechanics for how banks pay their employees. In analyzing a speech Goldman Sachs CEO Lloyd Blankfein gave a few weeks ago, I noted that he called for Wall Street compensation changes without actually saying that bankers should be paid less. The Fed's regulatory framework could very well have the same philosophy."