Earlier, I noted that Kenneth Feinberg, President Obama's pay czar, is seeking to defer a portion of take home pay for some bailout firm employees. I noted that this would be Feinberg's most aggressive move to date and that those employees will not be amused. There's one thing I forgot to mention: this could also potentially damage financial stability.
Let's say you're Citigroup, and you've just learned that the salary for some of your best employees is going to be cut by as much as 50% for the next few years -- or until you've paid back the bailout money. Such a prospect would drive the few talented individuals still left at your bank into the open arms of foreign competitors or other U.S. banks that have repaid their bailout money. What do you do?
Easy. You do whatever you possibly can to repay the government, even if that means weakening your capital base and putting the firm's stability in jeopardy. Because there's only thing worse right now than a weak capital base: virtually all of your top bankers leaving the firm.
While it could be argued that such employees had some motivation to depart before with their bonuses threatened, I think the czar sticking his hand into their bi-weekly paycheck is far worse. This likely scares these banks a lot. So much that it may speed up their plans to pay back their bailout money as soon as physically possible.
Of course, if bank stability is threatened, so is the broader economy. If we are on the road to recovery, then the last thing we need is a mini-financial crisis with the collapse of several financial titans that felt forced to repay the government before they were really ready.