Tuesday, November 10, 2009
Incentives Still Count
"In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and [Fed] announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks. ... We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury's 'pay czar' Ken Feinberg. ... Those companies--and executives--owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution. ... But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits. ... The irony is that judgment about what constitutes 'excessive risk' at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks 'excessive' now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kinds of risks warrant tighter compensation rules. And these new guidelines may also drive the best and the brightest out of the banks and into less regulated institutions", my emphasis, WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489263857516126.html.
"Tis a consummation devoutly to be wished", Hamlet 3:1:6, that the "best and the brighertst" are driven from our banks. Regulated institutions don't need them. Feinberg may be smarter than I think. Driving the "best and the brightest" from the banks may be in Yves Smith's parlance, "A feature, not a bug", a backdoor to a new "Glass-Steagall". The WSJ does not take the Big 87654 and SEC to task here. Isn't Citigroup an SEC registrant? What does the SEC look at? Isn't Citigroup "audited" by KPMG, whatever that means? Isn't KPMG "reviewed" by the PCAOB, whatever that means? Regulation is the cover up of the cover up. No one blows the whistle. Why? Feinberg applied pay controls to seven companies after "Vampire Squid" repaid its TARP money. Hmm. How about this Feinberg: prevent any bank holding federally insured deposits from lending to a TARP recipient?