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This should be an interesting, yet controversial, topic given the demographic and socio-economic makeup of my blog's readership and subscribers (see the piece I did on wealth and Wall Street for a background and a handy-dandy class model to see where you stand). I would really like to hear what my readers have to say about this, considering nearly 70% of them are in finance and over 1/3rd of them are rich!

From Bloomberg:

President Barack Obama will announce today that he’s imposing a cap of $500,000 on the compensation of top executives at companies that receive significant federal assistance in the future, responding to a public outcry over Wall Street excess.

Any additional compensation will be in restricted stock that won’t vest until taxpayers have been paid back, according to an administration official, who requested anonymity. The rules will force greater transparency on the use of corporate jets, office renovations and holiday parties as well as golden parachutes offered to executives when they leave companies. [I actually think this is a good idea. It prevents companies from spending money they don' have. It is also very important that the Obama Administration understand the true mechanics of Wall Street and the ramifications of its actions. Wall Street has no true inventory such as widgets, nuts and bolts like Main Street industrial companies. Wall Street's only real inventory is its thought and service workers. That is why so much of the revenue stream is diverted to compensation. People wrongly attribute the bonuses to pure compensation when in reality it is more akin to "cost of goods sold" or purchasing inventory. If you restrict the ability of a company to purchase its inventory, you restrict its ability to grow, or maybe even STAY, in business. With that being said though, this was long overdue because Wall Street executives, bankers, traders, analysts, and to a lesser extent its sales people, were grossly over-compensated. No single company could have reigned in compensation costs, and no company could have been first to do so because workers would simply migrate over to the next highest bidder. It was a never ending game of who was willing to risk the most risk adjusted profits. Since the industry couldn't truly right itself, it had to wait until it imploded and have the government do it for them. The only problem is that the government makes a HORRIBLE business manager and has failed at nearly every business management opportunity that it has tried. I see no reason to believe that this time will be any different. As a matter of fact, this will probably lead to a significant brain drain in Wall Street, for most of the brains were there for the money, and not a love of finance. Expect to see an influx of talent into entrepreneurial pursuits, technology companies, and industrial and manufacturing companies. This may very well be a good, thing, or it may very well spell the end of Wall Street dominance in finance. I don't know, since I can't tell the future, but I am damn good at examining the present and do not easily forget the past]

Public outrage over compensation has been building since October, when Congress passed a $700 billion financial-rescue plan. An $18.4 billion bonus payout in 2008 to Wall Street executives and employees further inflamed Americans.

“People are still getting huge bonuses despite the fact that they’re getting taxpayer money, which I think infuriates the public,” Obama said in an interview last night with CNN. [Well, to be fair, people are still working aren't they? People are still over-performing, right? Someone has to be doing a better job than everyone else, right? Imagine if everyone at high employee payout "Widget Inc." messed up all year, producing inferior widgets, maintaining poor quality control, poison little children, etc. - generally messing up all of the time for three year's straight even - save this one cat, who happens to not only outperform everyone in the company, but everyone in the industry. Not only was he the industry's top performer, he saved the shareholder's ass 6 times last year by settling law suits, he found and ceased poisoning in the bad widgets, he increased revenue 4 fold by inventing a new, super safe, hyper-performance widget, and all of the other widget producers from Europe and Asia have been sending head hunters with beautiful exotic women as gifts, and hitmen with silencers for the HR guys who help keep Mr. Performance at bay. Despite all this, Mr. Performance stays at Widget, Inc. because he actually likes doing a good job in and American Company, and has been paid well for his services. All of a sudden, the US Government says Mr. Performance will take a 90% pay cut, effective immediately (but fails to cut the costs of his mortgages, monthly household expenses, tuition or legal bills by a commensurate amount, effectively leaving him up sh1t's creek). The government sponsored paycut was due to the government attempting to micro-manage Mr. Performance's company, thus basically destroying the fine balance between performance and compensation. Now tell me, how fair is that to Mr. Performance? In most environment,s Mr. Performance would get a 90% pay raise!

This is the deal. If the government doesn't like the way the banks are runing their business, the banks should left to Mother Market to scold. I doubt very seriously if Mother Market would explicitly cut Mr. Performance's pay, but if she feels that the corporate entity is paying more then it could afford in compensation, she will most assuredly take the entire corporation out, and under. The problem is that this is exactly what our government is trying to prevent. Basically, they wan their cake, and eat it too!]

Obama and Treasury Secretary Timothy Geithner will announce the plan at 11 a.m. today. The guidelines will focus on companies that, going forward, take “exceptional” amounts of bailout money from the Treasury, as Citigroup Inc. and American International Group Inc. have in the past.

They won’t be retroactive to companies that have already taken rescue money, although those companies must agree to strict monitoring and oversight, the official said. [Damn, I hate to concentrate even further into the financials for risk management reasons, but free money is free money, isn't it? I mean, can you really blame for just considering it?]

Populist Fury

The populist backlash is hitting the halls of Congress.

Senator Claire McCaskill, a Missouri Democrat who proposed last week a bill to limit compensation, has been inundated with messages from voters fuming over corporate executives. Senator Jeff Sessions, an Alabama Republican, said small-business owners are calling the bonuses “obscene.” Senator Dianne Feinstein, a California Democrat, said her constituents are “really upset,” and Senator Sam Brownback, a Kansas Republican, said he’s hearing about it at the grocery store.[But.... are the bonuses really obscene if they are truly deserved? If you are contractually promised 20% of all annual revenues that you generate in a cash year end bonus, and you generate $500 million of revenues for the year, but Congress and the Administration have decreed that you will only get $400,000, tell me prescient soothsayers, who do you sue? Do you sue Senators MCaskill or Sessions for breach of contract? Due you sue your company? Do you just lose faith in contract law and start breaching contracts yourself for lack of fear of judicial enforcement? Inquiring minds want to know!]

The anger has been fueled by accounts of bonuses, the use of private jets and the purchase of luxury goods. [I addressed the bonus issue above, private corporate jets are often necessary if you are the CEO of 60,000 member firm with 200 offices across the globe. What do you expect the CEO to do, stand stuck in line at security at Newark Airport as his Asian office is shredded from the local quant fund getting blown up. Look, I already admitted, and have said for quite some time, that most of Wall Street is overpaid, but I feel the political witchhunt things is going too far, too fast. It would be highly impractical to ban corporate jets unless fractional ownership actually proves to be more efficient. Remember when CNBC showed the CEO of GM driving a hybrid Malibu to the Senate hearing? Imagine if he had an accident and shareholders sued? Worse yet, imagine if the President's use of Airfore One was restricted to the point that he had to take commercial flights? There comes a point where too much is too much! I can't defend Thain and the $1.2 million office reno at Merrill as the company was being sucked to the grave though. That was just plain old S-T-U-P-I-D!!!, with a triple capital S!]

Those headlines collide with reports of the U.S. losing an average of almost half a million jobs every month, 1.1 million homes being foreclosed upon in the last four months, retirement savings dwindling and bankruptcies mounting.

Severance-Pay Ban

McCaskill’s legislation would block companies from paying executives more than the U.S. president’s $400,000 annual salary as long as the companies rely on federal aid. The compensation cap would cover salary, bonuses and stock options. [This makes plenty of sense, just heed the warnings above!]

“These people are idiots,” McCaskill, 55, said Jan. 30 on the Senate floor. “You can’t use taxpayer money to pay out $18 billion in bonuses. What planet are these people on?” [Idiots!? Well, yes and no. Politically, it was the dumbest thing since Spitzer txt that cutie call girl, but in some circles it was a necessary evil - referencing my explanation above.]

Senator Byron Dorgan, a North Dakota Democrat, said he plans to introduce an amendment requiring companies that accept bailout money to make their bonuses public. [Hey, beggars can't be choosers, now can they?]

The complaints over executive compensation have sparked a backlash from at least one executive.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said this week that it’s wrong for politicians to criticize Wall Street pay without differentiating between companies where compensation is commensurate with performance.

“It’s unfair to talk about us as one,” Dimon, who was paid $1 million last year and didn’t accept a bonus, said at a conference in New York. “Not every company was responsible.” [Normally, I'd just say Dimon is pissed off because I busted him in opining that his bank is insolvent, but to be honest, he really does have a point here. Darn! Drat! Leveraged CDOs!!!]

Bad Tradeoff

Still, lawmakers are responding to anger among constituents like Carol Brata, a secretary from Dearborn, Michigan. Michigan has shed 319,700 jobs over the past three years, more than any other state and has the highest unemployment rate, at 10.6 percent.

“They ended up with excessive pay, and the tradeoff was that families had to go without insurance or a job and their homes tumbled,” Brata said. [This was Mother Market righting the wrongs of the Automotive industry, or at least trying to. She is getting push back from government subsidies here as well. Why doesn't the government fund entrepreneurial competition to the established auto industry in the form of alternative energy vehicle manufacturers. This will create jobs and better cars! Is it because the entrepreneurial/small business lobby isn't strong enough?]

Thomas Mann, a scholar at the Brookings Institution in Washington, said the anger hasn’t been this pronounced since Franklin Roosevelt took office during the depths of the Great Depression in 1933.[... and rightfully so!]

Roosevelt gave voice to a public rage against “a generation of self-seekers,” in his inaugural address. “Practices of the unscrupulous money changers stand indicted in the court of public opinion,” said Roosevelt.

$145 Billion

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. awarded their employees a cumulative $145 billion in bonuses from 2003 through 2007, according to estimates based on company reports.

That’s more than the annual gross domestic product of the Philippines. Lehman has since gone bankrupt, while Bear Stearns and Merrill have been taken over by commercial banks. [Hey, you guys know I have a lot to say on this topic. I've been telling you these guys were done for going on nearly two years, now! See the fertile, prodigious and spicy "Investment Banks" section of my blog.]

Wall Street firms’ pay has traditionally been tied to performance of the companies. As the bonus portion of employees’ pay has grown, many started to expect it regardless of performance. Some employees have been receiving incentives “for basically turning up,” Barclays Plc Chairman Marcus Agius said last week at the World Economic Forum in Davos. [People of high intellectual intent, and capacity - herein lies the problem. This statement is simply not true! Bonuses were tied to revenue, not actual realistic performance. If bonuses were tied to economic profit (read as actual risk adjusted returns), employees would not be able to walk away with 50% of the revenues when risk adjusted expenses ended up being 85% of the revenues just a year or two later. This is a very, very important, yet misunderstood point. Tying compensation into actual risk adjusted profits is the same as working for yourself. You make money, you get to have money. You lose money, you have not money. It really is just that simple. If anyone one is having a problem understanding this, just email me and I will design a compensation plan for you that addresses this very issue, and it won' take that long either!]

“There’s this fallacy that everybody will leave” if bonuses are restricted, said William Cohan, a former investment banker at Lazard Ltd. and JPMorgan and author of “The Last Tycoons” about Lazard. “What do they do? They push paper around. Where else can you get paid $500,000 to do that?” [Uhmm, I dunno!!!]


The Obama measure is “too draconian and too arbitrary, and doesn’t take into account free-market forces,” said Minerd. “Companies that need the most talented people to fix their problems won’t be able to pay them.”

To contact the reporter on this story: Heidi Przybyla in Washington at This email address is being protected from spambots. You need JavaScript enabled to view it..