Why we should cap Wall Street bonuses

Europe this week dared to do what the United States refuses to consider: it voted overwhelmingly to limit the amount of bonus money EU banks can give its executives.

Congress has tried passing a similar cap, but two entities stand in its way: fears of socialism, and the truckloads of money Wall Street uses to bribe Congress.

The first fear is legitimate, but irrational.  Giving the government the power to mandate how much Wall Street can pay its executives contradicts the concept of capitalism.  But when an industry reaches a point where survival depends on taxpayer (bailout) money to survive, then that industry has already become a socialist system, and it must abide by socialist rules (you can’t have your cake and eat it to).

To be clear: Europe has not really capped bank bonuses; it has simply required bankers to make its executives earn that money.  The way it works: European banks give out bonuses, but executives can only keep 30 percent at first.  At the end of the year, if those banks performed well, their executives can be proportionally compensated based on how much money their individual banks earn.

In the United States, banks allocate bonuses at the beginning of the year, and executives receive those bonuses in February – providing zero accountability, and creating incentive to take illogical risks (betting $30 for every $1 you actually have) to create the illusion of short-term profit.

One Wall Street banker described it as a game of musical chairs: the goal was to collect as much bonus money as you could, and then try to end up at a different bank or in a different department before the music stopped.  Anyone can borrow $1 billion, throw it on the roulette wheel, ask people to bet on where it will land, and then leave before the wheel stops.

Banks should instead wait and see where the roulette ball lands before handing out bonus checks.  The system should work to compensate actual performance.  One idea: the Federal Reserve suggested that banks start compensating executives based proportionately on how well their banks individually perform, by requiring banks to wait a year or two to see the long-term effects of CEO decisions before awarding bonuses.  Similar to Europe’s new model: that would force CEO’s to think about the long-term ramifications of their decisions.

But we should not expect Wall Street to self-regulate.  These CEO’s understand the game, and their goal is to take as much money from investors as they possibly can before the system collapses.   That is why we absolutely need government to grow some balls and regulate this system – particularly now that their bonuses come from taxpayers.

You might argue that these banks should have the God-given capitalistic right to do whatever they want with the money we invest in them.  But I’d argue that because they accepted society’s bailout money, they must now abide by society’s rules: socialism.

But even if we can convince every American to think this way, we still need to figure out how to stop Congress from selling out the country for lobbyists’ money – and that is the real reason we will never see genuine financial reform.

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One comment

  1. Interesting discussion but greater government interference and intervention is never the answer. The problem is that we have too many individuals working to preserve their position of power, both in the government and on wall street. I probably don’t have the right answer but I see government interference as a path that should be avoided. There is an overhaul of the system required. The Goldman Sachs debacle makes that an obvious requirement.

    Good article and provides Deb and I a lot of discussion points.

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