Banker Pay Is a Huge Canard

Talk about a hullabaloo. Pay packages at Wall Street firms from Morgan Stanley (NYSE: MS  ) to JPMorgan Chase (NYSE: JPM  ) have repeatedly come under fire, as the government and Main Street grasp at straws in their search for the root cause of the financial crisis.

So far, Obama's pay czar has tried to put restrictions on how much TARP-taking institutions could pay their top people -- a move which only inspired big banks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) to make plans to pay back their TARP funds. Goldman Sachs (NYSE: GS  ) , bowing to public pressure, announced that its top executives would be paid in all-stock bonuses this year.

But the problem isn't how much bankers get paid -- that's simply a result of the obscene amounts of money that bankers are able to bring in for their respective firms. Reduce banker bonuses, and you'll simply end up with more profitable Wall Street firms. Investors in the banks might be overjoyed at this thought, but the broader economic good is hardly served by simply shifting payouts from the people who produce the massive profits, to the people who own the company reaping those massive profits.

Instead, we should focus on keeping the whole of Wall Street in line -- making sure that these firms are acting ethically and not creating financial time bombs that will put the entire economy at risk. In the lead-up to the financial crisis, we saw giant firms taking on extreme levels of leverage, scary and little-understood securities being concocted in back corners of the finance world, and non-banking activities putting major banks at risk of failure. It's understandable that huge paychecks based on these kinds of activities would inspire ire.

As seems to be the case so often in government, though, the treatment for the problems we're facing has been aimed mainly at symptoms -- such as bonuses -- rather than the root cause. After all, if Wall Street is making big money while working with and contributing to a functional and growing U.S. economy, I have no problem at all with fat paychecks.

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Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


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  • Report this Comment On December 18, 2009, at 12:14 PM, questioner5000 wrote:

    Koppenheffer writes, " ... but the broader economic good is hardly served by simply shifting payouts from the people who produce the massive profits, to the people who own the company reaping those massive profits."

    As a BAC shareholder, I beg to differ. When BAC bought ML, it saved tens of thousands of ML jobs, (and probably the jobs of hordes at MS and GS, since these firms probably would have collapsed as well). Since then, ML employees have continued to receive their paychecks and even bonuses.

    And, what did the BAC shareholders get out of it? Well, they got a devastated common share price, a substantial level of dilution, and the virtual elimination of any dividends.

    Since the impact on BAC shareholders continues to today, maybe, just maybe, we shareholders deserve a little consideration, at least for the next couple of years.

  • Report this Comment On December 18, 2009, at 6:25 PM, TMFKopp wrote:

    @questioner5000

    No doubt shareholders need to be fairly treated by the companies they invest in. However, how much of a given bank's profits go to employees and how much go to shareholders is really something that I think should be determined by the board and management -- the board being (supposedly at least) beholden to shareholders.

    Not that I have a particularly high opinion of BofA's board (http://www.fool.com/investing/general/2009/12/17/more-of-the....

    But as far as government regulation goes, I think putting specific caps on compensation at financial services companies is focusing on the wrong thing. The government should be making sure that banks are doing what's in the best interest of the broader economy -- or at least aren't finding loopholes to enrich themselves while putting the economy at risk.

    Compensation and shareholder returns should flow naturally from the value creation going on at the banks. So if the banks are doing something squirrely, the squirrely activities need to be checked, not the compensation that results from them.

    Matt

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