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Floyd Norris has an article in today’s New York Times, neatly summarized by the headline: “It May Be Outrageous, but Wall Street Pay Didn’t Cause This Crisis.”

Norris argues that:
A) The crisis wasn’t caused by risk-taking behavior because Wall Streeters didn’t understand the risks that were being taken.
B) Wall Street’s pay structure, with all its rewards for high profits now now now, couldn’t have caused risky behavior in the first place because banks run by CEOs who owned lots of stock did worse in the crisis than banks whose CEOs relied more on their salary.

I'm a fan of Norris's blog, which is a good clearinghouse of current numbers as they come out, but these points are just silly. Still, Norris put some useful information in the article too--info that we can use. More below the fold….

As far as Norris's first point goes, nobody’s arguing that Wall Streeters took calculated, well-understood risks that didn’t work out. They charged into situations that they didn’t understand. That’s exactly the problem.

The second point contradicts Norris’s thesis—banks run by CEOs who owned lots of stock (and thus stood to profit more in the short term) are in bad shape now because they took dumb risks back when things looked good. It’s true that some of these execs didn’t cash out in time and would have been better off in the long run by not taking these risks. Which, if you buy a certain brand of economics, means that these CEOs couldn't possibly have been tempted by the prospect of huge immediate gains. You know, just like how the bad odds at casinos means that nobody goes to casinos, and how nobody ever drinks to excess because they know the hangover isn't worth it.

The most interesting part of the article is near the end, a fact that I didn’t know—there was a 1970s reform that forbade companies from deducting pay in excess of $1 million as a business expense. This sounds good, but “performance-based” pay was excluded. Which is one reason Wall Streeters today get most of their pay in stock options and bonuses.

And yes, that pay structure does encourage risky behavior. When your pay is based on this year's performance, it makes perfect sense to take wild risks with your company’s money—if the risk pays off, you’re set for life after a year. If it doesn’t, the money that was lost isn’t yours.

Norris seems to have brought up the 1970s reform to support the usual Washington attitude toward government actions (they're fraught with unintended consequences, so every change should take years of study and debate and we probably shouldn’t even bother). But really, the fact that that law is on the books points our way toward a couple of easy, if minor, fixes.

First, we could close the loophole--no deducting pay of any kind past a given limit. There’s no reason taxpayers should subsidize the ridiculous pay that Wall Streeters get.

Second, "performance-based" my ass. If you get your bonus even when you run your company into the ground, it's clearly not based on performance. Which means the worst and least defensible bonuses--the ones that are guaranteed no matter what--are already against the law. Well, at least deducting them as legitimate business expenses is against the law, and I seriously doubt that these companies refrained from doing that. Anyone for finding out?

(Cross-posted on my blog, Economixcomix.com, or it will be when the blog is up and running).

Originally posted to Manfromporlock on Fri Jul 31, 2009 at 01:23 PM PDT.

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Comment Preferences

  •  Tip Jar (1+ / 0-)
    Recommended by:
    Marie

    Check out Economixcomix.com, when it's up and running.

    by Manfromporlock on Fri Jul 31, 2009 at 01:23:53 PM PDT

  •  Is Wall St. really necessary? (2+ / 0-)
    Recommended by:
    Marie, ShempLugosi

    That's the question we need to be asking: is what Wall St. does actually important, or is it just a parallel universe with no real bearing on anything?

    •  Good question (1+ / 0-)
      Recommended by:
      Marie

      I'd say that Wall Street's official function--taking paper savings and turning them into real investment--is necessary, but that all too often, Wall Street does the opposite--it liquidates real investment (a car company, say) for paper profits, and then the paper profits disappear. So it does have a real bearing on our universe, but not the one it's supposed to have. In other words, our current financial world is important to the economy in the same way that having a 18th-century doctor bleed you is important to your health.

      Check out Economixcomix.com, when it's up and running.

      by Manfromporlock on Fri Jul 31, 2009 at 01:39:45 PM PDT

      [ Parent ]

    •  Perhaps 20% of what is done there (0+ / 0-)

      does facilitate a rational economic engine.

      "Dulled conscience, irresponsibility, and ruthless self-interest already reappear. Such symptoms of prosperity may become portents of disaster!" FDR - 1937

      by Marie on Fri Jul 31, 2009 at 01:39:58 PM PDT

      [ Parent ]

  •  That million dollar cap was a poor (1+ / 0-)
    Recommended by:
    NoMoreLies

    use of the power of government.  Much easier to let them pay whatever they want and then get the public's pounds of flesh in the form of taxes.  Given all the tax loopholes corporations can find, we'll have to go with an employer payroll tax on their highly compensated employees.  Start it at half a million (all compensation) and make it progressive.  Say a 100% employer tax on compensation over $5 million; 200% > $10 million.

    Then we also need to restore the progressive income tax -- FDR's team knew exactly what they were doing.

    "Dulled conscience, irresponsibility, and ruthless self-interest already reappear. Such symptoms of prosperity may become portents of disaster!" FDR - 1937

    by Marie on Fri Jul 31, 2009 at 01:37:55 PM PDT

    •  Hell Yeah (0+ / 0-)

      Absolutely, the system needs to be restructured, and I like the employer payroll tax idea. And yes, bring back the progressive tax system.

      But that's a long fight. The cap is something that's (I think) in place now, and closing the loophole would be (relatively) easy.

      Check out Economixcomix.com, when it's up and running.

      by Manfromporlock on Fri Jul 31, 2009 at 01:50:11 PM PDT

      [ Parent ]

  •  My idea is to prevent paying any compensation... (0+ / 0-)

    or bonus that totals over $500K per year from anything but the net profits from the past 3 years for any financial institution that is under the FDIC insurance program or has received any TARP funds or FED funds in the past 3 years regardless of profit...and that all said compensation is paid from capital in excess of the capital requirements...

    So the idea is that if you are a sound institution making profits, keeping adequate capital reserves, not receiving any Federal bailout money...pay whatever you want...but otherwise...you are risking taxpayer money not shareholder money...

    Finally, any compensation over that amount that is paid must be paid over a 4 quarter period with the provision that no conditions occur that would cause a restatement of earnings in a negative way and if it happens, then excess compensation must be returned.  

    Obama - Change I still believe in

    by dvogel001 on Fri Jul 31, 2009 at 02:06:02 PM PDT

  •  wrong--wall street creeps are supposed to (0+ / 0-)

    understand the risks they take, so they weren't doing their jobs.  They should actually be fired.

  •  How about ..... (0+ / 0-)

    CEO pay in general.

    No CEO of any American company should earn more than 10 times the earnings of the highest paid non management employee, and no more than 20 times the earnings of he lowest paid non management employee.  That's total earnings in wages, stock options and bonuses alike.

    In honor of the Obama Administration's actions on GLBT issues during Pride month, Pride 2009 is proclaimed "Back of the Bus Pride Month".!

    by emsprater on Fri Jul 31, 2009 at 02:14:24 PM PDT

    •  No role for government on pay caps (0+ / 0-)

      With the exception of situations where the government is an investor, where they have all the rights of an investor to set pay, their is no role for government in setting pay caps. The proper role for government is setting marginal income tax rates. High marginal rates impact all high income earners, entertainers, sports stars, lawyer, doctors, and corporate executives. There is no reason to focus just on CEO pay.

      "let's talk about that"

      by VClib on Fri Jul 31, 2009 at 02:28:06 PM PDT

      [ Parent ]

      •  The CEO pay .... (0+ / 0-)

        would be directly tied to the wages he pays his workers, so it is not limited by the government, but by the actions of the CEO.

        In honor of the Obama Administration's actions on GLBT issues during Pride month, Pride 2009 is proclaimed "Back of the Bus Pride Month".!

        by emsprater on Fri Jul 31, 2009 at 03:53:19 PM PDT

        [ Parent ]

        •  No you are wrong (0+ / 0-)

          Any time the government dictates how anyone's pay is calculated so that there is a defacto cap, it's not a legitimate function of government. I am not even sure it's constitutional. The government does not own businesses (except for the few bailouts) and should not interfere with the owners right to pay any employee anything they want to pay. The correct role for public policy is in setting marginal tax rates.

          "let's talk about that"

          by VClib on Fri Jul 31, 2009 at 04:26:14 PM PDT

          [ Parent ]

  •  Tax deductions (0+ / 0-)

    If you think these large banks don't structure their compensation within the letter of the law that caps deductions for salary at the $1 million level per person you really don't understand how the game is played. Each of these banks has very smart tax lawyers and accountants who work on these issues and each of these banks is audited by the IRS EVERY YEAR. The $1 million limit on annual salary is not a loophole, it is an exception. Typically any type of compensation to an employee which is paid in cash and is taxable income to the employee is an expense for tax purposes. In the case of a salary over the $1 million limit the IRS gets to double dip. The excess salary cannot be deducted for the business, thereby raising its taxes and the employee still pays tax on the entire amount. This double dip is hardly a loophole.  

    "let's talk about that"

    by VClib on Fri Jul 31, 2009 at 02:23:57 PM PDT

    •  Didn't mean to say (0+ / 0-)

      The $1 million cap is a loophole. Rather, the exception for "performance-based" pay is a loophole. And the fact is that some of the "performance-based" pay is clearly not actually based on performance at all. Which wasn't obvious when things were going well but is obvious now.

      As for how the game is played, why would Wall Street (or large corporations in general) closely follow the letter of the law when they structure their compensation? They don't with safety, with product quality, with unions, with pollution, with taxes, etc. etc. etc. Rather, they trust that our regulatory structure is so lax that they won't be caught. And most of the time, they're right.

      Check out Economixcomix.com, when it's up and running.

      by Manfromporlock on Fri Jul 31, 2009 at 02:40:36 PM PDT

      [ Parent ]

      •  It's not a loophole (0+ / 0-)

        The whole idea of my comment was that the performance exception is not a loophole, the cap is a double dip by the IRS. That's the opposite of a loophole. A loophole is when you don't have to pay tax, not when you and your employee have to pay twice on a cash compensation payment. You clearly have not been through an annual audit for a Fortune 500 company. This is an area of focus for the IRS who are there every year.

        "let's talk about that"

        by VClib on Fri Jul 31, 2009 at 02:48:02 PM PDT

        [ Parent ]

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