Critics: Executive Pay Cuts A Sop To Taxpayers The Obama administration's bid to ease public outrage over huge Wall Street paydays may be politically expedient. But critics say it distracts from the fact that a real overhaul of the troubled financial system appears to be withering on the vine on Capitol Hill.
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Critics: Executive Pay Cuts A Sop To Taxpayers

The Obama administration's bid to ease public outrage over stratospheric Wall Street compensation may be politically expedient. But critics quickly labeled the proposal to cut pay for executives at seven companies propped up by a government bailout a sop to angry taxpayers.

Meanwhile, critics say, a real overhaul of the nation's troubled financial system appears to be largely withering on the vine on Capitol Hill — just a year after risky Wall Street practices brought the nation's economy to its knees.

"The politicians are playing politics," says R. Christopher Whalen, a former Wall Street investment banker who predicted that, with midterm elections looming in 2010, "you're going to get another year of posturing and inaction.

"It's almost as though we didn't have a crisis," says Whalen, now a managing director of Institutional Risk Analytics.

Whalen is among Wall Street watchdogs and analysts who say they agree that runaway compensation is an issue — but not central to what ails Wall Street or the nation's economy writ large.

And they were pessimistic — some despairing — about the prospects on Capitol Hill for what the administration once promised would be a muscular overhaul of the financial system.

Papering Over Bigger Problems?

Legislation designed to regulate the high-risk derivatives market has already been so watered down that the biggest players will be able to avoid oversight, analysts say.

And intense lobbying efforts helped guarantee that a wide swath of the nation's banks are likely to be exempt from scrutiny by a new consumer financial protection agency approved Thursday by the House Financial Services Committee.

So with some key pillars of his overhaul agenda now in question, and criticism of his financial advisers rising, Obama has clearly identified the compensation issue as one that will resonate with taxpayers buffeted by unemployment and a seemingly jobless recovery. Even though the administration's pay czar Kenneth Feinberg insisted Thursday that it was his decision to cut pay, and not the president's.

The White House coupled the news that Feinberg will seek executive pay cuts at seven companies still receiving support from the $700 billion taxpayer-funded bailout with a separate Federal Reserve proposal to police the pay policies of the 6,000 banks it regulates.

"They're trying to attack a symptom, and the symptom is not the problem," says Yves Smith, a New York-based management consultant and founder of the blog Naked Capitalism.

"The problem we've got is socialized losses and privatized gains," she says.

At the New School's Bernard Schwartz Center for Economic Policy Analysis, Jeff Madrick said the public relations aspect of the announcement papers over the administration's lack of a clear plan to fix the financial system.

"They have failed to come to grips with how to re-regulate Wall Street — and even how to implement and enforce the rules that already exist," says Madrick, director of policy research at the center.

"Don't get me wrong. I think compensation is a big problem and should be restricted," he says. "But profits have returned to Wall Street with a vengeance, and the administration finds itself under the gun, criticized, and this is how they're trying to appeal to the public."

The plan appears to attack greed, one analyst said, instead of systemic problems with how Wall Street operates.

Why Not Goldman Sachs?

Analysts also questioned why Feinberg targeted just seven companies, rather than a broader range of institutions — including those that have already paid back the money they received from the Troubled Asset Relief Program.

Specifically? Goldman Sachs. The Wall Street investment bank, which has paid back $10 billion in TARP money, still has billions of FDIC-insured bonds outstanding, and it has been under fire for its plan to dole out more than $23 billion this year in executive bonuses.

"Government subsidies are just everywhere," Smith said in an interview. "If you accept that we have to do something — and most do — to make the focus the TARP institutions is ridiculous."

The companies identified by the White House for executive pay cuts are AIG, Bank of America, Citigroup, General Motors Co. and its former financing subsidiary GMAC, Chrysler and Chrysler Financial. Under Feinberg's plan, salaries of the top 25 executives at the seven companies that have yet to pay back TARP money will be cut as much as 90 percent.

Four are automobile-related companies; analysts consider bailed-out AIG as largely nationalized.

In an interview Thursday with CNN, Feinberg said that three AIG executives will be exempt from the cuts because they are working under valid contracts that pre-date his arrival. He also characterized the pay cut proposal as a response to salaries "inconsistent with the public interest" and said politics played no role in his decision.

Banking analysts like Bert Ely also warn that rules that constrict compensation at ostensibly recovering companies could cause them to lose access to talented people who could help turn around their fortunes.

"The last thing we want to do is fire bullets into these companies," Ely says. "We have to be careful in dealing with this so we don't make it that much harder for these companies to recover."

Anger At Obama's Top Economic Advisers

The compensation-cut announcement, while perhaps a temporary public relations gain for the administration, also laid bare growing anger among Wall Street watchdogs with Obama's top economic advisers: Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers.

The team, Madrick says, has been operating with "no central hypothesis about the causes of the credit crisis or the failures of the regulators."

The president's chief economic advisers, he says, have also failed to lay out how they plan to fix a system that rewards risk-taking but fails to punish poor choices.

"There's a heck of a lot to do here, and they've not made a strong case for what and how to do it, and they haven't made a case to the public," Madrick says.

Whalen, who pronounced re-regulation efforts as "pretty much dead," says Congress and the White House have adopted an "extend and pretend" philosophy.

"They rant and rave about salaries, but what about the banking industry?" Whalen says. "The Obama people are going to really regret this year."

So, while Elizabeth Warren, who chairs the panel that oversees the TARP program, asserted Thursday that corporate executives can't "party on like its 2007," the reality is, most top dogs on Wall Street still can.

And once unemployment starts heading down? An overhaul of the financial sector --and any real reform of banking practices and compensation schemes, analysts predict — will be seen only in the rearview mirror.

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