The Last of the Wall Street Pay Cuts

The Obama administration is finally getting tough—on corporate invalids.

The government's "pay czar," Kenneth Feinberg, is coming down hard on the seven firms under his jurisdiction, ordering steep pay cuts for about 175 top executives. The brass at AIG, Citigroup, Bank of America, GMAC, General Motors, Chrysler, and Chrysler Financial will have to live without the nine-digit paychecks Wall Street's titans have become accustomed to. Some won't even make eight figures. And the majority of their pay will come in the form of stock that can be cashed in only after the companies have met long-term performance targets. Until that happens, the impoverished execs might have to get by on meager salaries that might not even reach $1 million.

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So hyperventilate about the government meddling in the private sector, and then consider that every one of these firms would have been vaporized if not for government intervention. American taxpayers effectively own AIG and General Motors, with major stakes in the other firms. Together, all seven firms have devoured nearly $300 billion worth of bailout funds. They've gobbled up the majority of the TARP money in the government's corporate rehab program. None of these firms have said when they will pay back those bailout funds, and some may never pay it back.

That makes the employees of these ailing firms the equivalent of government workers. By that measure, they're some of the most highly paid people on the federal payroll. Traders at AIG, who in the past have earned millions for financial bets that ultimately trashed the firm, will earn no more than $200,000, according to the Wall Street Journal. That's practically the minimum wage by Wall Street standards, but it's more than Treasury Secretary Tim Geithner and his fellow cabinet secretaries earn. It probably irks the traders that they'll still earn less than the president, whose annual pay is $400,000.

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Government limits on executive pay are controversial, for good reason. But there are really two separate issues. The first is how much executives should earn at companies dependent on government aid. By the free-enterprise standards that Wall Street capitalists live and breathe, firms like Citigroup, AIG, and GM should already have failed and disappeared, to be replaced by other firms able to manage their business better. The unfortunate thing about Feinberg's restrictions is that for the most part, they punish new management that came in to clean up problems created by others. Former CEOs like Chuck Prince of Citigroup and Martin Sullivan of AIG, who bear much of the responsibility for their firms' collapse, remain off the hook. But lots of small businesses and other firms have failed with no bailouts for anybody, and if there's anything unfair about the conditions attached to bailouts, it's that a bunch of people at a handful of big firms still have jobs and paychecks while other workers just as worthy didn't qualify for a bailout because their firms weren't big or important enough.

Citi, AIG, and the rest complain that with strict limits on pay, they won't be able to retain or attract the talented workers needed to keep their businesses competitive. This is laughably dubious. The "talent" at these firms led them to the brink of extinction in the first place. By definition, as bailout recipients, these are uncompetitive firms. There's a presumption that the government's intent is to make these firms competitive again, but don't be so sure. In a more stable environment than we've had over the past year, the economy could have withstood the demise of these weak firms—and might even have been better off. The feds are still looking for ways to rein in huge, unwieldy firms with disproportionate market power, and starving them of lavish pay packages might be one way to accomplish that. And by the way, lots of talented bankers from the defunct Lehman Brothers and Bear Stearns, along with other downsized firms, are looking for work.

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The second issue is the pay earned at all the other companies in America, the ones that haven't needed long-term bailouts to survive. There are legitimate questions about Goldman Sachs and a few other Wall Street survivors that paid back their TARP funds but also got back-door bailouts through redemptions of contracts with AIG, sweetheart government loans, and other measures. As unseemly as those stealth bailouts are, they may end up being the ransom paid in exchange for a more stable financial system. But the Goldman clique is a tiny fraction of all firms, and it's not even clear how the government would enact pay restrictions on companies that aren't dependent on federal funds.

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So while Obama hammers the Sacrificial Seven, the rest of corporate America is probably off the hook. Severe pay limits at the biggest bailout recipients help Obama address the legitimate rage that accompanied the news earlier this year of lavish bonuses at AIG and Merrill Lynch (now part of Bank of America). As for the other firms and what they pay their people, that's now a matter for Congress to decide, as it debates new regulations on the financial industry. The strongest pay proposal so far would merely require a nonbinding shareholder vote on pay packages for executives. But shareholders have always had the ability to object to lavish pay, even when CEOs were raking in packages in excess of $100 million whether their firms prospered or not. Maybe shareholders will be more vigorous this time around. Let's hope somebody is.