Pay packages may ignite populist responses in 2010

By Sean West

Policymakers appear puzzled by massive Wall Street payouts. Why are the banks paying such large salaries and bonuses amid such political and public sensitivity to the issue?

There are a few possible explanations. They could be enjoying one last hurrah before a new regulatory regime changes their ability to earn blockbuster profits. Or they could be showing Congress and the administration, both of which demonized the industry earlier this year, that there’s nothing either can do to stop them. Or perhaps it’s much simpler: Pay is how bankers measure success, so firms will go to any length to retain top talent. Even if self-regulation could go a long way to currying political favor in Washington, don’t expect it from Wall Street. But massive payouts after a year of taxpayer support at a time when unemployment is over 10 percent seems like a recipe for populist backlash. So how likely is another bout of populism in response to bankers’ compensation? There will be plenty of opportunities to find out in coming months.

In recent months, anger at bank pay has subsided as the administration has tried to bureaucratize the issue by appointing a “Pay Czar” and Congress has remained focused on healthcare. In March, Congress lurched into action over bonuses at AIG. Only a handful of votes away from passing draconian bonus clawback legislation, Congress earned its highest approval rating this session: 37 percent. But few members have said much on the subject since then. The White House and Treasury have followed a similar path: cognizant of a perception that the administration was becoming too interventionist, they bureaucratized the issue by appointing Kenneth Feinberg to review pay packages at banks receiving exceptional aid in order to protect taxpayer investments. Part of the calculation is to create an environment for the banks to remain competitive, which includes retaining talent that demands market-rate compensation. It was no surprise that his first set of rulings, which applied to the top 25 highest-paid employees at each of the seven largest TARP-recipient banks, got big headlines but had a relatively limited real impact.

Even if the issue is downplayed in the near term by a light-touch Pay Czar, it will be a long time before bankers are out of the woods. For starters, bankers’ pay may again become a political lightening rod as Congress focuses on financial regulation reform package through early next year. This is particularly true if Obama begins to feel threatened by rising unemployment or if he senses that he is losing his base and needs to deflect anger. In that case, look out for fireworks as an election year Congress turns its attention to financial regulation in the first quarter of 2010.

It’s not just up to the Treasury Department or Congress though. Banking regulators like the Federal Reserve are trying to get in front of the issue to prove their competence and preserve their current powers — and whatever Congress passes, it will be up to the regulators to interpret and implement. Plus, a whole new round of legislating may follow from the Financial Crisis Inquiry Commission, which will unveil its report on what caused the market turmoil at the end of 2010. While Feinberg may be more of a technocrat than a czar, significant risk remains for a populist-driven response to bankers’ pay going forward.

Sean West is a U.S. policy analyst at Eurasia Group.

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