The Criticism Of Wall St. Bonuses Continues.....

Senior members of the Administration were out in force on the Sunday TV talk shows to criticize the multi-million  bonuses that many Wall St. bankers will get this year. Executives at companies that still owe the government money under the TARP program will have their compensation restricted by the Treasury. The rest of the largest banks and investment houses will be able to pay their best people as they choose.

The primary problem the Administration has with bankers is not that they are well paid, but that they take high compensation without helping the economy. David Axelrod, a senior White House advisor said, “The most offensive thing is, we haven’t seen the kind of increase in lending that … we should. There are a lot of small businesses, creditworthy businesses around this country who still can’t get the capital they need to grow, which is important for our economy.”

The trouble with a deep recession is that very few consumers and companies are creditworthy. That is why the amount of money outstanding on credit cards nationwide drops by billions of dollars each month. Credit card issuers are sharply cutting back  on the credit lines they offer. Small businesses tend to be bad credit risks. The most modest of them have been built on home equity loans or other risky borrowing. These firms  have almost no cushion in a downturn, no balance sheets or reserves to speak of. These may be worthy targets for lending when the government wants to turn the economy around, but that does not make them creditworthy.

Tying Wall St compensation to the practice of making high risk loans for the good of the economy is unlikely to work. A bank that makes bad loans loses money and many have had to raise more capital to make up for those losses. Most large financial firms are already facing very large write-offs on consumer and commercial mortgage loans. More high-risk loans will cause their troubled balance sheets even more trouble.

Bank executives know that write-offs lead to losses and losses lead to cuts in their compensation. The system is stacked toward bottom line performance even if that system initiated the credit crisis.

Banks are spending a great deal of their effort trading for their own accounts, underwriting and loaning money to businesses that can pay them for the transactions, and managing money for institutional clients. These are all financial activities that have histories of being profitable. Bankers are doing what they are paid to do — make money for their employers.

Congress and the Adminstration are tempted to pass laws that will cap the pay packages of all bankers whether they are at firms that owe the government money or not. That leads to the issue of whose pay gets caped next. Government contractors make a great deal of their profits from supplying things like planes and construction for taxpayer funded initiatives. The CEO of Boeing (NYSE:BA) could become a candidate for pay restrictions because his firm receives federal cash.  The number of large companies that the government could choose for management compensation restrictions could be nearly endless.

The other alternative is fairly simple . The government can simply tell the banks who it would like to see get loans and hold those banks blameless if they post losses on the loans. The government will cover the bad debt. The banks will be able to report reasonable earnings and will not have to go back into the capital markets and raise more cash.

Of course, Congress and the Administration are not going to help the banks with loan losses so that they will take lending risks that they feel are imprudent as part of an effort to help the economy recover. And, that would have to be the quid pro quo. The government pays off bank losses and in exchange has some say over banker pay.

The government does not have the tens of billions of dollars to make enough difference by making loans to consumers and small businesses through the banks. The deficit is too high.

Bankers will get their bonuses this year and year after year into the future. They are making money for their companies and their shareholders.  Fixing the economy is not a part of their charters.

Douglas A. McIntyre