Andy Kessler has a good opinion piece in the Wall Street Journal today. In it, he explains why pay controls for Wall Street are a red herring. I've made the same comment, but it's worth looking at some of the points he makes, because I think they're strong arguments. Here's his key point:
It
wasn't reckless schemes and excessive risk that sunk banks and Wall
Street; it was excessive leverage. And thanks to cheap money and twisty
regulations, risk was extremely undervalued. Banks owned huge
portfolios of real-estate loans and mortgages specifically because
they, and regulators, didn't think they were taking much risk at all.
I would add two points. First, nothing fundamentally changed over
the past decade in Wall Street compensation style. So to say that Wall
Street suddenly took greater risks than ever before because of a new
prospect of greater pay is an absurd conclusion to draw.
Second, even if pay were capped, Wall Street firms would still try
to maximize profits -- because that's what they do. I'm not sure I
understand the how capping pay or changing incentive structures would
hope to change banker behavior. They will always try to earn the
highest return, whether for job security, career advancement or to
appease shareholders. The distinction between short-term and long-term
profit is dubious at best. Both are important goals. And bankers didn't
take short-term risks knowing they would go bad. Kessler explains this:
Populist pay limits are squarely aimed at Wall Street, not
local banks, yet for the most part Wall Street doesn't take much risk.
Highly profitable investment banking and sales and trading are agency
businesses, doing work for customers for a fee.
He goes on to say that bad trades do happen and explains how they did over the past several years:
As competition and electronic trading ate into the agency
businesses and profits in the early 2000s, the firms redirected their
capital to invest in mortgage-backed securities, pocketing the 2%-3%
difference between mortgage rates and their cost of short-term capital.
This was the easy trade, the safe trade--not a "thirst for reckless
schemes."
In a sense it was a simple arbitrage trade. The problem, of course, was
more...http://business.theatlantic.com/2009/09/compensation_didnt_cause_the_crisis.php