Administration still won't rein in lavish pay schemes

Imagine if you could report the value of your work on your tax return, rather than your actual income. At the end of the year, you’d issue yourself a W2 or a 1099 based on a comparison of how other people who did the same kind of work valued their efforts. The lower the worth you put on your work, the lower your taxes. Let’s just say the IRS wouldn’t be too happy with a system that encouraged low-balling.

Wall Street bankers were able to arrange an equally self-serving compensation system for themselves - and they got away with it.

Here’s how it worked: everyone from the CEOs of the big banks to traders pegged their compensation to short term profits, which in turn were based on the value of the investments they were buying and selling to each other. Their favorite investments were “derivatives” – “financial weapons of mass destruction” Warren Buffett has called them – securities composed of bundles of other securities that were backed by assets like subprime mortgages. No one really understood the value of the derivatives, and many of the assets themselves were high-risk. That didn’t stop the speculators; indeed, the fact that the derivatives were difficult to value made it easier to justify huge paper profits. And those paper profits were the basis for the stupendous salary and bonuses that they were paid – billions of dollar for the biggest firms like Goldman Sachs and Morgan Stanley.

Neither the Congress, nor federal agencies, nor even the Boards of Directors of these giant corporations did anything about this compensation system, which encouraged reckless behavior. Then the game of musical chairs came to a sudden halt one year ago, and lots of banks and investment firms got stuck holding derivatives that plunged in value. Result: the crash.

“There can be no doubt that the way bankers and traders were paid contributed to the crisis,” says a writer for the Wall Street Journal. “Even bankers acknowledge that now.”

Taxpayers and Main Street ended up picking up the tab for the derivative debacle and are now struggling to make ends meet, while many of the financiers walked away wealth intact. Most Americans have not forgotten how Wall Street added the insult of billions in taxpayer-funded bonuses to the injury of the $700 billion bailout. And it remains a highly sensitive political point. The CEO of Citigroup, speaking before a New York audience the other night, was forced to acknowledge that $100 million in annual compensation was excessive.

For months, the Obama Administration has been promising to assuage public outrage and prevent another collapse by reforming the Wall Street compensation system. Unfortunately, its plan, first reported last Friday, allows the inmates to continue running the asylum.

There would be no caps on compensation; not even any rules on how companies set pay. Instead, the financial conglomerates and their Boards of Directors would be given the responsibility to make sure that executive compensation plan “balances” short term and long term “goals.” Relying on these companies to regulate themselves can hardly be called “reform.” Lest there be any doubt as to how inert the leadership and stockholders of these companies continue to be, even after the crash, a study reported in the Wall Street Journal found that this year, shareholders approved executive-pay packages at every one of the companies that got taxpayer bailout money.

Moreover, the two agencies that looked the other way as Wall Street pillaged the American economy – the Federal Reserve and the Treasury – are supposed to police the industry.

This is all great news for the Money Industry: no limits on how much they can pay; oversight by agencies ideologically indentured to the industry; and, not least, likely to take the steam out of congressional efforts to impose far tougher regulation through new laws, bitterly opposed by the industry.

Incredibly, there are some who think even these proposals go too far. They still believe that Wall Street should be free to do whatever it wants in the pursuit of money, even if the rest of us have to clean up afterwards. Republican Study Committee Chairman Tom Price said that the Fed’s plan “goes against every principle that has created American prosperity.” If he’s referring to the derivative-driven financial system that enriched but a small sliver of our population beyond their dreams, that’s a prosperity America can no longer afford.