The subject of executive pay, which has dominated conversations on both sides of the Atlantic, takes center stage once again as the G-20 gather to meet in Pittsburg. Yet addressing the subject of executive pay apart from the even thornier issue of the “too big to fail” phenomenon does a disservice both to the constituents these G-20 leaders seek to protect and to the executives whose pay they want to regulate.
The events of the past year should have put an end once and for all to the misguided notion that government and Wall Street are not inextricably interconnected.
No less a Master of the Universe than Hank Paulson determined that government intervention was necessary in order to save our financial system. The ostensible reason for the bailout was that certain institutions, whether investment banks, commercial banks or large insurers, were simply too big to fail.
That is the reason executive pay has become a topic of discussion for government officials, who in a purely market driven system should never be involved in setting the pay of private corporate executives. The events of the past year, however, have exposed the fact that some companies have every reason to expect that taxpayers will continue to backstop self-destructive decisions. Today, whether either side likes it or not, Adam Smith’s invisible hand is often very visibly nudged along by government officials sitting 200 miles away from Wall Street.
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Despite the overhyped cries of socialism emanating from some sections of the punditocracy today, few elected officials are happy that our government has gotten into the financial services business. Though the financial markets have begun to recover, there is no guarantee that our system is out of the woods yet. Just this week, Tim Geithner refused to rule out future bailouts of companies that our government deems too big to fail. As it is, taxpayers will be the not-so-proud stakeholders in Citibank , AIG and other large firms for many years to come.
These problems will persist as long as there is not a drastic regulatory overhaul that prevents firms from growing so large that government has to intervene in order to save them. Those who deploy lobbyists to stop any financial regulation essentially expect a system where they roll the dice, collect bonuses paid on short term gains and leave taxpayers holding the bag in the event that something goes wrong. Their repulsion at greater regulation would have been appropriate if they never received a dime of taxpayer money or posed a systemic risk to themselves and to those around them. At this stage of the game, however, this attitude is destructive not just to taxpayers, but to the very financial system from which these executives profit.
House Financial Services Committee Chairman Barney Frankhas pledged to enact “death panels” for institutions that are deemed too big to fail and which therefore pose a systemic risk to our financial system. Virtually every single power player on Wall Street and their cadre of lobbyists will be arrayed against him. The shortsightedness of their position is breathtaking only because it is so self-destructive. The longer too big to fail institutions exist, the more government and other regulators will insist on the right to monitor compensation and other practices that are best left to company boards and shareholders.
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Wall Street and its lobbyists would be better off recognizing that if they want to be masters of their own domain, sometimes it really does make sense to burn the village in order to save it. The faster too big to fail institutions are broken up, the sooner private businesses can get back to privately determining how they want to compensate those who determine whether they sink or swim.
Julie Roginsky is a CNBC contributor who has extensive experience in government, politics and public relations on both the federal and state levels including serving as the Washington communications director for former Senator Jon Corzine.