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Roginsky: He Who Pays the Piper Fails to Call The Tune

The government is reportedly– gasp – on the verge of dictating pay packages to private corporations that took the largest government bailouts. How long before the cries of socialism from those defending the status quo begin anew?

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AP

Total compensation for the 25 highest paid executives at the 7 firms receiving the biggest amount of government largesse will reportedly decrease by an average of 50% from last year’s levels.

These are firms, like AIG and Citigroup, which would not exist today if American taxpayers had not propped them up with hundreds of billions of dollars.

Those who protest these limits on executive compensation are pushing back by arguing that top talent at the 7 firms will flee to Goldman Sachs, JP Morgan or hedge funds that have no limit on executive compensation. So what? Taxpayers should no longer be held hostage to threats of a walkout from the same crew that forced us to pump billions of dollars to prop up their firms.

Moral hazard is the unfortunate byproduct of the “Too Big To Fail” era and large banks continue to take outsized risk knowing full well there is a government backstop. Curtailing compensation for executives who would be out of work today had the taxpayers not propped their firms up is almost laughably minor in the face of the much larger crisis staring us in the face. And yet even the refusal of a blank check for unlimited bonuses to firms like AIG, which is 80% taxpayer owned, brings on cries of socialism.

Wall Street executives and their enablers in government think that they can ride out the populist outrage that stems from massive Wall Street pay days at the same banks that helped precipitate the financial crisis and usher in the highest unemployment rate since the Reagan years. And in large measure, they’re right. The financial reform proposals emanating from both ends of Pennsylvania Avenue don’t go nearly far enough in truly reforming the system and ensuring that another systemic collapse won’t happen.

Real reform that will lead to long-term systemic stability does not appear to be forthcoming anytime soon. Former Fed Chairman Paul Volcker is the Cassandra of the Obama orbit, beating the drum on meaningful regulation lest we face another massive crisis that will bring the financial system to its knees. He has been joined in his criticisms of the current status quo by Bank of England Governor Mervyn King, who gave a blistering speech on the state of the British banking system this week and by TARP watchdog Neil Barofsky, who rightly testified that banks that were too big to fail last year have become bigger still through mergers and lessened competition.

  • Video: Pay Czar Speaks

Yet outrage stemming from some quarters about compensation limits at the 7 firms, which combined received $250 billion through TARP bailouts and billions more through additional government guarantees, underscores that even the most modest reforms make Wall Street apoplectic. No longer can elected officials say with a straight face that we needed to bail out Wall Street in order to bail out Main Street. There is now the expectation that Main Street will continue to bail out Wall Street and provide executives with a blank check lest they – horror of horrors – go somewhere else.

If Wall Street executives don’t want government interference, they shouldn’t count on taxpayer charity. Even firms like Goldman Sachs, which repaid its TARP bailout money and is now in the position to give out record bonuses, are able to thrive because their counterparties, including AIG, continue to be financed by the government. Their compensation appears to be safe, though they have been more empowered than ever by less competition and an implicit understanding that their recklessness ultimately will be guaranteed by the taxpayers. Meanwhile, the American taxpayer continues to pay the Wall Street piper – and the piper continues to call the tune.

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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.