“I don’t think we can go back to the way it was. We’re going to need to see very, very substantial change.”
-Treasury Secretary Tim Geithner
Yet another danger of Bailouts: It invites all manner of government intervention in places that industry would prefer be left to the private sector.
The counter argument is, of course, that the private sector already had the opportunity to align compensation with performance, and screwed the pooch on that. The misalignment — paying out ginormous bonuses based not on profits created, but on volume of risky business written, regardless of profits — is one of the underlying causes of the entire debacle.
Note that congress ordered the Treasury Secretary to come up with a compensation plan on this when they authorized the release of the second half of TARP monies.
“Treasury Secretary Timothy Geithner called for major changes in compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June . . .
He said that Wall Street’s pay practices, which include big year-end bonuses, encouraged excessive risk-taking and helped precipitate the financial crisis. What’s needed is a set of broad standards that financial supervisors can use to make sure that doesn’t happen again, he said.The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to infringe compensation contracts already agreed.”
There is a simple lesson to be learned here: If you take 100s of billions in bailout money form the government, you are likely to have them intervening in all sorts of areas you would probably prefer they didn’t.
He who pays the piper calls the tune . . .
Geithner Calls for ‘Very Substantial’ Change in Wall Street Pay
Bloomberg May 22 2009