On Friday, detailed compensation plans for the top 25 earners at seven companies — American International Group, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC — were delivered to the offices of Kenneth Feinberg, the Obama administration’s bailout bonus czar. Why? Because these companies received substantial government funds, and Mr. Feinberg has been tasked with deciding, within 60 days, how pay should be distributed to the firms’ highest-paid employees.

And while he is only ruling on these seven companies, his determination is binding and will no doubt cause ripple across the financial world.

So the question now becomes, how big of a wave is this administration willing to make?

Robert Reich, for one, does not have high hopes of being impressed. And finds it a troubling indicator of other reform measures for both Wall Street and health care by the Obama administration. There are “Grim early Indications for Wall Street reform: The banks want to stay huge and indulgent, and the administration may not be willing or able to stare them down.”

Second only to healthcare reform as a test of Obama’s toughness and resolve is reform of Wall Street. And like the healthcare industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. So what can we learn by what’s going on now, regarding pay for the top brass at big “too big to fail” banks?

…Tragically, Treasury has already given in on this one.

Somehow, I thinking Main Street might find stronger adjective to express their disappointment/anger/frustration then does Mr. Reich.

But beyond the lack of emotion he gives sound reasoning for why these pay decisions are wrong. And also why they really matter for both their political and financial ramifications.

… In judging whether a proposed pay package is appropriate, Treasury has decided to be guided by “comparable” pay packages in the industry. This means Ken Feinberg, appointed as special master to decide on a case-by-case basis, will be the flak-catcher. …

“Comparable” pay is a ridiculous standard to begin with, and the argument that $10 million, or even $7 million, is necessary to keep talent is absurd on its face. …Wall Street has exhibited a truly astonishing lack of talent. … Without these [taxpayer] bailouts, there’d be no “talent” because there’d be no Goldman, no Citi, no Street.

…The whole system of “comparable” pay is propped up by a zero-sum self-perpetuating competition in which the price of so-called “talent” is determined by how much every other bank is willing to pay for “talent.” If every bank decided to pay $1 million, that would be the “comparable” price of talent on the Street. I mean, it’s not as if this economy has so many other $1 million-a-year positions begging for Wall Street executives and traders.

Personally, I think the taxpayers should vote on pay since we were forced into becoming shareholders. And I’m thinking the taxpayers might find $1 million far too expensive.

And then there is moral hazard of pay for the “too big to fail.” Which only reinforces the non-reforming reform strategy of this administration. One would think that eliminating “too big to fail” would have been the first reform. But back to Reich:

The fact that these big banks have been judged “too big to fail” means their top executives and traders know they can take even bigger risks now, because we taxpayers will bail them out. So inevitably part of their firm’s earnings, based on such risk-taking, now come as a result of this public insurance policy. When risks pay off, as many are doing now that the stock market is showing signs of life, they reap large rewards. When the risks turn really bad, you and I and other taxpayers will pick up the pieces.

The insurance these “too big to fail” banks are receiving makes them more like public utilities than private firms. As such, not only is it entirely appropriate for government to review their pay but also to make sure pay is kept within strict bounds … earning just about what the top brass of any public utility earns (which, when I last looked, ranged from $100,000 to $600,000).

The big banks have a choice, of course. They could opt out of the “too big to fail” system. They could break themselves apart (or invite antitrust agencies to do the breaking for them) so they were no longer too big to fail and won’t be bailed out the next time they make hugely stupid mistakes. Then they could award their executives and traders as much money as they wanted and as the market would bear — because then they’d be part of the free market instead of wards of the state.

I thinking Main Street is learning that “free market” is an oxymoron for taxpayers. Nothing is “free”. It’s only a matter of who is pays. And we the people are paying, and paying, and paying.

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[Cross posted at No Quarter]

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