Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Wall Street Compensation Legislation; A Pyrrhic Victory | March 20, 2009

Members of congress recently passed a bill which will tax all individuals working for institutions which received over $5billion of TARP (Troubled Asset Relief Program) funds at a rate of 90% of all income earned over $250,000. Rather than basking in the glory of their decisive and punitive action, perhaps members of Congress should go back to their Plutarch and Roman history to learn about Pyrrhic victories. The tale of King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans during the Pyrrhic War, has lessons applicable today. Plutarch reported the King to have said after his final victory that “one more such victory would utterly undo him”.

Congress had a victory which could utterly undo the recovery progress that has been made to date and certainly result in a number of unintended negative consequences. As I say this, in no way am I apologizing for the bad judgment, avarice or possible malfeasance by bonus recipients at AIG. It is disgusting on its face. That said, the solution being proffered gives America a Pyrrhic victory. The reason is that it goes way beyond AIG. To punish some 400 people, Congress chooses to take action that has innumerable negative consequences:

1) It discourages future investment by private investors in a public/private TALF (Term Asset-Backed Securitization Loan Facility) program to restart asset securitizations-logical concerns arise as to potential government intervention in compensation and the general investment decision making of such private investors

2) It raises significant issues as to the sanctity of contracts and whether the government could unilaterally force the breaching of contracts with institutions in which it has made TARP investments-If you can’t rely on a written contract, what can you rely on?

3) It will likely lead TARP recipient banks to take actions to rapidly repay their TARP investments. While this may sound good, they will likely do it by decreasing lending to generate requisite capital for TARP repayment-Is this a time we want to take action which discourages lending?

4) We have seen the adverse consequences of inadequate regulation and supervision of highly motivated and intelligent players on Wall Street. That said, the problems really were generated by a small minority of the participants on Wall Street. The majority were honest hard working people who have suffered significantly in terms of job loss and investment in their companies’ equity (the currency which very many were paid with significant liquidity restrictions). Do we really think that they will want to stay working on Wall Street or that we will continue to attract top minds to an industry where top performers make substantially less compensation than do the lawyers, accountants or mid level executives at businesses across the nation with whom they work? It would be a mistake to think that top people have no alternatives. Foreign institutions are already seizing on the opportunity to strip American firms of top performers (BofA/Merrill is now suing Deutsche Bank for just such an action). Other savvy Wall Street veterans with significant experience in prior downturns are simply retiring or turning to other more remunerative and/or less stressful pursuits.

5) The real bad guys already have made their money. The rogue traders and irresponsible CEOs making $30-50million per year over the last ten years are crying all the way to the offshore bank. To punish the AIG 400 the way that Congress desires, we also have to punish those tens of thousands who we expect to remain at their posts to clean up the mess. Who among us really believes that spanking the innocent for the misdeeds of others is an effective motivational tool??

How did it ever get to this place to begin with? The answer to that lies with Hank Paulson’s ill conceived three page TARP plan to give money to desperate institutions with no pre-conditions. While not quite the moral equivalent of giving an alcoholic another drink, it is not a completely inappropriate analogy. In the United Kingdom, Gordon Brown clearly saw the need to stipulate significant preconditions to the granting of bailout funds. Tim Geithner’s comments that he did not know about bonuses etc reminds one of Inspector Reynaud’s comment in the movie Casablanca as he closed down Rick’s Cafe for gambling (after accepting his winnings). The time for assertive action was then. For Geithner to not have thought about compensation and contracts is naive. He was and is an experienced hand at dealing with Wall Street. He is neither naive nor stupid. Moreover, he had the example of Gordon Brown to follow (repugnant as it may be for an American financial titan to follow the example of an over educated son of a Scottish preacher). The sad reality is that he either was unduly influenced by Paulson, opted to not fight with Paulson for fear of adversely influencing markets or lacked the fortitude to do what had to be done at the time. As a result, and to paraphrase Julius Caesar, another ancient Roman, “the die was cast”.

What then should be done about AIG? Initially, each bonus recipient should be both “jawboned” and told that they will be publicly identified with all of the attendant ridicule. While many may not mind, there is tangible evidence that a number do care and are stepping forward to return their bonuses. All who do not voluntarily return the bonus money should be subjected to investigation to determine if their deportment was appropriate to warrant receipt of such a bonus. If found lacking, litigation should be undertaken. Finally, the government should seek the agreement of all other TARP recipient institutions to refrain from hiring or doing business with such individuals and/or institutions which hire any of the AIG 400. This de-facto “Black List” would serve as a powerful signal as to the government’s intention to avoid doing business with people who are not “on board with the program”. It will similarly provide a material disincentive for TARP and non-TARP recipients from hiring any of the AIG 400. Because TARP recipient firms firms like JP Morgan, Citibank, Morgan Stanley et al touch so many players in finance, this is a draconian threat to the future employment prospects of anyone who does not “play ball”.

The government needs to make it clear that it will take appropriate action on the AIG bonuses and not tolerate the AIG bonus situation from occurring again. It is equally important that it must not allow a mob mentality to impair its judgment in a manner that results in a Pyrrhic victory of expediency and unintended consequences over the desired administration of serious punishment for non-compliance with the people’s wishes.


  1. […] added an interesting post today on Wall Street Compensation Legislation; A Pyrrhic VictoryHere’s a small reading3) It will likely lead TARP recipient banks to take actions to rapidly repay their TARP investments. While this may sound good, they will… […]

    Pingback by Topics about Banking » Wall Street Compensation Legislation; A Pyrrhic Victory — March 21, 2009 @ 1:47 am

    • At the risk of sounding cynical, the banks will cut back on corporate lending first for two reasons: 1) the amounts are much bigger; and 2)there is no real political pressure on them to step up corporate lending. Politicians are focused on mortgages for constitutents so these won’t initally be hurt as badly when they start to cut back on lending

      Comment by bosox4 — March 21, 2009 @ 3:38 pm

  2. Very thoughtful observations, although the Obama administration probably thought they were acknowledging their debt to Gordon Brown by giving him such an impressive set of DVDs.

    Comment by skeptic — March 21, 2009 @ 11:12 am

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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan!







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