Congress Can Kill Outlandish Bonuses for Wall Streeters: Why Won't They?

Great minds have been searching, ever since last fall’s financial sector meltdown, for an antidote to the wildly excessive Wall Street paydays that made that meltdown inevitable. That search, after over a year, still hasn’t generated anything close to meaningful Wall Street pay reform.

And that has to be puzzling many, if not most, average Americans. The problem on Wall Street, after all, doesn’t seem to be all that complicated. Neither does the solution. Wall Streeters did terrible things -- they gutted the pensions and savings of millions -- because they were rushing to hit massive pay jackpots. To prevent that greedy rushing in the future, we ought to limit those jackpots.

And Congress could do that -- by not letting any banker getting bailout dollars make more than the President of the United States. Or by denying government subsidies or tax deductions to firms that pay their top execs over 25 or 50 or 100 times what their workers make. Or by taxing big bonuses at 90 percent.

Various bills that take these approaches have actually been sitting in Congress, all this year. Why aren't these bills going anywhere? America’s big banks, predictably enough, oppose them. But so do many of Wall Street’s mainstream critics. Both these camps have been bending over backwards to steer Congress away from the notion that rewards on Wall Street need serious downsizing.

The banks, by and large, simply deny that these rewards have had any significant impact on how the movers and shakers of high finance behave. In the end, they argue, "the market" will always punish power suits who take reckless risks -- and the power-suits know it.

And if those power-suits didn’t know it before last year’s financial meltdown, the apologists continue, they know it now, thanks to last year’s nosedives at Bear Stearns and Lehman Brothers.

These nosedives left top execs at Bear Stearns and Lehman holding millions of shares of worthless stock. The Lehman collapse wiped nearly a billion dollars -- $931 million, to be exact -- off the personal net worth of Lehman CEO Richard Fuld. Bear Stearns CEO James Cayne saw the total value of his personal stock holdings drop by $900 million.

In effect, apologists for Wall Street's compensation status quo argue, the market system worked. The truly reckless paid a price for their recklessness. So leave that system alone.

Wall Street’s mainstream critics don't want to leave that system alone. They believe "the market," left to its own devices, does not adequately discipline the reckless. We need reforms, they believe, that tie executive rewards to "performance" that boosts "long-term shareholder value."

With such reforms in place, their argument goes, Wall Streeters would have no incentive to take reckless risks -- and lawmakers would have no reason to mess with capping the rewards that go to Wall Streeters.

Last week, the most eminent among Wall Street's mainstream critics -- Harvard Law’s Lucian Bebchuk -- released a report that takes on Wall Street's hardline defenders and their claim that the reckless, thanks to the market, have truly suffered for their sins.

This new report powerfully demolishes that hardline claim. But the report, read closely, may just as powerfully undermine the mainstream case against caps.

Bebchuk's new paper revolves around what really happened, on the executive pay front, at Bear Stearns and Lehman. Top execs at these two banks, Bebchuk and his two Harvard co-authors show, did not lose their shirts when the banks crashed. In fact, the top execs at both Bear and Lehman left the crash scene in fine financial fiddle. Spectacularly fine fiddle.

Between 2000 and 2008, the top five executives at Bear Stearns and the top five execs at Lehman together pocketed just under $2.5 billion. About half a billion of that came from annual cash bonuses. They picked up the rest selling off the shares of bank stock they had received as "performance" incentives.