The Wall Street Journal weighs in on the "fanfare" surrounding President Obama's limits on bankers' compensation. But, they say, "the real drama is taking place behind-the-scenes as the biggest banks lobby to have the federal government guarantee their toxic assets, and the political class seems ready to oblige."
The compensation caps are no doubt politically satisfying as revenge for Wall Street's role in creating the current financial mess. Heaven knows it's hard to sympathize with Goldman Sachs, which yesterday expressed its desire to leave the Troubled Asset Relief Program on the very day the new bonus limits were announced. We assume this means that from here to eternity Goldman will not be too big to fail.
Taxpayers need to realize, however, that Members of Congress want to impose salary and bonus limits to give themselves political cover when they are next asked to provide more bailout cash. Congress wants to seem to be tough on bankers in return for the cash, even if in reality the feds aren't tough at all.
What's next? Guarantees of one sort or another. "The Obama Administration is debating several new bailout options, and the favorite of bankers is federal guarantees. The idea is that the government would agree to absorb any potential losses on dodgy paper, perhaps after some small initial loss by the bank."
Chuck Schumer, the Senator from Wall Street, told Bloomberg this week that insuring bad bank paper "is one possibility that seems to be gaining some currency." And no wonder: For bankers and politicians, the benefits are clear. The bankers know their losses have been limited, which means their bad lending choices become largely the taxpayer's problem. Unlike a public capital injection, a guarantee also doesn't by definition dilute current shareholders. When the Federal Reserve guaranteed $29 billion in Bear Stearns paper for J.P. Morgan Chase last year, it came with no strings attached.
While guarantees are on the table, they are not a panacea. Read more here.
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