The Washington pay czar who's ordered steep pay cuts for executives at bailed-out firms could
have practically unlimited power to regulate compensation at any company that gets federal funding, lawyers say -- even if his legal authority is sketchy.
The move raises questions about whether the mandate will be limited to the seven firms Kenneth Feinberg is currently targeting -- and whether it could trickle down to smaller companies.
"He has a lot of authority with respect to not just the seven but with respect to all TARP firms," said Stephen Bainbridge, law professor at UCLA. "It's an enormous expansion of federal power over corporations."
I haven't seen any polling on Feinberg's move but I suspect it would enjoy significant support. Why not? After all, no one likes greedy Wall Street executives. Most people especially don't like greedy Wall Street executives that ran their firms into the ground. If the tax payers bailed them out, we have a right to determine how much money they make.
Neil Cavuto was on O'Reilly's show to offer the minority opinion. Cavuto had two different problems with this. First, by limiting pay, it also limits the talent at these firms. If we're to get our money back, we'll need to have good executives at these companies. Good executives aren't going to come to GM if they know that Ken Feinberg can cut their pay if he feels like it. Second, Cavuto said that this is a very slippery slope. Once these companies have their pay set, where will it stop? O'Reilly acknowledged the first argument had merit but dismissed the second. Was O'Reilly getting ahead of himself?
Yet today, the Fed and Treasury announced a coordinated effort that will put the central bank at the heart of the rush to regulate pay on Wall Street. The regulations, which will try to align the financial incentives of managers with the longer-term performance of their firms, will give the Federal Reserve direct oversight over the pay of tens of thousands of executives, bankers, and traders.
In fact, whether by design or accident, Feinberg's move is only the beginning. The Federal Reserve is ready to be significantly more heavy handed than Feinberg is. Whereas Feinberg limited himself to seven firms that still owe the government, the Fed wants to regulate executive pay of every company they regulate. In other words, the Fed is ready to determine that part of their regulatory authority is the ability to regulate executive pay.
That's how monsters like this can easily start. It starts with an action that has overwhelming support, like Feinberg's action. Then, that action is followed by something just slightly more sweeping and soon, all financial firms have their executive pay regulated.
That's just one of the problems with these bailouts. I don't have a problem with Feinberg's move per se. After all, if the government is going to invest billions, they have a fiduciary responsibility to make sure that the money doesn't go to exorbitant salaries for incompetent executives. The problem with the bailouts is that it forces such relationships. Such relationships are inherently conflicted and counter productive. They create a perverted market and they almost always lead to bigger problems. That appears to be where we are headed.