Dismantling capitalism: bank compensation regulation way beyond TARP

The NYT and the WSJ have stories about broad plans to overhaul pay in banking beyond firms taking TARP funds to address practices that supposedly increase systemic risk.

The key difference in the stories is in the lead paragraph of the NYT story that the Obama administration was considering “moving beyond banks to include more loosely regulated hedge funds and private equity firms.” The WSJ story said nothing about hedge funds and private equity.

Although broad regulation of compensation would be stupid even if limited to banking, extending this regulation to hedge funds and private equity would be even stupider, and using systemic risk to justify this extension would be stupidissimo.

As I’ve been saying for several months, beginning here, private equity and hedge funds were not part of the systemic risk problem, partly because of the way they’re structured, particularly including the compensation part of the structure. Here’s the longer analysis.

The nastiest part of dismantling the basic structures of capitalism is once you start, where do you stop? So the WSJ ssays:

Despite the banking industry's weakened state, it would likely try to push back against curbs on how financial firms can compensate people. Bank executives have complained to federal officials that strict rules could prompt some of their best employees to move to parts of the financial industry that aren't regulated, such as hedge funds, private-equity firms and foreign banks.

And the NYT says:

Bank executives have been pressing for more clarity on the pay issue, fearful that talented managers and traders might flee their companies for overseas institutions and boutique firms.

Once you start regulating, the political dynamic changes and the interest groups can realign for broader, even more inefficient, regulation. So if the banks are going to clobbered, they're going to want the hedge funds to be clobbered too.

But there is a limit. The US will have to get global cooperation to impose its regulation on the entire world. That was the lesson learned from capital flight in the wake of SOX. Not surprisingly, we’re hearing talk of a global systemic risk regulator.

Space travel might bring some relief.  But I'm sure the Obama administration will be ready with plans for a galactic regulator.

Comments

[save_the_rustbelt]

"hedge funds were not part of the systemic risk problem,"

I think the jury is still out on this one, I expect many more surprises before this slump is over.

Had boards been doing their jobs perhaps there would not be a $6TR hole in the economy and perhaps we would not be having this discussion.

Somewhere I years ago I learned that when you manage other peoples' money there are attendant repsonsibilities - maybe I misheard?

[MHodak]

STR - You're apparently only applying the lessons to the private sector.