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Friday, October 23, 2009

Pay Caps? A Truly Stupid Idea

It is truly amazing how the White House and Congress can, given a choice, always pick the wrong solution. The problem is not excessive pay (yes, I know it can be grotesque), but it is the conditions that allow it to occur that are at fault. Here are the conditions;

1) Wall Street Bankers can gamble with borrowed money because if they lose their bets, the U.S. government will cover their losses.
2) Wall Street Bankers are encouraged to gamble by taking short term risks because the pay out is short term.

End of story. Instead of capping pay, the government should do this;
1) Limit the amount of money used for short term gambling by increasing reserve requirements.
2) Pay bonuses in company stock awarded in 20% increments over the next five years so that very quickly individual managers have a huge stake in the financial success of the bank over time.

The last thing we need is the U.S. government meddling with the pay systems of private companies. That is a truly stupid idea.

And by the way, did you notice which Wall Street Bank was excused from the pay caps?

If you said Goldman Sachs you would be right again.

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