Risking Too Much For The Money
The fact is that the financial meltdown, now widely known as the Great Recession
, started on Wall Street. It is also a fact that the meltdown quickly reverberated off the pavement of Main Street in the form of foreclosures and job losses. These things are clear. What is harder to understand is why so many on Wall Street continue to prosper while Main Street is still in shambles.
Perhaps the most blaring of the Wall Street bling is what has become the hated catch-phrase of this recession: executive compensation. While there have been rumblings and rumors of this from day one of the financial meltdown, reports came out in October that the executives of the top seven banks receiving government bailout money would also be receiving billions in bonuses. Big bonuses to the Wall Street elite is not new news, a fact Time magazine recently pointed with an article on the long history of executive pay.
In the 1890s, banker J.P. Morgan made 20 times what the average worker earned. By 1991, CEOs were earning 140 times what the little guy made. The trajectory of executive pay continues to rise, with an average S&P 500 top executive in 2007 earning in just three measly hours what a minimum-wage worker made in a year. Believe it or not, Plato recommended that top earning individuals in a society should never make more than five times what the lowest earner was paid.
Why do these executives get paid so much? If you ask them, they deserve every penny because their prosperity is necessary for everyone else to prosper, too. Goldman Sachs international chairman recently said, "We have to tolerate the inequality as a way to achieve greater prosperity for all." The research to back these claims has so far been mixed. However, there is some empirical evidence that Wall Street pay has reached a level that no longer supports the prosperity-for-all claims.
The recession certainly seems to bear that data out. The indignant uproar over executive compensation at companies that received bailout money has led to the appointment of a "pay czar." Treasury Department official Kenneth Feinberg has been commissioned with reining in the pay of the top 25 executives at each of the seven financial companies receiving the largest portion of bailout funds.
The pay czar proposes to cut salaries and bonuses of those top executives in half, capping salaries at $500,000 and bonuses at $25,000. The hope is that limiting the compensation will in turn limit the amount of risks financial executives are willing to take. The Federal Reserve plans to take limiting risky banking even further. According to the Associated Press, the Fed proposes to monitor executive pay at thousands of banks, even those that didn't receive a dime of bailout funds.
The reality is that Wall Street will always make considerably more than the average (and even the not-so-average) Joe on Main Street. The argument can be made that these are very talented financial wizards who do more good than Main Street realizes. However, the Great Recession offers a powerful counter argument about too much pay and a cautionary tale about taking too much risk.
by: Ki Gray
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