Our Take: Tiger By the Tail

Barack Obama is grasping a tiger by the tail. By feeding this monster, he hopes ultimately to tame it.

The monster, of course, is the rage against bankers that continues to boil up from America's grass roots.

Gauged against market expectations, the president's plan to cap cash compensation for top executives at companies that receive bailout aid is quite benign. Too benign, I'm afraid, to satisfy the industry's loudest critics. Their thinking is illustrated by Sen. Claire McCaskill, (D-Mo.)

McCaskill is the author of S. 360, with the deceptive title, "The Cap Executive Officer Pay Act of 2009." The kernel of that simple one-page bill is this: "Notwithstanding any other provision of law or agreement to the contrary, no person who is an officer, director, executive, or other employee [emphasis added] of a financial institution or other entity that receives or has received funds under the Troubled Asset Relief Program (or `TARP'), established under section 101 of the Emergency Economic Stabilization Act of 2008, may receive annual compensation in excess of the amount of compensation paid to the President of the United States."

And here is a typical grass-roots comment, posted anonymously yesterday on a Wall Street Journal reader comment thread: "The 500K CAP is very generous for people on welfare... These CEO's should be capped at the median National Income. That's the price of failure they should pay."

The Greater Danger: Politicians Running Banks

If Obama's modest pay-cap plan fails to calm the public anger, his program could easily give way to far broader limitations. But the greater danger we see in all this venting - which we warned about as far back as last October - is that Wall Street could be transformed into a clone of Washington in matters extending far beyond compensation. The trend toward elected officials usurping bankers' everyday decisions to appease public sentiment, which we labeled, "managing banks by sound bite", is gathering steam.

- Wells Fargo canceled a Las Vegas incentive trip for its top mortgage producers after an Associated Press "expose" crafted to exploit the prevailing soak-the-bankers mood.

- Bank of America canceled all employee incentive trips and is selling some of its corporate jets.

- Citigroup canceled a corporate jet order under pressure from the Obama administration. Citi also faces intense pressure to nix a deal to have its name on the New York Mets' new baseball stadium.

- Big U.S. banks avoided sending anyone to the annual World Economic Forum of global business leaders in Davos, Switzerland, in part for fear of giving Washington another straw man to attack.

- A New York Times story on Feb. 4 blasted all banks' spending for country club and gym memberships, private cars and drivers, and even parking costs for their executives, as "extravagances ... likely to come under greater scrutiny."

For Borrowers, Political Criteria or Financial?

Since all those expenses appear to advance a legitimate business purpose, the political onslaught against them doesn't serve shareholders' interests. Still, blocking those particular transactions won't seriously harm the financial condition of the companies involved.

However, consider another type of banking decision that elected officials are starting to usurp: how much money to lend, and to whom. Those decisions have the potential to affect any bank's capital adequacy and solvency. And politicians like McCaskill, who has publicly labeled bankers "idiots," are well on the way toward making them.

Just look at the reaction to the Federal Reserve's latest quarterly survey of bank loan officers, released Feb. 2. Most U.S. banks tightened lending standards in the past three months, just as one would expect while a rapidly contracting economy diminished both businesses' and households' ability to repay loans. Yet, instead of hailing lenders for this belated display of prudence, House Financial Services Committee Chairman Barney Frank, D-Mass., once again lambasted the banks for "hoarding" cash.

Now, rules mandating increased lending are expected to be part of the Obama administration's "Son of TARP" legislation to be unveiled in the coming week.

Once politicos attach "must lend this much" strings to the aid they dole out, it's not hard to see the next step: You "must lend this much" to applicants from my district.