"The government is stupid. Nobody with any brains is in that operation. They only make 30 grand, if that."
So declared 1980s insider-trading scandal figure Dennis Levine of Drexel Burnham Lambert, as famously recounted in James B. Stewart's 1991 book, Den of Thieves.
Although Levine landed in prison, his belief that modestly paid officials can't effectively regulate handsomely paid bankers is gaining currency as the world grapples with financial crisis sparked by abuses that slipped past both governmental and in-house overseers.
The numbers have changed, of course. Today's salaries for Assistant United States Attorneys, who prosecuted Levine and his ilk, range from $65,094 to $112,974 plus an additional amount depending on location. Meanwhile, bankers' pay rocketed in the intervening decades - to the point where vice presidents and even associate-level dealmakers dwarf the SEC chair's $162,000 total compensation and the Treasury Secretary's $191,300. In-house watchdogs within banks' compliance and operations departments likewise earn just a fraction of the compensation of those they oversee.
'Regulators Did Not Have the Human Capital to Keep Up'
NYU's Thomas Philippon believes yawning pay gaps between bankers and government regulators contributed to not only the present crisis, but the Depression-era market meltdown as well. A December 2008 paper by Phillipon, an assistant professor of finance, and co-author Ariell Reshef of University of Virginia, concludes: "In retrospect, it is clear that regulators did not have the human capital to keep up with the financial industry, and to understand it well enough to be able to exert effective regulation. Given the wage premia that we document, it was impossible for regulators to attract and retain highly-skilled financial workers, because they could not compete with private sector wages. Our approach therefore provides an explanation for regulatory failures."
In a footnote they add: "Of course, regulators will be able to hire cheap skilled labor in 2009, just as they were able to in the 1930s."
Pay Bounties For Enforcement?
Singapore's government has another idea: pay regulators better. "You must have as good people working in the government in the regulatory authorities as those that are working in the private sector," said Tony Tan Keng Yam, deputy chairman and executive director of the Government of Singapore Investment Corp., quoted in the New York Times from the recent World Economic Forum in Davos, Switzerland.
To accomplish that, he said, "We pay our politicians and our government servants very well. We lock remuneration to the market." Some high-ranking Singapore regulators "make seven-figure salaries," notes the Times.
The Times story floats the idea of paying individual regulators a bonus-like "bounty" - a portion of the fines the government collects for frauds they detect. The concept drew mixed reaction from industry and government leaders at Davos, according to Times columnist Andrew Ross Sorkin.
There's no denying regulators have gained power at bankers' expense as the world struggles to contain this financial crisis and pre-empt the next one. But power doesn't pay the mortgage. So, how about some money for the watchdogs?