Curbing Bank Pay: Good Politics, Bad Policy?

Washington Matters

Curbing Bank Pay: Good Politics, Bad Policy?

Fans of Michael Moore may be cheering over the administration's latest move to slash total pay of top executives at bailed out firms. But the timing of the announcement couldn't have been worse. News that TARP's pay czar, Kenneth Feinberg, would restrict salaries came on the same day that President Obama announced a new program to use the TARP program to boost small business lending by channeling bailout funds to community banks. Now that bank executives know that the money comes with such a tight leash, they may not be so keen to participate.

Both announcements had a lot to do with politics. The administration is eager to prove that it's not letting big bankers off easy and that it is helping Main Street. But announcing harsh pay restrictions for bailout recipients could undermine the new efforts to boost small business lending.

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While few are shedding tears for big bank executives, they won't be the only ones punished if executives at small banks are scared away by the new pay restrictions. Small businesses throughout the country will ultimately suffer if they can't borrow when they need to. Many are retrenching now, holding off plans to expand and hire. When they are ready to open to begin growing and investing,  the money they need may not be there if community bankers decide that they don't want to any part of the TARP program, no matter what benefits it offers for lending.

It could be big bankers who ultimately get the last laugh, when they get their deferred compensation in the form of stock. And executives at banks like, Goldman Sachs, which have already paid back funds, are still walking away with big paychecks. Feinberg's latest move could have more banks hastening to exit the TARP fund, with some leaving before they're really ready.