Salary Cap Sends The Right Message: Bailed-Out Firms Now Wards Of State

President Obama said Wednesday that top execs at banks and other companies receiving new "extraordinary assistance" from the feds will have to cap their own cash pay at half a million dollars annually.

That's fine — the problem isn't the government setting salaries at failed financial firms. The problem is that the government is indefinitely propping up those firms in the first place. If this salary cap convinces people that the feds need to get out of the financial industry fast, it's beneficial.

Obama's new pay limit for bailed-out firms is good for the future of relatively free markets. It draws a clearer line between what is the public sector and what is the private sector.

Private-sector companies have a perfect right to pay their workers however much they like (as long as they're not expecting a federal bailout when their strategy of rewarding reckless risk with high bonuses results in insolvency).

Stop Pretending

Government salaries, obviously, are lower. The president earns $400,000. The CIA director makes $172,000. Today, like it or not, Citigroup, AIG and a few of its brethren are wards of the government.

Over the past year, though, as the government has bailed out financial firm after financial firm, it has made a pretense of insisting that private managers are still in charge. It's hard for America to admit that we've nationalized our financial sector, when the financial sector's job — allocating capital — is the foundation of a market economy.

But it's far more dangerous to continue to pretend that we haven't nationalized the financial industry. A company like Citibank, for example, today likely has no idea who it's supposed to be pleasing right now: the few shareholders and private creditors who are left, its customers, or the government that is keeping it in business.

To wit: The government wants Citi and other banks to increase mortgage and credit-card lending. But private creditors and shareholders might think that that's a bad idea when it's hard to know how high the unemployment rate — and more loan defaults — will go.

Government's Role

Letting a company like Citi — or AIG — flail along indefinitely serving everyone and no one is a recipe for a tough economic recovery and lower growth after we've recovered. And government support of bad financial firms crowds out the good banks that will have a tough time competing against Uncle Sam.

The government's real goal should be to get out of its direct role in the financial industry as quickly as possible, so that it can go back to being a regulator and not a guarantor. That way, it, and the public, won't have to worry about how much money is acceptable to pay the CEO of a government-guaranteed bank, which is an absurd question.

To that end, the government should make it clear the new goal of companies like Citi and AIG should be selling off their good assets as efficiently as they can over the next few years, just as the FDIC already does with the small, failed banks it ends up owning.

Sales — even at low prices — are the only way to get good assets into the hands of the companies and people who didn't screw up these banks in the first place. And it's a necessary step toward a private-sector recovery of the industry. The companies who got us here certainly aren't going to get us out.

But doesn't the government have to allow these banks to keep paying high salaries to their top execs so that those execs can manage these assets and the sale process competently over the next few years?

Not necessarily. Being a short-term conservator of a functionally bankrupt firm — because let's be honest, that's what we're talking about here — is different from being a long-term CEO of a growing company (and it's not like high pay pushed them to do so well, anyway).

Further, Obama's executive-pay cap only covers the top people at each company. Heads of successful divisions can keep their higher pay, and perhaps go with their departments to a new firm.

Plus: people take jobs for all kinds of reasons. An up-and-coming exec may realize that if he successfully winds down a failed company and unlocks the value of its good assets, he'll be a hot commodity. A retired banker may want to serve his country.

Regulation To Riches

If it turns out that government-guaranteed banks can't find a few competent people to wind themselves down for half a mil a year, though, then that's a good jumping-off point for a discussion of whether or not the government pays its key people enough.

Bank regulators have earned far less than the people they regulate. Since they often jump ship for bank jobs after their regulatory stints are up, it's fair to wonder if lower government pay has encouraged these regulators to think too much about their future jobs. And the revolving door between the lower-paid public sector and the higher-paid private sector in general presents all kinds of temptations.

But that's an entirely different problem — when we've got enough problems now.