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Barney Frank and the Motivations of Wall Street CEOs

Related to our story yesterday about Wall Street firms acting only in the interests of shareholders, Rep. Barney Frank (D-Mass.) last week asked eight bank executives appearing before his House Financial Services Committee why corporate CEOs require enormous bonuses to do their jobs well.

If, in good times, you were told you weren’t going to get a bonus, what part of your job would you not do? I mean, if you weren’t getting a bonus, would you, like, leave early on Wednesday or would you take longer lunches? Would you bypass a certain class of investors?

While there’s a certain comic element to Frank’s questions, they’re also very serious.

The finance industry has opposed limits on bonuses and other compensation for firms receiving federal help under the Troubled Asset Relief Program, maintaining that the restrictions would encourage the most talented employees to flee to other companies. Such a “brain-drain,” the argument goes, would exacerbate the troubles of struggling firms and weaken the effects of the TARP program. (Nevermind, for a moment, that these are the same folks who’s investment strategies led to the collapse of the industry.)

Frank’s questions are timely also because there’s an emerging tension between congressional Democrats and the White House economic team over how to approach executive pay for bailed-out banks. In short, the congressional lawmakers want to place limits on executive compensation, while the Obama team opposes such caps. White House officials fear that the pay restrictions would encourage bailed-out banks to pay back their TARP funds simply for the sake of eliminating the pay restrictions — perhaps even before the firms were healthy enough to resume the levels of lending necessary to thaw the credit freeze. (That is, like the finance industry, the White House thinks the pay caps would undermine the very purpose of the TARP program.)

For his part, Frank wasn’t ready to buy that argument. “This notion that you need some special incentive to do the right thing troubles people,” he told the CEOs.

Morgan Stanley CEO John Mack was quick to challenge the idea that senior Wall Street executives are motivated by money. “At least at my level, and I think my colleagues here would say the same, we love what we do. If you gave me no bonus in the best year, I would still be here,” said Mack, who pulled in more than $40 million in company stock awards in 2007.

Still, Mack conceded that the system of Wall Street bonuses deserves some scrutiny in the wake of the finance industry’s collapse. “Without question,” he said, “given the kind of risks that we take today, the global nature of our business, and the size of our business, all that has to be looked at again.”

We’ll see if the looking evolves into anything more substantive.

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