Bonus Limits Good for Wall Street

Congratulations to Chris Dodd for sneaking a provision limiting Wall Street and big bank bonuses into the final language of the stimulus package. According to the New York Times:

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full . . .

The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”

Dodd's bonus restrictions and the Obama administration's salary restrictions ($500,000) will both contribute to restoring the financial industry to health. It's unfortunate that Dodd posed his bonus restictions in terms of public anger over companies using government money for enormous bonuses (i. e.. "public confidence"). Bonus payments of millions and tens of millions were a big part of the self-destructive dynamic with Bear Stearns, Lehman Brothers, and Merrill Lynch. The possibility of landing such high bonuses was a huge incentive for Wall Street executives to inflate the CDO and credit default swap bubbles that created the crisis. If the market is going to be re-established on a healthy basis, the huge bonuses have to go.

Restricting Wall Street salaries and bonuses is not only just, it gives financial companies an opportunity to reestablish themselves on a firmer foundation.