Memo to Congress: Please Stop Obsessing Over Bank Execs' Bonuses

| About: Financial Select (XLF)

The nine big banks that got the first slug of capital from the federal government are reassuring members of Congress (notably Henry Waxman and Charles Schumer) that, no, the money won’t fund executives’ yearend bonuses. Rather, bonuses will be paid for via “earnings and existing cash resources,” the Financial Times reports.

I don’t buy it, either. Not to blow anybody’s cover, but money is fungible. While the banks might want the pretend their new government billions will only be used for things like small-business loans and mortgages to first time-home buyers, and that the after-hours limos and dinners at Michael Jordan’s get paid for some other way, the fact is the cash all comes out of the same pot.

But that’s beside the point. The more urgent question: why is Congress getting its pants in a knot over compensation in the first place? Now that the government has taken a meaningful equity position in the country’s big banks, the last thing it should want to do is drive out their most capable, productive employees by refusing to pay them.

The purpose of the infusions, after all, is to bolster the banks’ capital, not their cash balances. But the more the government meddles in how the institutions are run, the less efficiently that new capital is apt to be deployed—which sort of defeats the purpose of the whole enterprise. (And if Congress doesn't have confidence the banks can deploy the capital effectively, why did it approve the rescue in the first place?) I know it’s a lot to ask, but if the Waxmans and Schumers of the world could refrain from political grandstanding (and good luck with that), the odds the plan will work would be a lot higher.