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It looks as if there may be some respect for the free markets still alive and kicking within the Obama administration. After a number of on-again, off-again signals, they appear to have thrown in the towel on regulating compensation.

From the WSJ:

The Obama administration is dropping its plan to cap salaries at firms receiving government bailout money, leaving them subject to congressionally imposed limits on bonuses, according to people familiar with the matter.

The move is likely to end months of confusion on Wall Street about separate pay directives from the White House and Congress.

The administration is expected to announce the compromise on Wednesday. In addition to standing behind the restrictions passed by Congress in February, the administration plans to push for broad changes in compensation practices across the financial-services industry, these people say.

It also will appoint a “pay czar” to monitor the firms receiving the most government aid. Treasury Secretary Timothy Geithner is expected to push all firms — not just those receiving funds from the government’s Troubled Asset Relief Program — to more closely tie incentive compensation to long-term performance by paying employees in restricted stock, rather than cash.

The important part of the above is that they are dropping plans to regulate compensation. All of the rest is spin and face saving.

Based on the article, GM (GMGMQ.PK), GMAC (GKM), AIG (AIG) and Citi (C) are the only firms that are likely to see any interference with their compensation policies. Given that all three are functionally government sponsored enterprises that seems fair. I expect you will see some huffing and puffing from Congress and then this whole sorry episode will diminish to historical footnote status.

Give the Obamites credit for recognizing that they were about to embark on a journey they didn’t really want to make. I suspect that they looked at all of the permutations and combinations of bad results that could have come about if they had pursued this policy and opted for discretion over valor.

Source: On Second Thought, Obama Drops Pay Regulations