Obama's Pay Czar Is Out to Lunch

Includes: KBE, WFC, XLF
by: Tom Brown

Here’s Kenneth Feinberg, President Obama’s pay czar, reacting on CNBC last week to the compensation packages Wells Fargo (NYSE:WFC) handed out to its top executives for 2009:

Even though Wells Fargo is not on my watch, and I have no jurisdiction over Wells Fargo, certainly the size of that compensation raises serious questions. . . .

What I’m hoping, and what we’re seeing with some companies, is that the prescriptions I’m laying out—small, cash-based salaries, no guaranteed compensation, stock that can only be redeemed over a lengthy period of time—hopefully those prescriptions will be voluntarily adopted by companies that aren’t under my exclusive jurisdiction. [Emph. added]

Oh, OK, fine, fine, you are thinking to yourself. Just some more banker-bashing from the guy whose main job in the first place, after all, is to jawbone the industry into taking it easy on the compensation front. What’s the harm?

Sorry, I don’t buy it. You’ll get no argument here that skewering the idiots who helped blow up the system can be a fun game. But let’s not forget a key fact: Wells Fargo was one of the good guys during the crisis. If WaMu, Countrywide, and the rest had followed Wells’s mortgage underwriting practices, there would have been no problem to begin with. Recall that, during the runup to the collapse, Wells was the country’s second-largest mortgage originator, and the largest originator of subprime.

Yet while its biggest competitors have mainly gone kerflooey, Wells came through it all with hardly a nick. So the company seems to have a clue.

Then after the deluge, Wells has played a major role in helping clean up the mess—most notably with its 2008 acquisition of Wachovia, which (unlike the Wachovia-Citi (NYSE:C) deal that Wells’s offer trumped, or even the JPMorgan-Bear-Stearns (NYSE:JPM) transaction) required no government backing.

Throughout the whole process, the company has been, and remains, one of the most profitable of the country’s big banks.

All of which is a long way of saying that the people who run Wells Fargo seem to know a thing or two about managing a bank. Which, if his bio on Bloomberg is to be believed, Ken Feinberg does not.

Which gets me to the question you know I’m dying to ask: where in blazes does Ken Feinberg get off telling Wells Fargo what to pay its people?

If I were a lawyer with no background in banking who’d been parachuted into the industry to “reform” its pay practices, I’d know what my first step would be: I’d go see the smartest players and find out how they do things. Wells Fargo would likely be my very first stop. But Ken Feinberg seems to have had other ideas. Less than a year into the job, and for reasons that are the opposite of obvious, he’s glommed this nutty idea that a low-on-cash-but-plenty-of-stock formula should be the industry’s gold standard for compensation.

I doubt it. To see why, fast forward in your mind five years or so. When people look back at the excesses surrounding the bank bailouts of 2009, one of the juiciest handouts of all, they’ll likely agree, will be the wads of low-priced stock Ken Feinberg now insists on stuffing into bankers’ pockets. Ken Feinberg might think he’s looking out for shareholders by insisting CEOs take the bulk of their pay in stock. He’s not. He’s sticking it to them, instead.

Compensation in banking is a tough dilemma, and has been for years. Wells Fargo is among a handful of companies that regularly seems to get the equation right. I’m sure that as he learns more about the banking business and its pay practices, Feinberg will find plenty of things to complain about. But how Wells Fargo handles the issue shouldn’t be one of them.