The United States government hold large equity stakes in some financial firms. It has decided to punish those firms by heavily restricting the pay of the top employees. Proponents say that it is unfair for financial executives to benefit from taxpayer-funded bailouts. Skeptics of this plan agree that it's unfair, but note that this incentivizes the best employees to seek employment elsewhere, leaving the U.S. taxpayer with few qualified employees overseeing the trillions of taxpayer dollars invested in those companies. In fact, the government may wish to pay employees more in order to lure the top talent to the firms with public investment in order to maximize the return on that investment.
Obama sided with the crowd who wants the pound of flesh. The result: employees at Bank of America (NYSE:BAC) and AIG (NYSE:AIG) have already jumped ship:
Many executives were driven away by the uncertainty of working for companies closely overseen by Washington, opting instead for firms not under the microscope, including competitors that have already returned the bailout funds to the government, according to executives and supervisors at the companies.
"There's no question people have left because of uncertainty of our ability to pay," said an executive at one of the affected firms. "It's a highly competitive market out there."
At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.
At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.
That's a 27 out of 50, a majority, who jumped ship before the plan was even announced. These folks were able to get other jobs quite easily, indicating that they have some skills that are highly valued by other firms. The ones who haven't left presumably will in short order if they have similar skills, leaving the least-qualified workers to manage trillions in public funds.
But maybe setting a strong precedent is worth it?
On Wall Street, reaction to Feinberg's ruling was swift, with some executives arguing that it will further handicap the most troubled firms by driving away top employees while making companies unwilling to promote rising stars for fear of bringing them to Feinberg's attention.
But Nomi Prins, a former Goldman Sachs employee, said Feinberg's rulings are unlikely to change the culture of bonuses on Wall Street.
"I don't think Wall Street is afraid of this at all," said Prins, author of "It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street."
"It's going to affect a small portion of a small portion of the industry. It won't have a lasting impact."