Watch out Wall St villains, here comes Obama!

A NEW administration is taking shape in the US. One of its first tasks will be to find ways of tackling the economic slowdown and ensuring the long-term survival of its financial system. Some of the steps taken so far by the current administration, represented by treasury secretary Henry Paulson, have come in for criticism for providing a lifeline to unrepentant and spendthrift financial institutions. So, what will the new administration do that’s going to be drastically different?

For one, do not expect anything radical too soon. The US system works in curious ways, but cuts across party lines when it comes to confronting national crises. Therefore, the Obama government is sure to continue with the work of implementing and monitoring Paulson’s $700-billion TARP package. But—and this is the best part—do not for a moment think that the Dick Fulds of this world have been forgotten or pardoned. Once the new administration feels the time for crisis management is over, it will go after all the people it thinks are responsible for the current meltdown—the guys who sold the mortgages to families that clearly did not have the capacity to repay, banks which then created virtual pyramids out of these simple loans, rating agencies that put their seal of approval on these instruments, bank CEOs who lulled shareholders into a false sense of comfort by repeatedly lying to them about their company’s failing health and impending demise. The compelling imagery of once-powerful CEOs in handcuffs (a la Enron, Boesky, et al) is all too potent and depicts in a single, two-dimensional frame the robustness of the American judicial system.

This kind of action will not only be expected but demanded from the Obama administration. There will be tremendous political pressure to go after the Wall Street villains because of two over-riding reasons. One, the popular vote seems to have communicated resoundingly that it does not view the Republican Party’s close links with the financial buccaneers too kindly. And, two, it does not like being weighed down by the uncomfortable burden of having to bail out their derring-do. Plus, and this is important, there is this uncomfortable vision of many CEOs landing safely with multi-million-dollar bonus parachutes while middle America hunkers down for an extended period of unemployment and lost wages.

Here is the most unsettling image: Lehman CEO Richard Fuld picked up a $22-million bonus in March 2008 even as the firm was struggling to stay afloat and would eventually go bankrupt six months later. There are some other CEOs who could be in the firing line too. Merrill Lynch CEO John Thain, who merged his bank with Bank of America, received a $15-million cash bonus on joining the bank in November 2007. Goldman Sachs showed $20.2 billion as payroll costs in 2007! Goldman Sachs chief Lloyd Blanfein earned about $68 million bonus in 2007, of which about $27 million was hard cash. Some CEOs read the writing early enough to forsake their bonus - Bear Stearns CEO James Cayne gave up his months before the firm was absorbed by JP Morgan Chase and Deutsche Bank CEO Josef Ackermann has also publicly declared that all top executives of the bank were surrendering their bonuses.

This could also lead the new administration down another possible, and interesting, path. There is already growing demand that the government re-examine the salaries of its regulators, who are supposed to keep a hawk-eye on the multi-million-dollar baggers. Part of the reason behind this call is that these lower salaries keeps the talent away from the regulators — guys who will be able to recognise a scam or a notice a danger signal before it becomes manifest to everybody else. Or, somebody who can understand the arcane and complicated instruments conjured up by highly-paid quants in banks and hedge funds. There is the also the question of motivation. A columnist recently wrote about how junior level officers from the US central bank (Federal Reserve Bank) and the markets watchdog (Securities and Exchanges Commission) would be completely overwhelmed by the complexity of the instruments they routinely had to vet and approve.

Some of the inequities come through when you juxtapose Fuld’s bonus with the salary earned by, say, Fed boss Ben Bernanke. According to a copy filed by news agency Reuters in October: “Ben Bernanke may be one of the most influential people on the planet right now as he heads the US Federal Reserve’s efforts to contain the crisis. But his $191,300 a year looks like loose change when compared with the near $500 million earned by Richard Fuld in his eight years in charge at Lehman.” The other powerful central bank in the world - European Central Bank - does not pay its top man Jean-Claude Trichet more than 350,000 euros (close to $440,965). And, at that, his salary is not necessarily the highest among all the European central banks. For instance, the Italian and Belgian central bankers earn more than Trichet. Even Bank of England’s Mervyn King probably earns just marginally more than Trichet.

One can only hope that some ripple waves from that action also wash up on Indian shores.