Another Missed Opportunity: Obama Retreats on Wall St. Compensation

But it's also another missed opportunity by the administration to take advantage of the crisis to materially change behavior on Wall Street, which is becoming something of a hallmark of the Obama administration. Obama's Chief of Staff Rahm Emanuel has said "you never want a serious crisis to go to waste," but that's exactly what's happening when it comes to the issue of reforming Wall Street.

In the latest example, the government has abandoned the idea of regulating compensation for all of Wall Street, which was probably doomed from the start. But the administration is also reportedly dropping plans to restrict executive salaries at firms receiving bailout funds, and is only going to restrict bonuses instead.

President Obama and Tim Geithner are now hoping the rest of Wall Street will "voluntarily" follow the same guidelines as firms operating under TARP, similar to the "best practices" banks are asked to abide by, The Wall Street Journal reports.

Given banks operating under TARP have already been raising base salaries to get around the government's restrictions on bonuses, it's hard to imagine Wall Street doing anything on a voluntary basis, especially when it comes to compensation.

This backtrack on compensation reform should not be viewed as a one-off event but as part of a pattern of behavior from the new president. 

From day one in office (even during the post-election transition), Obama has talked tough about changing the culture of Wall Street and railed against excessive greed and egregious pay packages. But talk is cheap and his actions tell a different story:

• Most notably when it came to the TARP program, the Obama administration has maintained the policies of its predecessor. Even avid Obama supporters like George Soros and Paul Krugman expressed frustration with this missed opportunity to hit the "restart" button on how the government deals with struggling financial firms.
• Under the guise of preventing "systemic risk", counterparties to Wall Street firms, even those surviving on government bailouts, were made whole via TARP funds. That's in stark contrast to how the automakers' creditors were treated. Similarly, the Obama team hid behind the "sanctity of contract law" amid the uproar over AIG bonuses but felt no compunction in redoing contracts between Chrysler, GM and their creditors; in the process, the administration overturned the way secured vs. unsecured creditors have historically been treated in bankruptcies.
• After a lot of proposals about how to reregulate Wall Street, including discussions about creating a new uber-regulator and/or merging some existing regulators, the administration has backed away from the reform agenda, "suggesting the current alphabet-soup of regulators will remain mostly intact," The Wall Street Journal reported. Most notably, the push to regulate derivatives has slowed, which critics say is the result of heavy lobbying by the industry's largest player, JPMorgan. (As an aside, I'd much rather see the government focus on getting the right regulatory regime and let Wall Street firms do what they want on compensation within those confines.)

With big banks repaying TARP funds and the market in rally mode, the acute stage of the crisis appears over and the zeal to reform Wall Street is fading. But if the regulatory regime remains largely unchanged and bonuses restrictions only apply to a handful of firms still under TARP, what's really changed after all the sturm and drang?

Anyone out there who believes the industry's "near-death experience" last fall and nine months in the government penalty box is going to materially change the culture and (more importantly) the actions of those on Wall Street, please raise your hand. I have a bridge I'd like to sell you....