Wednesday, October 21, 2009

Big paycuts for wall street; are they justified?

It has been over a year since the United States government issued the Emergency Economic Stabilization Act of 2008, or what most refer to as the bailout. Washington is coming out and saying that all the banks that received funds from the bailout last year have to severely cut their top executives pay this year. The top 25 executives at each of these companies need to slash their salaries up to 90%. Is this really justified? On the surface, of course it is. However, there is always more to every story.

September 15th, 2008, Lehman Brothers collapses. The floor is about to drop on the entire financial world. All the heavy subprime bets and investments that banks and others made over the years are coming to a head. To help protect the entire financial system from falling apart the Federal Reserve chairman Ben Bernanke and Treasury Secratary Henry Paulson propose a 700 billion dollar plan to help protect the assets of the nations largest financial and insurance institutions. Many of the largest banks needed these funds to stay solvent while others did not. That is where the issue lies.

To make sure that the public did not know who needed the funds, the government forced all of the top financial institutions to take the funds. While some have paid them back, others have held onto the funds and used them to make huge profits. I agree, the government needs to demand that the salaries of the companies who needed those funds be reduced. The companies who have already returned the funds or did not need them in anyway shape or form should be allowed to go about their business.

Companies like Goldman Sachs should be allowed to pay their executives what they want. Sachs payed back the 10 billion that was received from the bailout and was able to make money in tough times. Sachs stayed away from risky investments when it wasn't the sexy thing to do. Today they should reap the rewards for their intelligent investing, not be forced to pay their executives less. From what is being reported, it looks as though Goldman Sachs won't have to hold back any salaries. this company did what was right. The warning of cuts by the government is for the companies who were irresponsible and needed the funds or they would have followed Lehman Brother and Bear Stearns into insolvency.

The main companies that should have limited pay are Citigroup, Bank of America, General Motors, AIG, and Chrysler. These major companies made terrible bets and would have collasped if it were not for our governments intervention. In fact, the only reason the government assisted these companies was that they were so big and interwoven into the US economy that their collaspe would have affected far more than just their company. It is still possible that one or more of these companies could go under, but it can happen in a far more controlled way now.

The government is in a position to control what these companies pay their executives. Of course, the companies have fought the idea of limiting pay, and will most certainly fight it this time. Their argument for not limiting pay is that they need to keep the best talent. This argument is a total joke. They want to keep the talent that almost bankrupted their companies? If paying less for these executives will force them to leave, than it would be better for everyone in those companies and those who do business with those companies.

Does Wall Street deserve these large paycuts? Yes. Does every company in the financial industry deserve them? No. I believe the government needs to put rules in place that if a company needs to be bailed out they get no say on how the company is run until they are out of trouble. Without the governments help GM would be gone, AIG would be a memory, and Citigroup would be the new name for your local credit union. While I don't agree with Washington getting involved with private companies, now that they are, they should set rules to makes sure taxpayer money is used for what it was intended. To save the companies and economy, not to pad the pocket books of rich men.

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