But Will the Bankers Go Galt?

The Journal scoops that Obama is formulating a broad plan to regulate pay in the financial industry to make sure incentives don’t encourage the kind of excess risk-taking that’s blown up the economy.

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic risk to the economy.

This isn’t really surprising news, but it’s news all the same.

What’s really interesting is that the government isn’t limiting this initiative to Wall Street. It’s also looking at other financial sectors, including the mortgage business.

One thing not mentioned is that one of the ways the compensation issue presumably will be neutralized is by forcing financial institutions to be more boring by limiting the risk they can take. Less leverage means less profit means less pay, but, critically, it means less likelihood of a blowup.

The Journal has an interesting bit of information here: The government already has the power to rein in pay, and has even used it—including under the Bush administration. Who knew?

Regulators have long had the power to sanction a bank for excessive pay structures, but have rarely used it. The Office of the Comptroller of the Currency last year quietly pressed an unidentified large bank to make changes “pertaining to compensation incentives for bank personnel responsible for assigning risk ratings,” a spokesman said. Since 2007, it has privately directed 15 banks to change their executive compensation practices.

The Obama administration goes to pains to emphasize that it’s not trying to dictate how much banks can pay just how incentives must be aligned, but that point is lost on the commenters on WSJ.com, who increasingly resemble a slightly upmarket Free Republic swarm.

Sure enough, the commenters on this story have been thrown into a fury, foaming about “socialism” and “serfdom.”

But this one, from “Jonathan Tholen” wins the Unintentionally Ironic Capitalist Prize:

I can’t believe I’m saying this, but this calls for unionization of financial experts and executives.

Thank you, Jonathan, for the Comment of the Week.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.