'Idiots' Indeed

After President Obama denounced Wall Street bonuses as "shameful" on Thursday, the way was clear for the rest of the political class to pour gasoline on the bonfire being prepared for the offending bankers. Senator Chris Dodd, former "friend" of mortgage banker Angelo Mozilo, ranted that the Treasury should somehow confiscate the bonuses.

Senator Claire McCaskill rolled out legislation to put a compensation cap of $400,000 on executives whose firms receive bailout money. She also proposes creating a court to restrain their "massive self-indulgences." The Senator from Missouri then spoke of "a bunch of idiots on Wall Street." Insofar as the Congress is blithely waving more than $800 billion of cats-and-dogs "stimulus" spending into the air, the American people can be forgiven for asking who are the greater fools.

New York Attorney General Andrew Cuomo has begun a formal investigation into the bonuses and the negotiating details of Bank of America's takeover of Merrill Lynch. In short, Mr. Cuomo is putting BofA head Ken Lewis and Merrill's John Thain in the legal crosshairs. Watching this spectacle, Mr. Obama should consider that there may be a price for letting the populist flames burn out of control during a deep recession.

In our experience, political nuance has never been the strong suit of Wall Street executives. John Thain's year-end bonuses to Merrill Lynch executives, whatever their rationale, reflected an acute case of political tin ear. If the excesses of his office-decorating take this Wall Street practice the way of the dodo, we won't weep.

Yet the hard truth remains that whether on Wall Street or across the American business landscape, compensation levels are a business judgment made under the pressure of competition. The "idiots" notwithstanding, Wall Street has lots of highly talented financial minds and mobility among firms based on compensation is routine.

If Congress is going to start setting legal limits on salaries and bonuses in the U.S., it is going to drive talent out of Bank of America and these other banks and into institutions without such limits, perhaps abroad. The same goes for Attorney General Cuomo's implied threat of prosecutions.

A few quick facts about Wall Street bonuses. The pretext for the political outrage was the New York comptroller's report this week on the aggregate data for bonuses in 2008. That "irresponsible" bonus pool of $18 billion was for every worker in the New York financial industry, from top dogs to secretaries. This bonus pool fell 44% in 2008, the largest percentage decline in 30 years. The average bonus was $112,000; bonuses typically make up most of an employee's salary on Wall Street. The comptroller estimates that this decline will cost New York State $1 billion in lost tax revenue and New York City $275 million. Both city and state may have to announce layoffs.

What is more, the "Wall Street" of popular and fevered imagination isn't coming back anytime soon, if ever. Lehman Brothers, Bear Stearns and Merrill Lynch are gone, kaput. Enough bankers have been ruined or fired to sate class resentments for a lifetime. The remaining big two, Goldman Sachs and Morgan Stanley, are no longer formally investment banks but are now under the supervisory control of the Federal Reserve. The Wall Street business model is broken, and not at a particularly opportune moment for the economy.

Mr. Obama wanted to hit a populist nerve this week because he knows he may have to ask Congress for another $1 trillion or more to revive the banking system. He also knows that the core of the economic crisis is a lending system that remains frozen in a vast lake of toxic, mispriced securities. In short, the credit system is on strike (see above).

The U.S. is a long way from getting out from under this burden. The danger of targeting what capitalists we have left for abuse or prosecution is that they will stay on strike, as they did in the 1930s. It won't be pretty this time either.