Great News: The Pay Caps Are Working!

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The news that Citigroup is racing to pay back $20 billion of bail out funds in the next 10 days proves that the much despised compensation limits on Wall Street are working.

Citi has been pleading with regulators to greenlight a huge TARP repayment quickly. The bank justifiably fears that if it doesn’t raise money and repay TARP before the end of the fiscal year, it would find it nearly impossible to do so until after it reports year end results more than a month from now.

At the heart of the rush to pay back the TARP, of course, is competition for business and employees from other banks that have already paid back TARP. When Bank of America repaid its TARP with equity raised on surprisingly good terms for the bank, it effectively freed itself from many of the pay restrictions that apply to the banks with the largest portions of public funding. Citi fears that it will be severely handicapped in its struggle to retain top producing employees if it can be outbid by unrestricted competitors.

In short, the restrictions on pay are working to force banks to raise money in the capital markets and repay the government. Contrary to the view that the pay caps would kill TARP firms, it seems they are forcing management to abandon reliance on government funding.

This shouldn’t come as too much of a surprise. Given the choice between letting their banks sink under the weight of government control and paying themselves giant bonuses at the cost of selling huge chunks of equity to the public, the bankers are choosing bonuses.

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