Main Street's Trust: Worth One Percent of Bonuses?

This decision by Goldman Sachs' board was engineered, according to industry experts as well as Goldman Sachs spokespersons, to signal the firm's determination to show "moderation" and "restraint" on executive pay in an era of public outrage and Washington whining at Wall Street excesses. This follows a December decision by Goldman Sachs' board to give shareholders a non-binding vote on executive compensation, apparently the first big Wall Street bank to do so. Corporate governance groups were reported to applaud the move. Even a report in The New York Times, "Some See Restraint in Goldman Chief's Bonus," explained, "the news was widely seen on Wall Street as a show of restraint and a nod to Washington and elsewhere over the resurgent pay and profits."

Goldman Sachs spokespersons agreed, of course. Lucas van Praag claimed it demonstrated that, "We have shown respect for the environment." This followed a December remark by Goldman Sachs CFO David Viniar, in explaining the new "say-on pay" policy: "We really aren't deaf and blind. We see what is going on around us and hear what regulators and the world is saying."

Is Viniar right that Goldman has shown it 'gets it?' By implication, is it true that this show of restraint is sufficient to bring Main Street back to Wall Street, to kiss and make up?

Let's remember where we are, as SEC Chairman Mary Schapiro noted one year ago, "At a time when investors are appalled at the ways of Wall Street, it is there that change must begin....there needs to be a new era of responsibility on Wall Street and... the sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world."

Wall Street likes to think big. This is good because, if it seeks to materially improve its relationship with Main Street in time for individual investors to participate in the next bull market, it needs to think big. It might look to another big thinker, Bill Gates, for inspiration. Gates, as the world knows, isn't satisfied with tinkering around the edges of a problem. So, among other things, though the Bill and Melinda Gates Foundation, he's applying business prowess to a global vision, aiming to bring the best of 21st century health care to third-world countries. And he's making gains. Enough, anyway, to win over the confidence and backing of his bridge partner and friend, Warren Buffett.

There are ample opportunities for Wall Street to do likewise. To execute a 'Bill Gates' plan to deploy its considerable expertise and resources towards a vision that attacks an important social problem, and, whose success, by the way, will help the capital markets. Through concrete actions (forget the apol-ogies and defensive noises and statements, it's too late for them), Wall Street can demonstrate that it possesses a sense of community responsibility, knows the difference between right and wrong, and does not appear to view individual investors merely as a bunch of dupes. (Strong language, yes; but not as strong as Main Street's visceral anger at Wall Street.)

Where to start? Wall Street should look at a report by the Aspen Institute's Initiative on Financial Security, "Savings for Life: The Pathway for Financial Security for All Americans." The report was issued in 2007 and is the result of extensive work on strategies to increase savings. It was produced under an advisory board of individuals from corporate America, including: Bank of America, Goldman Sachs and H&R Block. It recommends four distinct savings programs, starting with "Child Accounts."

The essence of the Child Accounts program is to award every child at birth a $500 voucher to open an investment account designed for an 18-year investment horizon. The account would grow tax free, and be "locked in" until the child turns 18. Projections as to how much savings would be accumulated are based on varying returns from 8% to 4.6%, annual total expenses capped at 1.5%, and different savings rates for each of three household income groups (low, middle and high), and level of annual contributions (non-savers, moderate savers and aggressive savers). Family, friends, children themselves and employers could make additional contributions each year, and lower income households (under $40,000) would receive a federal match to their contributions. Total annual contributions would be capped at $2,000.

What are the projected results? Over 18 years, the government would invest $57 billion, and total accumulated assets would reach $316 billion.

An appealing idea? Sure. Spending $57 billion in taxpayer funds to accumulate $316 billion in (presumably additional) savings held by our youngest 72 million citizens. As is, however, this concept will raise as many questions for Wall Street as it answers for Washington. For starters, there is a "stimulus plan" resemblance to it that won't go down well. Further, some will view it as a federal government usurpation of a private sector function. A fair point for many.

Here is the opportunity: The project should be taken over by the private sector, operate through a private foundation, and apply well-honed business practices and market-based mechanisms that could undoubtedly improve its effectiveness and increase savings yields. (See Bill Gates, above.) It could be the counterpart to Walmart's leadership role in Hurricane Katrina relief. And funding? The Wall Street Journal reports that the 2009 total Wall Street bonus pool is $147 billion. The key question: would Wall Street firms and executives dedicate 1% to 2% of their bonus pool, per year, to fund a project that can rekindle a national saving ethic? And, in the process, return Main Street confidence in Wall Street bulls? It would be nice to find out.

Knut A. Rostad (kar@rpjadvisors.com) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia, and chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.

Read more of Knut Rostad's Regulatory Reason blog posts:

What's Truth Got to do With It? January 18, 2010 As Wall Street banks announce their 2009 bonus plans, estimated by WSJ to be $145 billion, what better time is there to discuss whether Wall Street firms can win back the trust of investors?...
The Return of Investor Confidence? In 2010? December 29, 2009 A snapshot of consumer attitudes right now is not a pretty picture and suggests there is a long road to travel before investor confidence returns. ...
Partisanship on Steroids December 14, 2009 Passage of the financial reform legislation in the House is historic and important. It may also be, unfortunately, short-lived in the current, toxic partisan environment. ...
Peter Drucker for Wall Street Czar November 24, 2009 Drucker would advise Wall Street to ask what retail brokers think. About being a fiduciary, brokers might "surprise" execs. Many would say "Bring it on!"...
Too Rich or Too Thin? November 03, 2009 You can never be too rich or too thin: Can we disclose ourselves out of obesity? Can disclosures replace fiduciary duty?...
A Tail is Not a Leg October 16, 2009 As the rhetoric heats up over regulatory reform one is reminded how much political life has not changed all that much since Abraham Lincoln was quoted noting the following: "How many legs does a dog have if you call the tail a leg? Four..." ...
SEC Chairman Speaking the Fiduciary Language September 28, 2009 SEC Chairman Mary L. Schapiro's September 24th speech, before the Financial Services Roundtable, included her most recent public remarks on the fiduciary standard. The Chairman's remarks are important. ...
Rakoff's Bank of America Opinion: "The Tipping Point" September 16, 2009 In September 2013 when we look back on Lehman Bothers' demise, will we also see a "reformed" financial system and regulatory structure? One that may be hard to recognize compared to today's structure? If "yes," look to Judge Jed S. Rakoff's opinion. ...
Listen to Chuck August 31, 2009 When Chuck Schwab talks do people listen? They ought to--even when he is off base, as he was in an August 19 opinion piece, "Brokers Aren't Responsible for Bad Bets," in The Wall Street Journal....
Disclosures and Evoking the Lewis Liman Defense August 14, 2009 Why did the SEC accept a $33 million settlement in light of its allegations that Bank of America failed to disclose that bonus payments were authorized for up to $5.8 billion? Judge Jed Rakoff wants to know. ...
The Authentic Fiduciary Standard--What's the Fuss About? August 11, 2009 Recent discussion in some quarters has focused on the "similarities" between the fiduciary and "arm's length" standards. The clear implication appears to be: What's all the fuss about whether investors retain fiduciary advisors or not? ...
Blog: Talking the "Fiduciary Talk" in Washington July 07, 2009 The Obama Administration proposes that brokers giving investment advice should meet a fiduciary standard. SEC Chairman Mary Schapiro states strong support for a fiduciary standard. How will this translate into legislation?...
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