The question is if Wall Street will undergo lasting structural change.

Question: How is Wall Street changing?

Dean Baker:Well, it definitely will undergo a downsizing simply because the climate doesn’t exist for it to maintain its preexisting form. You saw two big investment banks, Bear Stearns and Lehman Brothers, go under. The sorts of risks that they had been taking simply aren’t viable because people won’t lend them the money. The key part of the story of what was going on in ’04, ’05, ’06, up to the crash in ’07 or ‘08 was that you had investors all over the world who trusted Wall Street. They believed the investment grade ratings on the mortgage-backed securities and other instruments coming out of Wall Street. They don’t believe [Wall Street] anymore. So without having basically an endless supply of gullible investors, Wall Street has no choice but to downsize. So it is certainly going to be smaller at least for the immediate future. But the question is whether the structure is going to change. And that’s what I’m not sure of. If the structure doesn’t change then what I worry about is, overtime, we just get back pretty much to where we were. And that’s not a good place to be.

Question: Will executives self-regulate their pay?

Dean Baker: Well, it’s a good question and I’m not sure at this point. I don’t think that’s their intention. There was an article in The New York Times just a couple of days ago talking about Goldman Sachs. It was about Wall Street more generally but Goldman Sachs was the real model: they’re basically back to where they were in terms of salaries to the pre-crash days. They are pretty much what they were back in 2007 so they don’t intend to change. So if there’s not something that forces it on them, they’re not going to change. Now, it could be forced in different ways.

On the one hand, you have a lot of stockholders at these places that are very angry and with good cause because they were paying out very high salaries and they lost their shirts. The value, mostly stocks, certainly of Bank of America and Citigroup is down by 90%. It would be down probably a 100% if weren’t for the government bailouts. But yet, the people who nearly put these companies out of business, they walked away with huge salaries and many of them are still there. So stockholders may change on their own. Part of the story with many of the hedge funds is they got their money from state and local pension funds, or in some cases, private pension funds that are basically being ripped off because in many cases they weren’t getting returns to justify that. The story was: give us your money, will give you this 20% return and you shouldn’t mind that we’re walking away with salaries of hundreds of millions of dollars a year. Well, they weren’t getting 20% returns. A lot of that was bogus and certainly through the crash many of them did very poorly. So basically, they’re ripping off pension funds. One hopes that these funds will turn around and stop doing it.

But you might well expect, and I would like to see government regulation. The simplest regulation I could envision is changing the rules of corporate governance. Again, the government sets rules of corporate governance now so it’s not as though we would be doing an intervention we don’t currently do. We just need different rules because they’re not effective. Many of the rules of corporate governance are designed to protect minority shareholders. We can’t [protect] 50.1% of IBM and tell the other 49.9% they’re out of luck. They protect the minority shareholders. Well, they also have to protect the shareholders against abuses by the executives and they’re clearly not doing that right now. Basically, the top executives appoint the boards who are then very happy to approve very high pay packages for the top executives. It’s not a big surprise. That’s the way things work. So what you have to do is try and redress that balance. The best thing I could think of is simply to require that pay packages and compensation packages to the top paid people get sent out to shareholder approval at regular intervals: three years or five years. And also, that this be a serious vote: that non-return proxies—this is a scam with corporate votes that they’re allowed to count non-return proxies as supporting a management position. I always say it’s like we had our elections for Congress and everyone that doesn’t vote is counted as voting for the incumbent. I mean, it’s very much a rigged election. It should be a real election. You’re only going to count the votes that are returned. And if they don’t approve your pay package, you have to come back with another pay package.

Recorded on: April 28 2009