24/7 Wall St.

John Thain of Merrill Lynch (MER) and John Mack of Morgan Stanley (MS) looked like men in hostage video tapes with guns held to their heads as they were forced to forgo their 2008 bonuses. It made for good theater. It made shareholders and regulators feel that they have leverage. But, over the long haul it sabotaged the financial industry.

A lot of sports teams claim that they pay players ludicrous salaries because otherwise they would go to competing teams. The argument has an elemental logic to it. Rich franchises get the best players. The best talent gets rich. It is a sort of free market analog to what goes on in the business world.

Shareholders are always hard pressed to understand why public company CEOs make tens of millions of dollars. Corporate boards argue that there is a limited pool of skilled people who went to the Harvard Business School but did not go on to become consultants at McKinsey or Bain.

Wall St. will probably flush out the best 5% or 10% of its talent by not paying them a competitive wage. The best people will end up at hedge funds and private equity firms. It is easy to say that those institutions are also in trouble, but the cream of them can still raise billions of dollars, and the very finest still make money. The heads of these companies know that they are about to be able to cherry pick the real talent out of Wall St.

Losing the best people at the large commercial banks and brokerages might be OK in robust times, but, of course, the best people make a lot of money when these firms are flush so they stay on. During periods of real trouble the floundering operators cannot afford to part with their real stars. Who will be left to think and trade their way out of the deep holes the industry has dug for itself?

No one.

Douglas A. McIntyre