Is Washington a Foe of Manhattan?

For many decades, the key driver of the Manhattan economy has been the financial sector. More than a third of all employee earnings in New York City come from the financial sector, and one of the other key economic drivers of Manhattan and of NYC, real estate, is driven in part by the engine of the financial sector. In fact, while midtown Manhattan is the largest business district in the United States, the financial district in lower Manhattan is the third largest such district.

In this context, it is obvious that improving the state of the financial sector in the United States is crucial for the economy of Manhattan and for the rest of NYC, but with so much of Manhattan's success riding on the health of the financial sector, forces in Washington DC are on the attack against the financial sector. In so doing, they are also attacking Manhattan.

Dodd Amendment to the Stimulus Package

The recently enacted stimulus package included a frontal attack against the health of the financial sector, and the author of the offending position was Senator Christopher Dodd of Connecticut. Separately and ironically, despite the fact that many Wall Street executives and high earners live in Connecticut, Senator Dodd has also threatened to force all recipients of year end bonuses at Merrill Lynch to give their bonuses back to their employer. The Dodd attack contained in the stimulus package is aimed at limiting the bonuses of employees at companies that are recipients of the TARP (Troubled Assets Relief Program) funds provided to financial companies since the market meltdown began in September 2008. All major banking institutions and a very large number of smaller such institutions are recipients of TARP funds, therefore, regulations affecting all recipients of TARP funds have the practical effect of regulating the entire financial sector of our nation's economy.

Dodd's amendment results in a regulation that prohibits the paying of bonuses in excess of one-third of base salary to the top 25 or more earners at companies that received TARP funds. In financial firms, employees receiving the largest amounts of compensation receive well over half of their compensation in the form a bonus, and bonuses often represent more than 90% of the compensation for a high earner.

This new law is very bad news for the financial sector and even worse news for Manhattan.

1. Firms may choose to dramatically increase salaries so that bonuses can be no more than 33.3% of base salary while compensation remains competitive for the best performing employees. This approach will result in less incentive for those employees to maximize on their talents. The modest salary approach coupled with the possibility of an enormous bonus results in the best performers giving their best effort. The financial reward for success is contained in the bonus that is provided AFTER a full year of effort, creating the urgency for each such employee to succeed enormously every year in order to take advantage of that potential financial reward. With the higher salary and small bonus, the incentive for such effort is dramatically reduced, and the overall performance of the top employees at these firms will like be less successful than it would have been if a large bonus was still available as a reward.
2. Top performing employees may choose to work for small firms that haven't received TARP funds. With that approach, they can work in institutions with less regulation and with greater potential for large bonuses. The movement of these top performers to smaller firms leaves the larger firms with fewer high quality employees right at the time that they need the help of the most talented people in our country. Moreover, as taxpayers, we are all investors in the firms that have accepted TARP funds, and we should encourage the Congress and the President to avoid new regulations that make the success of the TARP recipient firms less likely.
3. TARP recipient firms may scramble to pay back the TARP funds as soon as possible in order to escape the restrictions represented by the Dodd amendment. Such an approach may undermine their liquidity and cause them to undertake business approaches which are not healthy for themselves or for the economy. We should remember that several of the firms that accepted TARP funds were not eager to do so and were told by the Treasury Department that accepting the funds was both their patriotic duty as well as a requirement of Secretary Paulson. If the TARP funds exist to improve the likelihood of success of the firms that received the funds, the Dodd approach seems designed to create the opposite trajectory.

The Dodd restrictions leave us wondering whether the Congress is attempting to undermine the already weakened financial sector. If so, they are also working to weaken Manhattan and NYC.

Nobody Home at Treasury

The current Treasury Secretary might be feeling lonely as well as inadequate. Secretary Geithner has yet to propose a plan to promote the recovery of the overall economy or of the financial sector. When he was nominated for the Treasury Secretary position, his previous failures to pay taxes were overlooked because he was expected to be an excellent captain of the economic recovery and because he was viewed as uniquely competent and prepared to do the job. Instead, his performance has resulted in reduced investor confidence, a lack of a plan for the recovery, and no team in place at Treasury. In fact, Secretary Geithner is the only leader appointed at Treasury in the new Administration. None of his deputies have been appointed, and the financial markets have continued to experience increasing turmoil.

Manhattan Needs These Trends to Stop

Manhattan needs the attacks and the procrastination in Washington with regard to promoting a healthier financial sector to end immediately. We need a recovery plan that we can support, and we need to get started right away.