We weren’t surprised by the Fed’s compensation guidance, but we’re still disappointed to see it. The Board is pursuing a belt-and-suspenders approach to the post-crisis regulatory rewrite, in part to defend itself from criticism sparked by all the goofs that got us here. But, if prudential regulation is well crafted and bank risk management rightly targeted, there’s no need for new compensation protocols. Simply put, bankers couldn’t get paid to go bad because they would be barred from bad actions and meaningfully punished for any that escaped internal control and corporate detection.

The rationale for the comp standards is the appalling history in the mortgage arena. It’s always the poster case, with regulators noting that brokers got huge bucks for putting borrowers – some of them fictitious – into wildly-inappropriate mortgages. Banks then bought these loans, securitized them for both corporate fees and management comp, raking in the dough as investor risk piled on to that taken by hapless borrowers. The thinking here is that compensation created the incentive misalignment that led to such wrack and ruin.

Did it? For mortgage brokers, of course, if they hadn’t been paid for bad loans, most wouldn’t have offered them. But, regardless of their compensation, brokers can’t offer loans if no one buys them. If risk management at the commercial banks, investment houses and GSEs had been effectively drawn, then brokers could have pleaded their case all day long and still not sold a loan. Similarly, if securitization through banks had appropriate risk controls, then poor paper never would have made it out the door. If, for example, the rating agencies had done even a bit of their job, none of the mortgage-backed securities consisting of dodgy loans would have been blessed with AAAs. Banks couldn’t have sold them no matter how hard they tried and how much the pumpers were to be paid.

The only area where risk management can’t handle compensation is when pay and perks are so independent of internal activity as to have no impact on it. For example, huge country-club fees and no-lose severance packages can create hubris at the top and resentment throughout the firm. But, is this different at a bank than at any publically-traded corporation?

Yes, we would answer, if the bank has received public funds. As a result, we think the new pay caps for big TARP recipients are reasonable. But, the answer can and should be no for the rest of the banking system. If nothing the government does bails out banks, then bankers’ pay shouldn’t be judged on grounds that they have a heads-they-win, tails-you-lose perch. Deposit insurance was meant to protect depositors, not banks. Brought back to that rightful purpose, and bankers would fend for themselves under – hopefully – more aggressive board control and shareholder scrutiny. Similarly, if even systemic-risk resolutions are liquidations – as they should be – not bail-outs as many to date have been, then again bankers’ pay is conceptually no different from that at other firms.

Clearly, the Fed differs. It is in fact proposing to treat bankers differently. Does this mean that it despairs of a banking system without bail-outs and taxpayer subsidy? Does it mean that even the regulators don’t trust themselves when it comes to the new prudential regime they are rushing to create? We hope not, but the new standards suggest not only political acquiescence at the Fed, but also grave doubts about the degree to which pending reforms will really matter.