I and many others have noted over the years that populists and progressives often advocate the same economic policies no matter how much they otherwise wage culture wars. A little-noticed case in point is work underway in the Trump White House to subject the biggest defense contractors to strict limits on compensation and capital distributions. Treasury Secretary Bessent is said to support the idea, leading Sen. Warren to suggest a “partnership.” Might this extend from prime defense contractors to GSIBs? It’s unlikely, but not impossible.
The rationale for the prime-contractor constraints is frustration over the decades in which these firms have consolidated and gotten ever bigger contracts yet delivered fewer and fewer armaments on time anywhere close to on budget. There is thus a flood of stories about how many ships, planes, and super-weapons the Chinese build as U.S. capabilities grow ever older, slower, and still more expensive. Will de facto nationalization for defense contractors make the U.S. military agile again because contractors grow hungry? I don’t know the sector well enough to even hazard an answer.
But, I do know a bit about banking. Would similar comp constraints lead GSIBs to slim down as Secretary Bessent desires? Maybe, but the power would shift not to smaller banks, but to the biggest nonbanks sure to lure disenchanted GSIB executives to the still-lucrative spheres of private credit and so many other bank-like activities. I doubt Mr. Bessent wants this, but the real deciding factor over GSIB comp limits isn’t substantive; it’s political.
I can safely say that the President will not scruple at slamming GSIBs if he is persuaded that this will appeal to his base, which it may at a particularly convenient moment. Indeed, the President might not need a midterm-election objective to slap GSIBs around. All it might take is for him to get angry at one or another mega-bank. Every CEO is walking on tiptoe, but that might not help if the President still thinks someone stepped on his big toe.
One easy option for vengeance is of course an executive order. Another not possible for defense contractors is the dormant provision in Dodd-Frank demanding incentive-compensation reform. This has never gone anywhere in part thanks to the super-cumbersome implementation process financial institutions inserted in Dodd-Frank when they realized they couldn’t kill the concept outright. However, every financial regulator now reports to the President and each will snap-to with a tough rule if told to do so. Any new rule will cover all financial institutions of size, not just GSIBs, so the industry as a whole has a stake in this fight much as some might like to bring GSIBs down a notch.
All this is of course highly speculative, but nothing is out of bounds in this Administration. Thus, while new banking-sector comp constraints are unlikely, they’re no longer improbable. Thus it goes these days in wild Washington.