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Mr. 'Fat Cat' Banker Goes to Washington

As markets rallied last year, investment banks paid back TARP funds and Wall Street reactivated steakhouse tabs en masse. A return to Bonus Bonanza was almost preordained. According to Bloomberg, financial services profits could triple by 2011. Goldman Sachs (GS) is getting ready to report what looks to be its biggest profit on record. Some of the top banks in the country are about to pay at least 40% of that windfall out to employees.

Main Street—with double-digit unemployment, record foreclosures, and even soaring food-stamp use—eat your heart out.

It is amid this disconnected backdrop that the Financial Crisis Inquiry Commission convenes in Washington on Wednesday, Jan. 13, for its first hearings. Congress created the 10-person commission to study how the financial system very nearly failed, asking that it report its findings by December—that is, more than two years after the commencement of the dreadful chain of collapses that marked the Panic of 2008.

So much for slamming the barn door. Where was Congress when the nation—cuff-linked or not— was bingeing on subprime head cheese? That's beside the point now. What you need to know is that there will be some choice flogging on view when the suits from Goldman, JPMorgan Chase (JPM), Morgan Stanley (MS), and Bank of America (BAC) belly up to the mic. (Lest it be forgotten, these are the folks that President Barack Obama referred to on Dec. 13 as "fat cats.") Considering the cringe-worthy history of such Hill-CEO encounters as Detroit's private jet fiasco last year; oil company executives explaining high gas prices in 2008, and Big Tobacco's infamous "nicotine is not addictive" hearing in 1994, C-Span may want to think about running the proceedings on pay-per-view.

In that spirit, here's a quick-and-dirty user's guide on what to expect from the festivities:

Ersatz Humility

The past two years marked an unprecedented government intervention to address the multitrillion-dollar financial meltdown. Enter TARP: The $120 billion-plus, 100¢-on-the-dollar bailout of American International Group (AIG) transitively bailed out every house on Wall Street. Along the way, the financial sector was chastened as never before. The era of the bumper-crop bonus was over.

No one truly expected a heartfelt shift in world view from our captains of high finance. Wall Street masters of the universe have historically held a high opinion of their deeds. Recently, Goldman CEO Lloyd Blankfein even dared suggest that he was "doing God's work." You, on the other hand, don't know what they do. You will never appreciate how they spend nights and weekends away from their families, eating lunch out of Styrofoam, and generally contributing to a higher divorce rate. The bankers' take on all this: They earned what they made, so bug off.

In this environment, bankers won't dare take that tone to Capitol Hill. Look for them to try to convince you that they are sharing your recessionary pain.

Already, Goldman, BofA, JPMorgan, Morgan Stanley, and Citigroup (C) have warned their thundering herds to brace for less immediate bonus gratification (cash) and more deferred compensation (long-term stock). Although some divisions have cushioned the blow to morale by bumping up their workers' base pay, expect the testifying CEOs to plead that they're exercising discretion. (Never mind that a routine $500,000 Wall Street payday still represents nearly 10 times median U.S. household income).

To drive home the newfound humility, Goldman Sachs will underscore how it has ratcheted up charitable giving over the past year. The New York Times even reported on Jan. 11 that management will ask more employees to give on a compulsory basis. I predict that Goldman's peers will affect a similar eleemosynary spirit, but you should expect some especially press-savvy pol to call them on it and make them commit to a dollar figure and/or cause. A National Foreclosure Fund? The AIG Taxpayer Gratitude Fund?.

Awkward Identification with Americana

There is a significant contingent of Americans out there, Republicans and Democrats alike, who resent the trend of rampant nationalization, homeowner intervention, and Washington's unabashed intrusion into all manner of private enterprise. In Florida, California, and just about everywhere in between, populist-libertarian tea parties are supplanting coffee klatches as venues for candidates to electioneer as we head toward the November midterms. Close your eyes and you can almost hear Springsteen and Mellencamp.

The testifying execs will throw rhetorical bones in the direction of populism. For all its arcana, esoterica, and newfangled Excel models, Wall Street at its core runs on the spirit of private enterprise that has crackled since the dawn of man. Early humans cornered wildebeest and divvied up the choicest cuts in front of lumbering Neanderthals. Withhold the protein from your hunting posse and it will, citing artistic differences, regroup elsewhere—leaving you, hoarding boss man, with nothing.

Similarly, Wall Street—more-kill-what-you-eat than ever—doggedly stands by the time-honored belief that it must be able to competitively compensate its producers, lest they leave for the higher-paying fields of non-U.S. investment banks and Hedge Fund County, Conn.

Make no mistake: Not one Wall Street executive will dare claim that several hundred thousand dollars in median pay is a pittance. But look for one intrepid captain—my money is on JPMorgan's celebrated CEO, Jamie Dimon—to finally throw down the butt-out-of-my-business-sir gauntlet (cushioned in gobs of euphemism and humility, of course).

We Can Police Ourselves, Really

True, the confluence of conditions that made it possible for everyone to take the system to the brink—30:1 leverage, real estate mania, and fly-by-night mortgage lending—won't just suddenly reconstitute. Nevertheless, Congress will wax inquisitional in grilling bankers on how best to guard against a repeat of the horrors of 2008.

In that respect, the FCIC's charge is analogous to that of the Pecora Commission, which was convened in 1932 to study the causes of the Crash of 1929. Its findings led to the separation of investment and commercial banking under the Glass-Steagall Act, which was repealed in 1999. In full-circle fashion, the specter of a resurrection of that Chinese wall will get long shrift at the hearings.

But try reimposing Glass-Steagall in the age of way-too-big-to-fail, a policy that the Federal Reserve has already blessed by allowing JPMorgan to become JPMorgan-Bear-Chase-WaMu and Bank of America to become BofA-Countrywide-Merrill Lynch (Fleet, MBNA, etc.). These two superbanks, at the very least, can argue that they mashed together commercial and investment banking like never before, precisely for the good of the system.

So is this all destined to be so much Kabuki regulatory theater? Perhaps. Wall Street bankers messed up, we bailed them out, they went back to their old ways. Wash, rinse, repeat.

But if these hearings deliver on their promised histrionics—bailed-out banker pay is an almost-irresistible whipping boy this year—the chief upshot will be renewed Wall Street-Main Street polarization. All of which, even after banks have paid back their TARP loans and made nice with charitable causes, will underscore for executives that it just doesn't pay to be a publicly traded investment bank.

Would all this ever have happened if Lehman Brothers and Bear Stearns had been private partnerships whose risk fund was their own partners' capital—an embedded check on excessive risk-taking? Wouldn't it be far preferable to structure compensation away from the peering eyes of Securities & Exchange Commission filings and a Washington-appointed Compensation Czar? Does Goldman Sachs rue the day it went public?

Leave all that for the white papers. Must-see-TV beckons.

Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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