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EXECUTIVE COMPENSATION….Should the Wall Street bailout include provisions to punish executives who were responsible for bad behavior during the housing bubble? Megan McArdle asks if this is even legal:

Here’s a question: a lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally? I mean, yes, they make the law. But my understanding is that while you can grandfather in benefits, you can’t retroactively punish people for behavior that was legal when committed. Can Congress reach in and retroactively void a private contract? I’m not asking for commentary on the wisdom or morality of such a move, just whether it would withstand a court challenge.

Not a chance. The Fifth Amendment prohibits the direct impairment of contracts, and Article 1 prohibits both bills of attainder and ex post facto laws. Felix Salmon adds some practical questions:

Which folks did you have in mind? The ones who ran subprime mortgage originators which have now gone bust? It’ll be pretty much impossible to get money back from them. The MBS and CDO desks in investment banks? Most of them have been fired at this point, there’s not much work for them any more. The senior executives at the banks? They’ve seen their net worth plunge along with their share prices. There might be a couple of fat-cats still around whom the government could ask to repay their bonuses. But it would be gesture politics.

Obviously this is a bummer. We can, of course, demand that executives voluntarily agree to new compensation packages going forward if they want to participate in the bailout, but even there we need to be careful. For example, John McCain, in his new role as the Scourge of Wall Street, says we should just limit all executive compensation to $400,000 or less. But who knows what that means? Does it include only direct income? Perks? Stock options? Retirement pay? Bonuses? Or is it all of the above? If it is, all that will happen is that the brightest people at these firms — which, remember, we would like to succeed since we’ll all have equity stakes in them — will scurry away for more lucrative futures at small hedge funds and boutique banks. Granted, given the performance of the brightest people over the past few years, maybe we’d be better off with a few dullards instead, but be careful what you wish for.

Much better, I think, would be structural changes that reduced income for everyone in the finance industry, not just the bankrupt firms. If Democrats had a spine, that might be feasible. Under present circumstances, however, I realize it’s pie in the sky. A few ritual disembowelments is probably the best we can hope for.

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