One of the penalties I  pay for living on the North Shore is having underemployed investment bankers as neighbors. Smart enough guys, only a few years ago capable of buying large houses with cash, now left to rake leaves and shuttle kids around. A neighboring bond trader wandered over to our house earlier this week with a family carload for a noisy dinner (beef, noodles, and beer if you must know).

I mentioned that he has been around home a lot assuming a lack of work in his trading area. Somewhat surprisingly I was wrong. A lack of pay has put a formerly productive banker/trader into an early retirement this year. His (British) firm limits compensation at 200K per year, which he gains on trading commissions. He reached his maximum on October 1, and is taking the rest of the year off. But wait…wouldn’t his bank make more money if he worked the rest of the year? Sure…but why do it? You work for free.

As a result of mindless regulation such as this, there is less competition in several investment banking business. I wrote it off to the typical pathetic European regulatory regime, but again was wrong. The wise souls in the Obama administration have imported this bloodletting into the US economy this week, with a 90% pay cut imposed for top earners at 7 firms receiving TARP money. And sure enough, US Bankers are quitting as well, with nearly 50% taking a hike at some firms.

The net result? Traders with unlimited bonus potential such as those at Goldman Sachs, are cleaning up, facing reduced competition from other investment banks where compensation is limited. Goldman has put aside put aside $16 billion so far this year for employee bonuses. Another expected result, explained to me by my neighbor, is that new firms will pop up, funded by the likes of Blackstone and the Carlyle Group, to employ traders and executives exiting the banks which received TARP money.

New York Governor David Paterson has the math done for him on salary caps: “That probably cost New York $1 billion,” Paterson said. “And look, I’m not going to defend these people that run these companies. They’ve frittered away a lot of money in these reckless schemes. But the reality is, in the end, we’ve lost $1 billion dollars because of that act.”

Who could be behind this type of mass ineptitude? Well only someone who paves with good intentions, in a role of mindless incompetence and grimacing earnestness generally  assigned to the clergy, Special Master Kenneth Feinberg. Feinberg, prone to platitude and not thinking things out very well sees his role in restricting pay as “putting things in proper balance”. You may remember Feinberg as a previous “Special Master” of the Vicitms Compensation Fund which doled out $7 Billion in compensation to 9/11 victims. Unsurprisingly, I received no compensation whatsoever when my bicycle was stolen in September of 2001, nor did any other crime victims, except those who collected from farce of paying people for being killed by terrorists.

The story (not sounding very likely) goes that Feinberg made the pay cut decisions on his own without consulting Pres. Obama, in which case a responsible executive would have fired him already. Feinberg lumbers on, investment is stifled, and my neighbor continues to shuttle his kids back and forth rather than generate tens of millions of dollars in profits for his employer…while providing liquidity and making a market for the rest of the economy.