This is a rush transcript from "The Journal Editorial Report," October 24, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," the government moves to cut compensation at all banks, whether or not they were bailed out. Will they soon be setting wages for all of us?

And the White House picks another target. Move over, FOX News, the U.S. Chamber of Commerce is the latest group to find itself in the administration's cross hairs.

Plus, a special election in New York is pitting prominent Republicans against each other and raising doubts about the party's strategy to take back the House in 2010.

Welcome to the "Journal Editorial Report." I'm Paul Gigot.

The White House pay "czar" Kenneth Feinberg announced plans this week to drastically cut the salaries of the highest paid employees at the seven companies that received the biggest taxpayer bailouts. The cash portion of their salaries will be slashed an average of 90 percent over last year. And the Federal Reserve proposed new pay guidelines for all banks it regulates, whether or not they were bailed out.

President Obama praised Feinberg's ruling, calling it an important step forward in curbing the influence of executive compensation on Wall Street, while still allowing those companies it succeed and prosper.


PRESIDENT BARACK OBAMA: I've always believed that our system of free enterprise works best when it rewards hard work. This is America. We don't disparage wealth. We don't begrudge anybody for doing well. We believe in success. But it does offend our values when executives of big financial firms, firms that are struggling, pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat.


GIGOT: Joining the panel this week, Wall Street Journal columnist, Mary Anastasia O'Grady; assistant editorial page editor, James Freeman; and Washington columnist, Kim Strassel.

So, Mary, I think a lot of our viewers might think, OK, these bankers paid themselves handsomely before the panic and then they got bailed out by the taxpayers and now having pay cuts, case of just desserts?

MARY ANASTASIA O'GRADY, COLUMNIST: In the case of the seven biggest companies that got the TARP money from the government...

GIGOT: And still have the TARP money.

O'GRADY: And still have the TARP money, it might be. We don't know because we — there's a reason why the market sets compensation. A single person sitting in Washington really doesn't know how much any of the employees are worth to the company.

GIGOT: But now some might be less than $200,000 he says.


O'GRADY: I think the bigger concern is that the fed and the Treasury now say that they can regulate compensation for the entire financial services industry. And that's a lot more troubling. I mean, and the other thing that's really troubling here to me is that those who caused this problem are really not being held responsible at all. And that would be the people at the Federal Reserve.

GIGOT: Oh, oh.


The federal government had a role here, is that what you're saying?

O'GRADY: Risk was mispriced for a very long time because, A, the fed was pumping out a lot of money and, B, the credit rating agencies, which were basically anointed by the government, were...

GIGOT: Like the triple-A ratings on the securities.

O'GRADY: Exactly.

GIGOT: Said sell them and make fees on the sales. This is a crucial issue, which is what role do we — did the bankers cause it? Because that's the federal government is now saying, banker pay caused it all. Just cut banker pay, we'll never have this happen again.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: It's more depressing than it sounds. Because...


GIGOT: How can — really?

FREEMAN: And it's a financial disaster like we just had and you hope there are lessons learned. A big part of the reason this happened is because the federal government, the Federal Reserve, the regulators started labeling things safe. Regulated across the world, actually, hold these mortgage-backed securities, they're safe. We know what risk is. Now we're getting back into the same exact experiment again, where the government is now saying, we understand risk and we will be able to tell you what compensation is appropriate for that risk. And the danger is that, when a standard gets set across the whole economy, it's going to be wrong, it's going to be wrong everywhere, just like it was with the rules that the Fed put out on banks.

GIGOT: Do you have a problem, Kim, with the seven companies that still have TARP money being limited?

KIM STRASSEL, WASHINGTON COLUMNIST: It's being marginally more defensible, slightly more defensible than the Fed rules. But the problem is here, why are — the seven companies were the ones that were in such terrible situations?

GIGOT: Auto companies, Citigroup, Bank of America.

STRASSEL: AIG. And they were in such dire straits, they needed federal intervention. Now what we're doing is setting compensation limits so strictly that it's going to be that much harder for them to get the high-flying talent they need to bring the companies out of the doldrums they're in. And that's a real risk too.

GIGOT: So then these companies still need to pay back the federal government. You would like them to think that we'll get some of our money back, right? What you're saying is...

STRASSEL: Let's hope we're not stopping that.

GIGOT: What you're saying is, if you limit the pay, some of the smartest folks will end up going to the banks that have less regulated pay.

O'GRADY: That's true. And I think Ken Feinberg was aware of that.

GIGOT: He's the pay "czar."

O'GRADY: I think he really — he's the pay "czar" and he did try to say, look, we have to try to keep the good human capital on the companies if they want them back on their feet. There's no way he would satisfy everybody.

GIGOT: Right. Impossible job.

O'GRADY: I think what's more troubling here is the fact that, for example, Goldman Sachs, which also is part of the bailout money but paid it back, completely gets off the hook. They don't have — they don't fall under any of the compensation limits that Ken Feinberg has assigned.

GIGOT: Well, they're still regulated — No, they don't fall under Feinbergs, but would presumably fall under the Fed's guidelines because they're now a deposit-taking institution.


O'GRADY: Right, but let's go back to when they took the TARP money. They claim now, well, we didn't really need it and there are lots of people who are around that table that say, well, we were forced. But this brings up another subject, which is that, why was there such a lack of transparency there? Why was it a closed-door session where Hank Paulson decided, whatever he decided, and now everybody has their own version of the story?

GIGOT: Now you're right. In Freeman's wheel house here on the lack of transparency.

FREEMAN: No transparency, but I've got to say this "czar" thing, I think, the danger is that this spreads to the whole economy. It's fun to be the "czar."


The power is a little intoxicating. He's already saying that he hopes that his guidelines, which for the seven banks getting taxpayer assistance, are picked up voluntarily by companies across the country.

GIGOT: I think that's a little rough on Feinberg because I think he's been given an impossible task. I think this is a political clash on Washington saying, we need an alibi. We don't want it blame ourselves.

FREEMAN: I know, but...

GIGOT: We don't make it our mistakes. So, Ken, you take it. You handle this. And then we'll pick up your guidelines and spread them everywhere because that's what Congress wants.

STRASSEL: But that doesn't excuse the Fed for its guidelines, which actually is probably more coercive than the Feinberg rules because this really is a regulatory...

GIGOT: Could be.

STRASSEL: Could be.

GIGOT: Could be. They're not as explicit now, but they could be in time.

STRASSEL: Right. Reliance is a squishy word.

O'GRADY: Yeah, but that suggests...

STRASSEL: That puts incredible pressure on companies to...

O'GRADY: Well, you're suggesting that the Fed is separate from the Treasury.


And I think this — I think this is part of the problem here.

STRASSEL: Oh, good point.

O'GRADY: I mean, the fed is now taking direction from the Treasury.

GIGOT: The other problem is that this government is not taking the "too big to fail" issue and addressing that reform. And it's that guarantee against failure that allows a company like Goldman Sachs ultimately to take the outside risk, because, you know what, if we make mistakes, the fed will bail us out.

James, we've got to go. I get the last word.


When we come back, why the U.S. Chamber of Commerce is the latest organization to make Obama's enemies list.



REP. LAMAR ALEXANDER, R-TENN.: If the president and his top aides treat people with different views as enemies instead of listening to what they have to say, they're likely to end up with a narrow view and a feeling that the whole world is out to get them. And as those of us, who served in the Nixon administration know, that can get you into a lot of trouble.


GIGOT: That was Republican Senator Lamar Alexander of Tennessee, who accused the White House this week of street brawling with opponents, and said the West Wing strategy of freezing out its critics is the modern-day equivalent of President Richard Nixon's enemies list. The attacks on this network have been well-publicized, but the White House is waging another war as well. This one on businesses that fight its agenda.

The United States Chamber of Commerce is the latest group to find itself an administration target, having voiced opposition to many of the president's priorities, including some aspects of health care reform, financial regulation, and climate change legislation.

We're back with Mary O'Grady and Kim Strassel. And Wall Street Journal columnist and deputy editor, Dan Henninger also joins us.

Kim, the Chamber is an umbrella group for thousands of businesses, large and small. Why would you fight with business, a business lobby, if you're trying to persuade the lobby to help you on this issue?

STRASSEL: This is called divide and conquer.


The idea is — this is a deliberate thing. What has bothered the White House about the Chamber is that the Chamber is very effective about the things when it does push back. It's actually given the administration some help on things like stimulus, et cetera.

GIGOT: It was for the stimulus.

STRASSEL: For "cash for clunkers," for the TARP bailout, for everything. What they have pushed back on is card check, on climate, on some of the financial—

GIGOT: The card check is union organizations, making it easier to organize unions.

STRASSEL: Yes, so this bothers the White House. What they're trying to do is undermine the organization and pick on individual CEOs. CEOs are easily intimidated. Get themselves to distance themselves from the Chamber and then the Chamber is a less-forceful group.

GIGOT: Seem to be working in some ways. You have four or five big companies resigned from parts of the Chamber, Exelon, the big utility, others on cap-and-trade. Apple Computer, where Al Gore is on the board, resigned over the peak over climate change.

O'GRADY: First of all, we should make it clear, it's not unusual for a business group to be interested in subsidies. So we shouldn't be surprised that they've climbed on board with some things that the Obama administration has done. But I think what you're seeing here is a little bit of what I would call their corporatist agenda. Under corporatism, which is an economic model that links, business, labor and government together, government has to give business its legitimacy. It signs off on which businesses are legitimate and it does not support really an entrepreneurial kind of candidates.

GIGOT: You think winners and losers as opposed to support for markets.

O'GRADY: Exactly. And the Chamber here has not exactly been — you know, they're not global warming deniers. They're not against a government subsidy in health care. They just don't like the particular model that's been set forth here. So the fact that they're pushing back and there's some dissent, the White House doesn't like it.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, Paul, maybe we should think lower as someone once said about what's going on here.


GIGOT: Get out of this policy biz and start getting into the real dirty stuff.

HENNINGER: Right. A lot of what this administration is trying to do, the health care initiative, cap-and-trade legislation, card check, is really not, despite what they say, in the mainstream. They think it's in the mainstream. It's hard. They have been having a hard time passing this stuff. so with what they've decided to do is use the full force and power of the federal government to say to these institutions, look, if you oppose us, this is what's going to happen to you.

Remember, the insurance industry was with them on health care until that strategy wasn't working, so they just carved out the insurance industry and made them the enemy.

GIGOT: Medical device industry they said, you know, all the industries you've got to ante up a certain amount of money. The device makers didn't ante up enough and hit them with a wham-o, $40 billion tax.

HENNINGER: This is blackjack politics.

STRASSEL: And it's not just that. I mean, look, when Humana, which is an insurer sent out information to its customers saying Medicare Advantage is going to get cut under Obama care, they got hit with a gag order.

GIGOT: Which is true, by the way.

STRASSEL: Which is true. But they got hit with a gag order from the federal government. When the insurers came out recently and criticized the most recent health care products, this week, the Congress was talking about stripping them of their anti-trust immunity.

GIGOT: This is — this is pretty raw thuggery.


O'GRADY: Part of the problem is that the Obama campaign had such smooth sailing, everybody loved him, everybody climbed on board. And now, when he starts to run into some resistance, I think he doesn't really know how to deal with it. And he's reverting to his most basic instincts from Chicago.

HENNINGER: To your point, Mary, they're trying to restructure the American economy, moving it towards more of a social market economy like Europe, where the government does guide in many ways. There's much more stronger regulatory phenomenon and it takes a lot of effort to do that. You've got to push the private sector in the United States to accept that. And that's what they're doing.

GIGOT: Kim, you talked to Tom Donohue, the head of the Chamber, this week. Does it look like he's backing off?

STRASSEL: No, it doesn't. In that interview, he was certainly not out and aggressive about some of the people, the White House and others, who attacked him, but definitely strong, unbowed. Sort of the argument is we have a right to go out there and complain and talk about the things that we don't like and that it's not good for our business community, and we are going to keep doing that.

GIGOT: What are the dangers here, Dan, for a White House that plays this kind of bare-knuckle politics? Early in his administration, you have all the power, but sooner or later, I assume you're going to need some Republicans and some conservatives. And if you've alienated them all, when you need them on Afghanistan or something, they may not be there.

HENNINGER: They may not there. And I also think there's a media problem, Paul. The word Nixonian is getting kicked around. Richard Nixon was president in 1970s. This is 2009. Media presence is pervasive. When you elevate it the way it's been elevated, it doesn't look very attractive. And that was Barack Obama's biggest attribute. He was an attractive new politician. He's starting to look kind of tarnished.

GIGOT: All right, Dan, thank you.

When we come back, a special election this November that may signal trouble for the GOP. The race to fill a vacant seat in Congress is pitting prominent Republicans against each other and raising doubts about the party's plans to take back the House in 2010.


GIGOT: It's a rare House race this November. And the special election to fill the seat vacated by former Republican Congressmen and now Army Secretary John McHugh, in upstate New York, should be an easy win for the GOP. Instead, it's pitting some prominent Republicans against each other in a three-way contest that may end with a Democrat representing a district for the first time since a Civil War era.

The latest poll shows Democrat Bill Owens with a slight lead over Republican assembly woman Dede Scozzafava, whose liberal voting record has caused some voters to flee to Doug Hoffman, a business executive, who, after losing the GOP nomination, is running on conservative party line. The race, seen as a bellwether for the mid term elections next year, has garnered national attention. Scozzafava was endorsed by former Republican House Speaker Newt Gingrich last week, and Hoffman by former majority leader, Dick Armey. And late this week, former Alaska Governor Sarah Palin endorsed Hoffman, calling it a matter of principle.

WSJ.com columnist, John Fund joins us.

So John, why are Republicans scrapping with one another instead of what everybody says they were going to do, which aim at the Democrats and their majority?

JOHN FUND, WSJ.COM COLUMNIST: New York is one of the few states, Paul, where party bosses pick the candidates, especially...

GIGOT: No primary.

FUND: No primary.


The party bosses decided to pick the local assembly woman. The problem is she's an attractive candidate, but her voting record is to the left of half of the Democrats in the state legislation, and she barely edged out another Republican, Doug Hoffman, so he's running with the support of the Club for Growth and a lot of conservative groups, and now Sarah Palin.

GIGOT: Wow, so, is the — I mean, so this was kind of a back room deal, basically?

FUND: This was the bosses. In fact, Sarah Palin, in her endorsement of the conservative candidate, said, I fought against the political machine. I'm endorsing Doug Hoffman because he's fighting against the political machine.

GIGOT: Why did they pick her? Presumably for a reason. They thought she was — she was a woman I suppose. They figured they could appeal to more Democrats. Her voting record might appeal — the district is in sort of a purple district? It's...

FUND: Barack Obama won 52 percent so...

GIGOT: But Bush carried it twice.

FUND: Right.

GIGOT: So they figured they wanted somebody who was more to the left, but this has now backfired.

FUND: Because she's so bad on all of the issues the conservative base likes, with the exception of gun control. There's been a revolt against her. She's also run a very hand-handed campaign. I think she's in danger of slipping into third place. And the race may, in the next week, be between the conservative candidate and the Democratic candidate.

GIGOT: If the Democrat wins, Kim, you can hold this for a very long time. We know that incumbents are hard to beat. But isn't getting a seat to organize the House, that is a Republican seat, particularly when you're down in the minority, isn't that more important than basically, let's put it bluntly, ideological purity here?

STRASSEL: Look, people are trying to make this a question of ideological purity. And despite the campaign saying, this is another example of all the knuckle-dragging candidates who don't like socially candidates like me. They're not really talking about the fact that this is about an economic and fiscal questions that are being raised in the race. And the fact, you know, she is actually doing so poorly against Hoffman on these things, that suggests that this is actually the way that most the people in the district feel. And that's why he is doing well, is because there's this big question. So, yes, they should be trying — Republicans should be trying to put people in districts that fit their districts, but this is just a bad pick.

GIGOT: Here is the problem. A lot of people — there's been an enormous grass-roots anger built up in some parts of the country about the Obama agenda. And that has created real energy against the Obama agenda. On the other hand, it could turn against the Republicans, in some cases, if they don't really articulate a very well principled agenda.

FUND: Well, that's the problem. That's the problem with Ms. Scozzafava, because she supported the Obama stimulus package. Not a single Republican in the House did. She supported union card check legislation. There are almost no Republicans supporting that. She is way off the ideological left when it comes to the Republican Party.

GIGOT: What I'm saying is — the question, is this grass-roots populous passion going to end up dividing the Republican coalition in a way that helps the Democrats keep a majority for a very long time?

HENNINGER: I don't think necessarily, Paul. New York State is a unique situation. Even the New York Times editorialized this week that state politics is a cesspool. But they've got to understand that this will be represented as a national loss for the party. All of these particulars will get washed out. Why do you think that Bill Clinton is in upstate New York campaigning for the Democrat? Because they know it has national implications.

GIGOT: And Barack Obama was raising money for the Democrat in New York this week. What's the lesson here for the Republican Party nationally?

FUND: You do have to pick more moderate candidates for more moderate districts, but you cannot alienate every single part of your conservative base. You have to stay within the guardrails. In this case, they went off the guardrails, so now a Democrat could win. But I actually think that the conservative candidate might pull a Jim Buckley. He was the conservative Senator who won in 1970.

GIGOT: Against two liberals, one liberal Republican.

FUND: Right.

GIGOT: And one liberal Democrat. And you're thinking that could be a repeat, which would — and the lesson would be nominated...

FUND: Nominate people who fit the district.

GIGOT: All right, John, thanks.

We have to take one more break. When we come back, our "Hits and Misses" of the week.


GIGOT: Time now for "Hits and Misses" of the week.

Dan, first to you.

HENNINGER: Paul, a hit to Tennessee Senator Lamar Alexander, who says that we ought to start thinking about giving students the options of getting through college in three years. Now, obviously, this is driven, in part, by the skyrocketing costs of tuition in schools.

But I think there's something else going on here. I was on the streets of New York recently when I heard one young woman say to another one, "So you don't think your life is going to be as much fun as college"?


Time out.


We are in a world-wide competition here with India, China, Taiwan, Korea. And I think three years would show that we're in the game to win, not to play.

GIGOT: All right.


STRASSEL: Democrats are very worried about the high price tag of their health care reform. So this week, they tried to do something sneaky. Hoping to get support from doctors, they tried to pass this doc fix, which is a way of putting out cuts in Medicare payments to doctors. And instead of putting it in the big health report, they tried to pass it on its own, $245 billion in deficit spending. They couldn't get the votes for it and it failed on the ground. A rare hit for some temporary sanity in Washington.

GIGOT: All right.


FUND: On November 3rd, there are going to be two initiatives in Washington that may tell us more about the mood of the country than what personalities win. And those initiatives are called TBOR, Taxpayer Bill of Rights. And what they would say is state government spending can grow at the rate of inflation and population growth. But if you have to grow faster than that, you have to get a vote of the people to approve it. These brought all the public employee unions against them. A lot of the taxpayer groups, the tea party people are for them. How they turn out may well indicate the direction of the country on the issues of big government.

GIGOT: That's an important vote.

All right, thanks, John.

That's it for this week's edition of the "Journal Editorial Report." Thanks to my panel and for all of you for watching.

I'm Paul Gigot. We hope to see you all right here next week.

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