Feb. 17 (Bloomberg) -- Oppenheimer & Co. analyst Meredith Whitney has been prescient in a way that almost no one else has on the crisis engulfing America’s banks. But she’s just wrong on the effect capping banker pay will have on the industry.

“If you can’t compensate your employees, they are going to go somewhere else,” she said in a television interview this month. “You’re going to get a different variety of folks who are going to come in.”

Would that really be such a bad thing? You have to wonder.

What prompted this was U.S. President Barack Obama’s proposal two weeks ago for a $500,000 pay ceiling for senior bankers whose companies accept federal bailout money. Pay measures included in the stimulus bill approved on Feb. 13 are even more stringent and apply to any company that has received funds under the Troubled Asset Relief Program -- not just future recipients, as Obama proposed.

Obama’s decision involved a bit of political theater, yet the restrictions in the bill from Congress were surprisingly tough. Maybe that is to be expected when taxpayers are being asked to fork over several hundred billion dollars to buoy institutions populated by individuals who on average make multiples of what ordinary folks bring home.

Salary Caps

When historians look back at the banking crisis, they will find that it exposed several myths concerning financiers’ pay.

Myth No. 1: Government-imposed compensation caps are counterproductive because they deter gifted bankers from accepting jobs just when their knowledge is most needed.

Come on. These so-called Masters of the Universe were the guys who got it all wrong to begin with, something Whitney seems to be forgetting. Granting mortgages to people they knew couldn’t afford them and underwriting derivatives whose impact they didn’t understand, they pocketed their bonuses and plunged the world into the mess it’s now in.

There will also be reduced demand for so-called sophisticated bankers in an environment of fewer jobs, tighter regulation, shrunken leverage and less-complex products.

Myth No. 2: High compensation identifies individuals as the best and brightest.

The premise that maximum pay attracts talent doesn’t hold water. After five years as president of the Federal Reserve Bank of New York, Paul Volcker in 1979 became chairman of the Federal Reserve System. He took a pay cut to $60,700 from $116,000, and no politicians had to shame him into accepting the reduction.

Willing to Pay

Investment bankers make a lot of money because their corporate clients have been willing to overpay for their services. Ever hear of a corporation’s management rejecting investment- banking services because they were too expensive?

What’s more, bankers’ compensation reflected the size of the transaction, even though a $50 billion deal might take no more effort than one of $50 million.

In a move that would make a socialist proud, Morgan Stanley’s board in 2005 guaranteed Chief Executive Officer John Mack he would be paid no less than the average of that of his four major counterparts, who were, of course, the firm’s competitors. The implication that the more successful your opponents, the more you earn is ludicrous; and, although Mack later rejected that provision, it speaks volumes about how much bankers assume fat-cat pay is an entitlement.

Best and Brightest

Although business schools have lured away gifted individuals, it’s a stretch to argue that the world’s finest minds were lost to the financial-services industry. There’s no dearth of Nobel laureates or top-flight candidates for the prizes.

Myth No. 3: Governments shouldn’t nationalize banks. They don’t know how to run financial institutions and don’t appreciate the need to pay up for talent that does.

Nationalization doesn’t require micromanaging a bank; governments just have to choose the boards who select senior management. Most politicians aren’t military professionals, yet they appoint the generals and admirals entrusted with defending the country -- no less a responsibility than managing a big bank.

It’s also expected that the best military talent can be retained for modest pay. Why should financiers be any different?

The base pay of U.S. Army General David Petraeus, commander of all American forces throughout the Middle East and Central Asia and architect of the successful surge strategy in Iraq, is $177,000. What’s more, he doesn’t receive a performance bonus.

By contrast, the average CEO of a Standard & Poor’s 500 company received $14.7 million, according to the World Economic Forum. In 1960, the average CEO earned twice as much as the U.S. president. Today that multiple is 62 times.

“I had a better year than he did,” Babe Ruth said in 1930 when asked whether he deserved to be paid more than the president. Ruth was holding out for $80,000, while President Herbert Hoover made $75,000.

Ruth was one of baseball’s all-time greats, which is a lot more than you can say about today’s corporate chieftains.

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net

Last Updated: February 16, 2009 19:00 EST