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Tuesday, September 23, 2008

Washington and the bailout 


Over lunch, while our help desk fixes my computer remotely, I've caught a bit of the Senate hearings at which Secretary Paulson and Chairman Bernanke are testifying. I also listened in on a conference call with Congresspeeps Ed Royce (R-CA) and Melissa Bean (D-IL) over the regulation of the insurance industry post AIG. I have several quick observations.

First, Paulson is not as articulate as I hoped he would be, and Bernanke looks terrified. Not comforting. The Senators are digging in, mostly intelligently, and the weak responses are begetting more questions. The markets are noticing; the DJIA has fallen from around +20 to -150 in the last 90 minutes or so.

Second, Christopher Dodd, who was one of the big critics in the press, is sounding as or more supportive as any of the others. Tennessee Senator Bob Corker, a Republican, has been more critical although intelligently so.

Third, Royce and Bean are pushing federal regulation of the insurance industry. Good, for that is about a century over due. Their argument is that one of the reasons why regulators did not know that AIG was leveraged "sixty to one" is that each state only sees a piece of the picture. "One world class regulator" for insurance is the solution (supposedly), and Royce and Bean believe that the state interests who have long opposed this move will lose this time because of the AIG catastrophe.

Fourth, Bean was stuck on the question of limiting executive compensation in companies that participate in the Paulson plan. She said that Paulson had argued (as he has) that firms we want to participate might not because of the limits. Bean said she was surprised that executives would not act "for the good of the shareholders and the country" just because their compensation was limited. Barney Frank, who is on CNBC today, says that we should have limits on executive compensation in "all corporations," but that our only leverage is over the companies that participate in the program. "We would then look to broadening it next year to all public companies." Camel's nose.

The issue of executive compensation generally deserves a long post. Suffice it to say that if you impose legal limits on executive compensation you will drive the best people into private companies where there are no such limits. Why? Because the limits on the table relate to bonuses and increases in the value of the company's equity and severance payments. All three exist for a reason, the first two because top people do not work brutal hours a week under enormous stress for a mere salary, and the third because top people do not leave a job they have for another one without financial protection against their quick termination.

MORE: Others have a different view, at least on the smarts of the Senators.

STILL MORE: Apart from the populist blathering about executive comp, I thought the Senators actually did a good job. The DJIA has now recovered into positive territory. I wonder if this is because people who have their doubts about the vast hugeness of the Paulson plan got some comfort that the Senate is making them think this through in steps. Of course, the extent of one's comfort is a function of whether one believes that we are on the precipice, or not. Perhaps equity investors are again more positive than they ought to be.


18 Comments:

By Blogger Georgfelis, at Tue Sep 23, 03:10:00 PM:

The “Limits on executive compensation on bailed out companies” meme has traction, because we taxpayers out here do not want to hear “Taxpayers bail out XYZ company for 100 million, executives distribute 110 million in bonuses, company goes bust”. My personal opinion is that companies that distribute bonuses should give them by three-year post-dated checks, revocable by the board OR the chairman at will, and cancelled in the event of bankruptcy or takeover.

That being said, the government has no right to poke into my company and determine my pay scale UNLESS the company agrees to it in the provisions of the bailout.  

By Blogger SMGalbraith, at Tue Sep 23, 04:25:00 PM:

I caught some of this during lunch and at, er, other times (okay, I need to do more "self-governing") and thought the Senators were sober and serious.

As I believe Schumer suggested, why can't we do this incrementally? Why the $700 billon all at once? Buy $200 billion, see if things stabilize and go from there.  

By Blogger Papa Ray, at Tue Sep 23, 05:04:00 PM:

Over coffee this morning a bunch of us ol' timers watched the tv at our favorite coffee shop.

When it was time to leave, the main thoughts we came away with is that several people both in gov. office and on Wall St. deserve the rope. Second we observed that every person that bought a house that they couldn't afford in the first place deserved to lose it and nothing should be done for them. Third was that it was going to be damn hard for the average joe to get a loan on anything in the future, let alone a house.

Because we are all retired and have fixed income with modest savings but with some outstanding debt, none of our credit scores are very high.

We decided we had better just start saving up for a new used car, even if we just got a new one. Because that is about the only way we will ever be able to buy anything anymore.

With Cash.

Papa Ray
West Texas
USA  

By Anonymous JT, at Tue Sep 23, 05:49:00 PM:

TH ... while I generally agree that high comp brings the best and brightest the issue here is the 39 billion paid in bonuses at the top five banks last year, and Lehman's request for 2.5 billion for this year's bonus pool.

As a guy who works in a business closely linked to mortgage, I can tell you with certainty that anyone who was conscious saw this collapse coming for several years. Greed drove providing loans to lesser and lesser qualified borrowers. It was simply a game of not being the last man standing. Many big banks have this toxic crap on the balance sheet because it was so bad even Fannie and Freddie wouldn't tough it. Why pay a bonus for that?  

By Blogger randian, at Tue Sep 23, 05:55:00 PM:

The usual suspects are talking about giving judges the power to rewrite mortgages in bankruptcy. If they make that bankruptcy change nobody will give a mortgage to any borrower that isn't A+. The risk that some judge will take pity on the borrower and reduce their interest rate, eliminate arrears, or change some other matter in the note down to prime mortgage terms (or better than prime, if it's entirely within the discretion of the judge) is much too great.

Even worse, since the bankruptcy rules apply to everyone, even owner-financed deals would be affected, which is a huge problem for a homeowner looking for a way to exit in a tight credit environment.

Btw, what's the deal with "tenant protections"? They were talking about preventing tenants from being evicted during a foreclosure. That will wipe out the investor lending business, because no bank is going to stand for being unable to evict a tenant after the foreclosure.  

By Blogger TRundgren, at Tue Sep 23, 05:56:00 PM:

This comment has been removed by the author.  

By Blogger TRundgren, at Tue Sep 23, 05:58:00 PM:

Anyone serving in public office needs to agree to term limits and a lifetime ban on lobbying for corporations and foreign governments.

The Congress is corrupt and their policies encourage corporate greed all the while neglecting their own oversight roll.

We need to end the professional political class as we know it.

the fact that Congresspeople leave office richer by multiples of 10 then when they entered is a crime.  

By Blogger SMGalbraith, at Tue Sep 23, 06:03:00 PM:

Reportedly, Ahmadinejad blamed (in part), all together now, "Jewish bankers" for the crisis. I guess if he had blamed "neocon bankers" that Sullivan would have linked to the story approvingly (or, at least, claimed that he's "just asking questions").

I shouldn't be surprised but, for some reason, I'm surprised.

Yeah, let's let this guy have a nuclear weapon.  

By Blogger randian, at Tue Sep 23, 06:10:00 PM:

It's obvious the Jews are at fault. The Quran says so.  

By Anonymous Anonymous, at Tue Sep 23, 06:52:00 PM:

Hey, if my year end bonus is going to be affected because of the wrath that Wall Street's greed has leveled on a significant number of related industries, I sure as hell think that the big boys can take one for the "team" this year.

Better yet, let's divide up their bonuses as additional severance pay for the tens of thousands of employees without a job.  

By Anonymous Anonymous, at Tue Sep 23, 07:09:00 PM:

Randian and Trundgren are entirely correct. Congress critters are stirring up populist anti-business sentiment, while ignoring their complicity in forcing lenders to lend to poor credit borrowers. Every program designed to lower interest rates and downpayments contributed to this mess. Sen. Frank blocked every attempt to reform FRE and FNM.

Something to think about, almost 50% of the population doesn't pay income taxes. Seems, for all their protest, they won't be the ones paying for the bailout. Of course, they still benefit from keeping the financial system from total collapse.  

By Anonymous Anonymous, at Tue Sep 23, 07:15:00 PM:

Re: executive compensation and they "deserve the rope":

How good a method is revenge for putting food on the table or keeping a roof over your head?

FDR tried this once he got in office, and the results were not pretty. Look up the unemployment rate for 1938, and the USDA saying during the 30s that (as I recall) about 1/4 of the nation was not getting enough food, which was confirmed when the draft was restarted for WWII. The latter was a major motivation for the National School Lunch Act in 1946.

I'm not saying we'd have a repeat of the food problem, but these are the sort of stakes we are are playing with, in avoiding the seizing up of the financial system and the resulting fallout on Main Street.  

By Anonymous A Stoner, at Tue Sep 23, 07:24:00 PM:

No to the bailout. What we need is to get rid of Mark-to-Market. Commnunity Reinvestment Act, Sarbanes-Oxely. If that does not help, then we should look at returning 3% of mortgage paper value to owners of sub-prime mortgages (about 15 billion dollars). If that does not work, then screw them.  

By Anonymous Anonymous, at Tue Sep 23, 07:25:00 PM:

This executive compensation cap is an interesting idea, but let's be pragmatic and test it first in markets where it doesn't place all of our public corporations at risk.

Instead, let's apply it in the entertainment and professional sports industry. While capping a CEO can jeopardize an entire org chart of tens of thousands, capping a hollywood actor or NFL player to a maximum living wage of, say, $150,000/year, with 100% taxes above that would allow us to measure the effectiveness of this approach without concern.

Should we destroy an NBA season or ruin a movie or two, we'll all survive. Screwing up more than half of our economy and global competitiveness, on the other hand, is just too risky.

I'm writing my Senator to take them up on this grand idea. In fact, I'm certain Larry David, Barbara Streisand, Rosie and Oprah will do their patriotic duty and sign over their excess compensation immediately to help our Senate kick this effort off. Just think of all the health care we can provide in Chicago alone with the hundreds of millions these three people don't need.  

By Anonymous Anonymous, at Tue Sep 23, 08:00:00 PM:

Extending Anon 7:25p comment, why don't we include any organization that contributes to a politician. You want to donate to a campaign, you accept compensation limits.

How about charitable organizations as well. Being tax free brings in compensation limits.  

By Anonymous Anonymous, at Tue Sep 23, 08:08:00 PM:

CEO compensation is dictated by the board. How about holding the boards of these firms equally accountable?  

By Anonymous John, at Tue Sep 23, 08:25:00 PM:

I want to see the details of the bailout. And frankly, I'm expecting some huge shareholder lawsuits. People relied on the financial statements to make investment and credit decisions (the definition of the purpose of f/s as I learned it) and those financials were fraudulent.

There is substantial evidence that this was effectively a ponzi scheme, and there are layers and layers of culpable people. String 'em up, shackle 'em in leg irons, and waltz them to the joint for some re-education. Sieze all assets to public auction, and tell the foreign creditors to read their prospectuses for remedies to losses sustained.

If China sells the USD, then put a tax of 10000% on all imports from them, and create those jobs back here in the USA for people perhaps 'humbled enough' to take them. And let the Americans who were too proud to do those jobs the lowly Mexican has been doing see that the same illegal is taking food off their table.

I do not feel sorry for those who face a bankruptcy, as I feel they did it to themselves, but there's no reason to bail out the engineers of this mess either.  

By Anonymous Leif, at Tue Sep 23, 11:02:00 PM:

A Stoner wrote, "No to the bailout. What we need is to get rid of Mark-to-Market. Commnunity Reinvestment Act, Sarbanes-Oxely."

He is correct in naming some of the regulatory gaffes that made this crisis possible. I would add to that list Chris Cox's Private Securities Litigation Reform Act, which removed accounting firms from liability in all but the most egregious cases. The net result of the PSLRA was to reduce market transparency by eliminating any incentives the auditors had to uncover financial fraud. Cox's tenure at the SEC has also been miserable. McCain was right, if not for the right reason, Cox should go.

That said, the bailout is sadly necessary at this point, if only for the psychological well-being of the global markets. The panic over an impending crisis is likely to be worse than the crisis itself.  

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