Wednesday, February 04, 2009
The Stupidity and Socialism of Pay Caps
And then they browbeat bank managements that are working night and day to rapidly delever their balance sheet (i.e. shed assets - which are called loans, by the way), reduce risk and raise capital. They call them venal thieves and idiots. They call them irresponsible stewards.
Then they bemoan the state of our employment markets, while banks must shed employees by the skyscraper-full as business plummets.
Pretty bad, huh? So explain to me why you would want to be the CEO of a
big bank?
Pay caps are stupid for a number of reasons. Let me take a run at a list:
1) You are punishing the wrong people - the CEOs now running many of the culprit institutions didn't create the mess. John Thain was brought in by Merrill's Board after Stanley O'Neal mismanaged the place. Thain saved Merrill's bacon - if you are a former Merrill shareholder or customer or employee, John Thain is a bloody hero. Good luck finding the next hero. Only an idiot would sign up to the task. And that is what you're gonna get folks. Idiots.
AIG is another great example. After the government took over, they lost their best leaders in all of their key traditional businesses - not the trading businesses that blew it up, but their insurance and aircraft finance businesses. If you embarrass a guy in the newspaper by beating him up sbout his compensation guarantee, especially after he's had his entire wealth wiped out after 25 years at the Company, he's going to leave. And he can, believe me. I have reason to know that that type of executive is in high demand for high compensation from investors.
If you want to punish somebody, go after the guys who cratered the business and walked away with a pile of money - Stan O'Neal at Merrill, Chuck Prince at Citi - but don't make it impossible to get or keep the amazing people you are going to need to repair these places and get them working.
2) You are promoting 100% risk aversion. If you want lending to be stimulated, you need people to have an appetite to take risk. Why do people take risk with capital? To make money. They don't do it for moral reasons. They need bonuses, commissions and other financial incentives - sensibly designed - to promote taking risk. No incentives? No risk taking, no lending. Bad.
3) Senior managers don't make loans. Regular people without fancy titles originate and underwrite loans. Cap the CEOs pay, you wind up capping the originators' pay. No incentive to go out and hustle to originate? No new loans.
The list is much longer but I have work to go do. It's just become much easier to hire really talented people from financial institutions and deploy them to take risk in other, related businesses. So I have stuff to do to exploit the government's socialist stupidity at the moment. Since they can't tell them they can't quit. At least not yet.
19 Comments:
By 
cgoellner, at
Wed Feb 04, 02:47:00 PM:
I like to call this economic fascism since it's state control of private property rather than state ownership.
But then I get accused of Reductio ad Hitlerum, the circle of irony is complete, and the discussion is over.
By 
, at
Wed Feb 04, 03:01:00 PM:
Yes, not smart. Predictable though.
Here's what I said before in the Wells-goes-to-Vegas thread, and I think it applies in spades to this issue:
Here's the fundamental problem: the "bail-out" moved from an asset based approach to a capital based approach. Taxpayers are owners now, and our representatives in the House have a constitutional duty to stick their big fat noses into every single company that has our money. When Congress finds a good political fault line opening up, like buying French jets, or baseball stadium naming deals, or corporate junkets to Vegas, it jumps equally on all of them. Discrimination among "good" junkets or "bad" junkets is too much to expect.
The way to fix this is obvious. The next TARP program should be focused on assets. We, the taxpayers, should buy only the GOOD assets from Citi or BofA. Leave the executives behind to manage the "bad bank". They can pay themselves whatever they want, which will not be much. They can struggle to achieve price discovery all they want, though they won't like the news when it comes. Let 'em sink. I hope they rot.
Meanwhile, we the taxpayer will own the good stuff. We can hire somebody other than Goldman to organize those assets into about a dozen "good banks" and sell our interest in the equity markets. Et voila! We get our money back, and the markets pick up in the same instant. The only losers are the losers that ran these companies into the ground, Robert Rubin, Ken Lewis and their ilk. The stockholders already have been wiped out, so this plan doesn't hurt them any more. The taxpayers win. And, best of all, the Congress can go back to whatever it does every day without worrying about Vegas trips. Maybe they can investigate Charlie Rangel a little bit, or something.
By , at
Wed Feb 04, 03:36:00 PM:
Anon, what board would ever approve being stripped of good assets and left to own only bad? And how, exactly would such be effected? A military take over by the government?
We may have been better off in the long run simply letting entities fail. We can debate what caused it the failure (Community Reinvestment Act et al OR evil greedy execs), but throwing good money after bad is rarely appropriate or prosperous. In this case we are throwing "Holy" (taxpater) money after "failed" money. Even worse.
By Catchy Pseudonym, at
Wed Feb 04, 03:54:00 PM:
I'm still not convinced. I think I'll break out the world's smallest violin for these guys.
Don't want pay caps? Don't take govt. money.
By , at
Wed Feb 04, 04:05:00 PM:
One amazing aspect of all this government intervention is that it is being done by people (politicians) who, for the most part, have little or no business experience or aptitude. That is why they chose Law/PoliSci as a career. Now they want to force academic "solutions" onto the marketplace that have no basis in practical experience or historical success. The market will eventually prevail, but the more intervention, the longer it will take, and more people will be hurt. (Let alone the Debt for Generations aspect of all this proposed spending). Margaret Thatcher was right, "The trouble with socialism is that you eventually run out of other people's money."
By Cardinalpark, at
Wed Feb 04, 04:23:00 PM:
Catchy - I appreciate the resentment encapsulated in your violin comment. But let me put it this way. I am a singificant taxpayer. I bet I pay more in taxes than you do. I don't mean that to sound as obnoxious as it does, but that's life. I am not a bank executive. So I have my taxpayer hat on. I want AIG and Citi and Merrill and all these places to get the best damn people and ge these places working again to pay me off. And I have seen it firsthand at AIG that they lost all there best business leaders. They're all leaving. And the business will leave with them, and leave me the taxpaper with bag of nothing. Vikram Pandit did not create the mess at Citi. John Thain will never take another job at a govt run bank to try to save it. We should want him running BofA instead of that political moron Ken Lewis.
The guys we should recapture money from are Price, O'Neal, Mozilo, the Fannie Freddie idiots who made this mess. The guys we should pay handsomely for saving these carwrecks will now not take the job.
It's assbackwards. I promise you.
By Christopher Chambers, at
Wed Feb 04, 04:47:00 PM:
Ha! Let's call it Welfare Reform. Frankly I think the cap should be $100K. Or perhaps $30K. Enough to feel the pain the regular people getting screwed out there.
Freddie Fannie idiots made the mess? Lord, that's stuff stale even on the wingnut talking points sheet. Get up to speed...
By , at
Wed Feb 04, 05:29:00 PM:
JSF, the board of BofA or Citi has very little to say about what the terms of the eventual government deal they take will look like. There is only one buyer of bank assets today, the government, and the buyer calls the tune.
We are in extremis. The banking industry is dead already. BofA traded below $5 today. It's entire market cap is less than $25 billion, according to yahoo, a fraction of what the government has already invested. The board works for the US Treasury. The complete lack of transparancy on bank balance sheets is endangering the entire stock market, including healthy industries like consumer products.
Since the bad bank-good bank concept turns on a valuation problem, ie, no one knows what bad assets are worth, the answer is to segregate good assets, group them, divide them into new banks, sell those new banks to private investors in IPO's, and leave the bad banks with net cash from the sale (after repaying the TARP, perhaps) plus the bad assets, to work themselves out. To me, it looks like the only way to acheive a positive valuation on banks, and remove the questions from bank valuations. Whatever gets proposed won't need the US military to get done, thats for sure.
By , at
Wed Feb 04, 05:44:00 PM:
You want socialism? How else would one explain the "nullification" of legal oil leases, because they are "close" to national parks? That should exercise the readers on this blog just as much as the nationalization of executive comp.
By JPMcT, at
Wed Feb 04, 05:56:00 PM:
Everybody REEALLYY wanted Obama to be a success except Ruch Limbaugh...and, I guess. ME!!
Now that we are being time-warped back to Germany in 1935, how do you all feel about wishing this arrogant nincompoop all the best in his endeavor to financially enslave you?
The only thing good about the fairly routine corruption in his never-before-vetted cabinet choices is that it reminds us of old times.
Time to head to Alaska.
By , at
Wed Feb 04, 06:01:00 PM:
What I find amusing about this thread is that bloggers CP and TH were all for the Bush bailouts last fall, when even this feeble minded farmer could see this coming. Did you guys actually expect the Feds to shell out several hundred billion and then turn their backs and walk away? Now government is behaving like government and you guys are screaming bloody murder. It is to laugh.
By Cardinalpark, at
Wed Feb 04, 06:13:00 PM:
Feeble -
I am supportive of the government providing capital to the banks for the simple reason that without it, they would be bankrupt and insolvent. If that happened, and depositors lost their money and or ran on the banks, we would have a depression the likes of which none of us has ever seen or read about it.
And the government shouldn't "turn and walk away" having provided the capital. Part of the problem in this thread relates to, sadly, some commenters not having much financial experience or expertise. The same can be said of most government officials, trained typically in the law, and not finance. Would you have a lawyer perform neurosurgery? I think not. I'd prefer not to have a lawyer determine who to hire and how to pay bankers to make capital allocation and risk management decisions.
So in "becoming involved", it would probably be sensible to create a board of commercial overseers - Buffett? Bill Gross? Greenspan? Volcker? and other widely respected business people and investors to act as a board on matters like this, rather than leaving it to a bunch of inexperienced lawyers.
I would observe, for instance, that post 9/11, the government created a like oversight board to be accountable for loans made to struggling airlines. Generall,y, my recollection is that it was comprised of mostly sensible business and finance people with experience, not a bunch of govt lawyers.
For a good look at what the lawyers get you, look no further than the SEC, Madoff and the experience of Harry Markopoulos.
By Cardinalpark, at
Wed Feb 04, 06:17:00 PM:
CC -as for your dismissive, arrogant and ultimately foolish and ignorant comment, Fannie Mae was and is the epicenter of the mortgage crisis. Its leadership was clinically deficient and should be at a minimum be chased for disgorgement of their profits; just as Angelo Mozilo at Countrywide should be. And yes, that also involves certain politicians. Since Fannie speaks for 65% of the mortage securitization market, it is patently absurd to suggest it wasn't at the center of culpability.
But then, you need to have at least a modicum of financial and business literacy to acknowledge certain facts.
By TigerHawk, at
Wed Feb 04, 07:09:00 PM:
What I find amusing about this thread is that bloggers CP and TH were all for the Bush bailouts last fall, when even this feeble minded farmer could see this coming. Did you guys actually expect the Feds to shell out several hundred billion and then turn their backs and walk away? Now government is behaving like government and you guys are screaming bloody murder. It is to laugh.
First, the term "bail out" was a misnomer, insofar as the common stockholders have been crushed and the managements have had their compensation slashed (even before today's nonsense). The only people being "bailed out" were people who needed to borrow money and could not, and non-bank "depositers" (investors in commercial paper and such).
Second, you are right, I was in favor of it and history will show that it was the right thing to do. Strong medicine, painful medicine, ideologically offensive medicine (to me, anyway), but necessary given what was happening in September-December.
Third, CP is precisely right. To the extent that the United States now owns a stake in these enterprises, its objective should be to attract the best people it possibly can to run them. Sadly (though not surprisingly), the politicians are more concerned with doing the vote-getting thing than the responsible thing.
By Catchy Pseudonym, at
Wed Feb 04, 07:15:00 PM:
"I bet I pay more in taxes than you do."
You're right that was obnoxious and has little to do with your argument.
Also, you don't know anything about me.
By Catchy Pseudonym, at
Wed Feb 04, 07:40:00 PM:
Also,
"The pay cap would apply to institutions that negotiate agreements with the Treasury Department for "exceptional assistance" in the future. The restriction would not apply to such firms as American International Group Inc. (AIG), Bank of America Corp. (BAC), and Citigroup Inc. (C), that already have received such help."
What constitutes "exceptional assistance"? Sounds fairly vague to me.
http://finance.yahoo.com/news/US-sets-executive-pay-limits-rb-14257506.html
By , at
Wed Feb 04, 08:43:00 PM:
According to Clusterstock the details are not as onerous as first appear
1.The strictest limits only apply to AIG, Bank of America and Citi..
2.Everyone else just has to say what they are paying their executives.
3.Pay limits only apply to "top executives.", not traders etc
4.Clawbacks for fraud but not for stupidity.
Also, although that executive pay is limited to $500k per year, they can still receive stock options (presumably large), they just will not vest until the TARP money is paid back. Therefore as I understand it, these institutions can still get in a great turnaround artist who will get paid back in the future once they have turned the company around a la Steve Jobs who received $1 salary whilst he was turning around Apple.
Is 500k + stock options really that miniscule a salary that it will not attract any decent talent in this economy? If so we REALLY need to pay the office of President more although there still seems to be lots of applicants for that job despite the pay, danger of assassination, constant vitriol and a WAY tougher job than being Citibank boss (although feel free to question the competence of applicants on either side of the political aisle, perhaps the low pay is the problem? Anyone in favor of a pay for performance President?).
Given the widespread anger on Main Street vs Wall Street and the fact that taxpayers are the major shareholders of these banks, I think the above measures were probably about the minimum Obama could get away with imposing.
This whole issue was caused because TARP was so rushed and we quasi nationalized the banks. I believe it was essential for confidence at the time (3 month T bill rates were indicating fear at Apocalypse levels) and it did halt a full on stock market crash. However, it did not build on that by separating healthy banks from zombie banks, we just chucked money at everyone and hoped they would all work it out on their own and ended up with banks that are neither fish nor fowl.
Zombie banks should have been declared insolvent using standard solvency rules as per Indymac. We would have to be careful how to handle BAC and C going belly up (just look at their balance sheet or their stock price – Mr. Market is saying they are insolvent) to avoid Main Street panic and perhaps do some explicit support of bond investors to avoid a repeat of the money market issues that Lehman caused the Reserve Primary fund. The healthy and sick but treatable banks could have been given capital injections to repair their balance sheets and set free to lend along standard commercial risk/reward principals with the taxpayer being either preferred or ordinary shareholders until such time as the recovered banks/other investors could buy them out and the executives could be paid whatever the market determines is fair. Even this would still cost the taxpayers a lot of money but then our options at this point seem to be a) bad b) very bad c) Depression bad.
To paraphrase Winston Churchill, I have faith that we will do the right thing – but only after trying everything else.
Clusterstock links here http://clusterstock.alleyinsider.com/2009/2/the-five-things-you-should-know-about-obamas-pay-caps and here http://clusterstock.alleyinsider.com/2009/2/barack-obama-top-executives-capped-at-500k
By , at
Thu Feb 05, 01:55:00 AM:
Sorry, Bubba; but we knows our idjits. And, they is already here.
They wrote trillions of dollars of loans to folks that had no jobs, and no credit; and to top it off they did it at rates that adjusted upwards to levels that guaranteed default.
Then they "insured" the loans with other people that didn't have the reserves to guarantee payment (some had, virtually, NO reserves at all.)
Then they hired a third party to "service" the loans, and loaded the original, legal documents into trucks and shipped them off to Mexico.
Thain defrauded a public company by misrepresenting the crappy company he was selling.
They shouldn't be limited in their earnings; they should all be fired (and, many, incarcerated.
If it was up to the people of my state Gitmo wouldn't be "empty," long.
Maybe you should refrain from the wearing of the "monkey suit." It seems to affect the flow of oxygen to your brain.
By , at
Thu Feb 05, 10:36:00 AM:
Can we please just see Chris Dodd and Barney Frank tarred and feathered? Or, put in stocks in front of the exchange? I'm not asking for anything really hurtful or medieval. Even CC should not want them welcome in polite society. No restaurants should seat them. No party invitations. People should avert their eyes when they walk down the sidewalk. Where's their shame? What they've done is disgusting and terrible.
