Sunday, March 22, 2009

Destroying value right and left 

In yet another regulatory blow, the Obama administration is now talking about regulating the pay of executives at all public companies. One might argue about this for hours, but several observations leap to mind.

First, this will do nothing to encourage executives in American public companies to take the risks necessary to restart the economy.

Second, executive compensation at public companies, including banks, did not cause the present economic troubles. This is but another "crisis" not to be wasted by people who want to effect social change.

Third, we are going to drive many of our best people out of public companies into private companies, or (perhaps worse) management will become dominated by people who are trained in process (lawyers and accountants and such). We are also going to deter private companies from going public (as has already been happening with the steep decline in initial public offerings in recent years). It does not seem to me that we should exacerbate either of these trends.

Fourth, you can cure "excessive" executive compensation by having the United States Congress or the attorney general of the state of New York determine what public company executives should make, or you could simply repeal the Williams Act and other state law obstacles to hostile takeovers. In a liquid market for corporate control, big, fat executive paychecks will become "synergies" if they do not earn a decent return.

Fifth, at least one persistent reader has argued in email and via comments that the public "anger" somehow justifies this and other regulation. I obviously do not agree. Yes, I know how mad people are. I just do not think that anger improves any argument ever, or that the intensity of anger influences the morality or justice of an argument. The merits of an argument are quite independent of the emotion with which the argument is conveyed. Finally, it is the job of elected leaders in any serious country to dampen anger rather than accelerate it. To the extent our politicians (of either party) are exploiting or promoting anger rather than calming people they are doing their constituents and their country a great disservice. The exploitation of anger is the specialty of demagogues and dictators, and is not worthy of American leaders. Not even members of the House of Representatives.


By Anonymous Anonymous, at Sun Mar 22, 08:13:00 AM:

Fifth, at least one persistent reader has argued in email and via comments that the public "anger" somehow justifies this and other regulation

I think the so=called anger is being mis-characterized in the reporting...I think the anger is at congress for mismanaging it so baldly. So when on reads the public is angry at the bonuses, they are angry that congress knowingly voted and protected the bonuses and are now standing on any soapbox they can find to denounce them

People are angry at the worst congress ever. See generic congressional ballots and GOP out fundraising the Democrats. Democrats are in meltdown.  

By Anonymous Anonymous, at Sun Mar 22, 08:27:00 AM:

With the colossal failures of oversight at HUD, the SEC, the FED, Homeland Security (illegal immigration failures)and especially the FEC I really can't visualize how any of this massive government control is going to solve anything.

I'm against all of this "over-reaching" by Democrats and a President whom does not know how to govern or conduct himself as a high level executive.

Vice-President Biden is the biggest BUFFOON in the history of national politics.

Obamas Youtubing diplomacy of IRAN last week was immature, irresponsible and incredibly stupid. This invites these rogue regimes to initiate their own stupid policies that could likely place the USA in jeopardy.

I've always had a problem in recent decades with any company that pays "bonuses" when the company is posting losses. I believe this to be fraud against stockholders and employees.

Backlash revolt is coming and is reverberating all over the country. See photos of Orlando Tea Party on 03-21-09. This is just a warm-up for April 15th in 170 cities that the media will not be able to ignore.  

By Anonymous Anonymous, at Sun Mar 22, 08:30:00 AM:

Tigerhawk ... where is Atlas Shrugged on the Amazon list now?

I can understand the feds setting down rules where they essentially own the company (FNM, FRE, AIG, etc.), but applying those rules to all public companies is just asinine. And if they go there, who thinks they stop at executives? Top sales guys can clearly step into the list of the most highly compensated? where do you start to regulate earnings via options as total compensation? Then there's the trips on the executive jet (auto industry sideshow), etc. that some smartie might deem to be compensation, or unfair to the lowly worker.

Exacerbate, yes ... following the internet bubble, many good execs and CFOs just decided it was no longer worth the exposure. This won't do anything but make it worse.  

By Blogger Georg Felis, at Sun Mar 22, 09:29:00 AM:

Sixth, establishing laws that limit executive compensation does not mean that executive compensation will be limited, it just means companies will find a new loophole. Look at history, in particular the era of Wage and Price Controls (which did not really work on either).  

By Anonymous Anonymous, at Sun Mar 22, 09:45:00 AM:

Exec pay is last week's outrage.

Our next train wreck is that the heads of Treasury and the Fed -- the two major agencies necessary to fix the banks -- will be ruined politically by the end of this week.

Barney Frank is holding another AIG show trial this coming Tuesday, with Geithner and Bernanke in the dock. In Barney's own words: "They have much to clarify for the American public. I look forward to their appearances.”

Geithner may not last another week ... after the details come out about how Hank Paulson looted the government to save his partners at Goldman using backdoor AIG money ... with Geithner's help. Bernanke will be sullied, and his political position weakened.

I can't believe that Barney is freelancing to this extent ... Rahm would now how to rein him in ... so this must be with the blessing of Obama & Co. Is this what Obama & Co want? Cui bono?

Here's a telling story within the story. I heard some pro-Obama journalist say on Imus last Thursday ... that back in February Axelrod wanted to cap pay at big banks to no more than what the President made ... but got overruled by Treasury. I bet Geithner told Axelrod that if they did that, they would drive talent out of the big banks ... and that losses would skyrocket. A month later, it emerges as a populist issue. I see Axelrod's fingerprints all over this. The bonus story always had potential to be an issue, but it didn't have to be. You needed to have the flames fanned, and then Barney Frank & Co throw on some gasoline. Cui bono?

We need a crisis manager in the White House ... instead, we have an ACORN "community organizer." They thrive on agitating outrage. His near term object is to get his budget passed, and to generally f*ck things up, using the Saul Alinsky playbook.


By Anonymous Anonymous, at Sun Mar 22, 09:55:00 AM:

Some journalist this week called this 'economic arson', and that's exactly what it is.

Through the whole history of the United States we have seen many examples of this from both parties while in opposition, but never so far as I am aware from a party in power.

FDR's serial experimentation may have come close, and did a lot of damage over time, but at least he was trying to make the economy's functioning improve.  

By Anonymous Anonymous, at Sun Mar 22, 09:57:00 AM:

Barney (the spitter)Frank D. MA., IS President. So are Pelosi and Reid. They look down on Obama with disdain, irrelevant, except when they can co-opt his/their populist disasters into further destuction of our national economic system.

We used to say it would only take one decade to bring this nation down. Now, it looks like they can do it in one hundred days.  

By Anonymous Anonymous, at Sun Mar 22, 09:58:00 AM:

Agreed TH. Another alarming proposal from Obama. Again, once we start down this road, where does it stop? BTW, FDR had similar ideas. I remember hearing an excerpt from a 1942 radio broadcast where FDR said in quite amiable tones, "I don't think anyone in America needs to make more than $25,000 a year."  

By Anonymous Anonymous, at Sun Mar 22, 10:07:00 AM:

I would only add that many of the "elites" outside of the US are laughing at us.
My French Director-General had quite a good time lecturing us at dinner the other night about everything that is wrong with the US. Not that that is unusual, but I usually disagree with him, being the arrogant elitist that he is.

Laughing at us. I don't know who is in charge, or if anybody is, but these guys are going to set the country on fire, maybe literally.


By Blogger D.E. Cloutier, at Sun Mar 22, 10:09:00 AM:

More American companies will move to foreign shores.

From the Financial Times, 20 Mar 09:

1. "Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in U.S. finance, saying the 'anti-American' measures smacked of 'a McCarthy witch-hunt' that would send the country 'back to the stone age' "

2. “ 'Finance is one of America’s great industries, and they’re destroying it,' said one banker at a firm that has accepted public money."


By Anonymous Anonymous, at Sun Mar 22, 11:01:00 AM:

Today on 60 Minutes Obama will publicly defend Geithner over AIG bonuses. Advanced text shows that Obama will say that if Geithner offered his resignation, the answer would be, "Sorry buddy, you've still got the job."

Tomorrow, Geithner is supposed to announce his toxic asset bank bailout plan -- the one that depends heavily on private sector participation, the one that should have been launched back in January.

On Tuesday, Geithner will be publicly pilloried by Barney Frank & Co over AIG and how $170B was paid out to Goldman Sachs and a handful of European banks that most Americans have never heard of. I'd bet that the criticisms will spill over to bailout plan.

By Wednesday, Geithner's plan will have been re-characterized by Congress and MSM as a plan to give hedge funds cheap loans ... so the hedge funds can put up 10% in equity and have all the upside on a trillion dollars of mortgage assets ... "Wall Street to make another killing by buying back the bad assets they created at cents on the dollar ... with the US giving them cheap 10:1 leverage."

By Friday, Geithner and his plan will have crashed and burned.

If Barney and Obama were from different parties I could understand this. Geithner's plan would have been a hard sell back in January, when Obama made the Stimulus Bill a priority. With fears that we can't keep pushing trillions out the door, it'd be a very hard sell now in any circumstances ... but Barney's show trials will make it impossible. So Geithner is about to drive over a cliff.

If Obama can't control a Barney Frank, how does he expect to be President? Or is this by design?


By Anonymous Anonymous, at Sun Mar 22, 12:06:00 PM:

I'm coming around to the view, expressed previously here by Link and others, that the administration must intend to destroy the economy. Why else would policy be left so broadly to the Pelosi Congress, a place where the Barney Franks of this world actually look intelligent sometimes, while the President seems only to meander around aimlessly?  

By Blogger Stephen, at Sun Mar 22, 12:19:00 PM:

Limiting executive pay is the first step on the way to comparable worth, a doctrine that would get nowhere with a Republican administration or a Republican Congress. Did Americans know they were voting for this last November?  

By Blogger MartyH, at Sun Mar 22, 01:03:00 PM:


You, like other Conservatives, rumble about going "John Galt." The Dems beat you to it. Consider the evidence:

-The government of the most powerful nation in the history of the world is being run by a man whose main qualifications are that he is beautiful and can read convincingly from a teleprompter.

-Geithner is going to present a public/private partnership plan to clean up the toxic assets. Only anyone with a brain is going to realize after the AIG bonus issue that there is no "private" when you are dealing with the government anymore. Any upside for the private party is retroactively limitable.

-Talk of limiting public companies' executive compensation

-Vice President Joe Biden

-The first bank bailout plan, where our beautiful, glib President promised that Geithner would have a plan the next day, only Geithner really didn't have a plan.

-Despite it being the greatest financial crisis since the Great Depression, our beautiful President has nominated no one to assist Geithner in Treasury. Which means that Geither can't be fired or quit, regardless of how incompetent he is.

-Liddy is working for a dollar a year and practically assaulted by Congress.

-The continuing string of withdrawing candidates for various offices-Freeman, Daschle, Gregg, etc.

-Barney Frank, Chris Dodd

I would have said that this was incompetence. But as in great sarcasm or satire, there is always the "tell" by which you know that the author is joking.

Hillary Clinton's "Reset Button" was that tell. Here, you had the world's smartest woman, former Senator and First Lady, now toiling for the world's smartest and most beautiful man, working "really hard" at translating a single word from English to Russian in an effort to repair our tattered relationship with our greatest rival, and she blows it? C'mon!!!

That's when I knew-the Dems were doing their version of Altas Shrugged.

That raises the question:

Who is (the Dems') John Galt?  

By Anonymous Anonymous, at Sun Mar 22, 01:25:00 PM:

So Congress has essentially devised a new tax bracket. It's the same as the current top tax bracket, but once you hit an income limit of $250,000, your tax rate jumps to 90%, and the states have the go-ahead to tax the last 10% away as their cut.

Yesterday this tax bracket was reserved for "bonuses to AIG executives", but now it's moving on to "Compensation to executives in publicly traded companies." Soon it will expand to "highly paid employees", and ultimately it will apply "fairly" to everyone.

To each according to his need.  

By Anonymous Anonymous, at Sun Mar 22, 01:39:00 PM:

From Link:

Executive pay is a great issue to create political outrage ... an issue that regular people can understand ... and one where you can vilify specific individuals ... it's right out of the Saul Alinksy playbook. But I expect there's even more to come. Obama wants his budget, and to set up sweeping "reforms" of our financial services industry. Geithner and Bernanke are about to be tarred and feathered to advance this.

I don't believe in black helicopters, but I have gotten very worried about Obama. Early in the campaign I didn't know from Obama ... I thought he was Puerto Rican. Like Hillary, I didn't think he had a chance. Until June, I was foolish enough to want Obama to get the Democratic nod because I thought it would increase McCain's chances of winning. My big wish was for divided government ... the less Washington does the better off we all are.

Starting in June, I started doing some digging on my own about Rezko, etc. and was amazed ... not just at what went on ... but the way media was covering it ... and the way some of my friends thought Obama walked on water. There was a total disconnect to the actual facts about Obama.

$250,000 is the new target for confiscatory taxes. But our future Obama deficits will make this $100,000 ... do the math ... it's inevitable. Meanwhile, just before he took office, Obama reworked his book deal. They're creating dumbed-down versions of his books aimed at teenagers, for which Obama got a $500,000 advance. They already had children's versions. The timing of this deal conveniently avoided any Senate ethics review.

I'm convinced Obama is a sharp Machiavellian radical with an agenda ... and that we're stuck with an ACORN "community organizer" for at least four years. To me, no other explanation squares with the facts, including how he's acted in office. The other choice is that he's incompetent, and in way over his head. Some of us, may say it's both.

I used to think he just wanted 2009 to suck, so he could claim credit for a rebound in 2010. Now I don't know.

I had heard of Saul Alinksy but knew little about him until last week. That Obama specifically went to Chicago to join Alinsky's group ... and taught the Alinksy way of community organizing for years is chilling. It's an amoral philosophy that fundamentally hates the American middle class ... you can look it up.

And it's not just Obama ... many of our representatives in Congress are out of control. They've gone power mad. How is Barney Frank head of the House Banking Committee? We're worse than Rome.  

By Anonymous Anonymous, at Sun Mar 22, 03:59:00 PM:

VDH published an essay on Why Americans are Depressed, and Scott Johnson responds by making the same point so many here have made,

"I feel utterly powerless to do anything about the fellow in the Oval Office who combines infantile leftism and adolescent grandiosity in roughly equal measures. It seems to me that every day he is responsible for assaults on the freedom and well being of the American people. I can't keep up and I can't stand to pay attention...I am depressed because the president of the United States is a fool who will immiserate us, render us wards of the state and lose us our life and liberty to those who understand what they are about."

True words. We face a sobering, gigantic challenge. Every day, some new outrage in Washington is floated, and quickly passes for a good idea. I still can't get over how the Congress just "granted" a vote in the House to the District of Columbia, in direct defiance of the plain English of the Constitution, but so many new and incredible things happen everyday that hardly anyone even noticed. We are being bankrupted, our economy is being destroyed so that our children and granchildren will grow into poverty, our alliances are being assaulted daily, our enemies are being mollified with our obvious self-destruction, a sherrif who dares to try enforcing immigration laws is now being "investigated" by the Civil Rights division of the Justice Department, and even our international competitors, like China, are concerned for our national well-being.

But I say: all is not lost! We are still Americans, proud of our traditions of liberty and self-reliance. We are still capable of doing anything we choose, whenever we choose to do it. Screw the Eric Holders and Janet Napolitanos of this world. The bailout mentality will pass, so don't worry about the Barney Franks of this world. Nancy Pelosi will shortly be driven from office, disgraced and ignored. We will overcome these horrible people! We must endure.  

By Anonymous Anonymous, at Sun Mar 22, 04:29:00 PM:

The leadership from the White House and Congress is non-existent. Instead of focusing on ways to solve problems, they're creating a lynch mob mentality that could cripple American businesses for years. Instead of helping those businesses who didn't cause the financial crisis (including publicly held companies), the Obama administration and Congress continue to pillory them. Pass enough laws -- caps on executive pay, high marginal tax rates, Employee Free Choice Act, among others, and many good executives will choose to step aside and find something else to do. And who would blame them? The risks -- in terms of scrutiny from Congress, attorneys general (state and Federal), trial lawyers, among others -- will just not be worth it. And then the only people who will want to run such companies will be people who need a title (CEO, CFO, COO) but who might not have the experience, training or judgment to manage a company wisely. Look out.

All of us must continue to fight the good fight. First, we must lead our peers, employees, friends and neighbors by a positive example -- we can't let the President, his advisors or Congress drag us down. Second, we must pressure our newspapers, legislators and anyone else who has influence to stop the lunacy of negativity and a mob mentality. If we keep at it, the tide will turn.

The Centrist  

By Blogger Larry Sheldon, at Sun Mar 22, 06:31:00 PM:

Directive 10-289 Point 7

[captcha looks like "Hangs True]  

By Blogger Escort81, at Sun Mar 22, 06:44:00 PM:

Well, first off, I agree with the sentiments of The Centrist expressed above about fighting the good fight. Let's have common sense prevail.

I am willing to conserve rhetorical ammunition for a bit until the details of the proposal discussed in the top of the Labaton/NYT article in TH's link are fleshed out. I don't see anything there yet about capping pay in public companies. If there are new kinds of reporting requirements, I think we'd have to look at how onerous those requirements are relative to the additional benefits, if any, of transparency. Also, if it means that fewer companies want to have access to the public equity and debt markets, then so be it -- a reasonably good private market will emerge in its place, albeit with many fewer participants. Like a force of nature, capital will find its way to the people who can best employ it, even if liquidity suffers.

This is all just like the kindergarten teacher who punishes everybody in the classroom for the misdeeds of a few. Undeniably, there have been boards of large public companies where the directors have been asleep at the wheel, with adverse effects for the entire economy. So, it is entirely predictable that the government now steps in to layer on new rules that might help to light a fire under boards or large shareholders. I don't think that anything is foolproof, however, because -- it is my experience, anyway -- unless you have intimate familiarity with the operational details of key business divisions, you will have a hard time preventing an implosion from happening.

Here's a benign paragraph from the link:

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

Who would have a problem with that philosophically? Of course, the devil is in the details, and obviously it should be up to the individual corporate boards to align compensation and corporate performance, but we have that kindergarten teacher issue again.

Also, as I've posted previously, President Obama likely received considerably more in campaign donations from employees of financial firms during 2007-8 than did Sen. McCain (at least from the NYC employees of the firms), so it is not clear to me why it is in his politcal self-interest to cap pay at such companies.

Another graf from the piece:

It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.

If commodity futures and equity options that trade in NY and Chicago are already reasonably well (if imperfectly) regulated, I don't think I have a problem with other types of derivatives going through a regulated clearinghouse. I think that better disclosure of hedged, unhedged and total notional amounts of derivatives by financial firms (beyond existing FAS rules) might have some benefits, though it clearly would have costs as well. The basic problem here is that very few people really understand this stuff, so that I am not sure how much benefit additional disclosure will have. I've taken a graduate level course in derivatives, and can draw hockey stick graphs of basic option strategies as well as the next guy (and I've used options personally in my investments from time to time for a number of decades), but it would take me hours to try and decipher and model the behavior of the really exotic and complex stuff that is out there. It is a bit concerning to think that a few thousand people with PhDs in math might do things that result in a crisis requiring significant government intervention in the economy (a la LTCM) because nobody really understands their transactions. I suppose the argument is that if there are regulations on the handling and transportation of toxic physical substances, then it makes sense to have regulations on potentially toxic financial substances/derivatives, given the experience of the last few years.

As to more aggressive enforcement of mortgage rules, I think it cuts both ways -- both to borrower and lender, regardless of whether Labaton phrases it as an effort to "protect consumers."

Let's argue for regulations that make sense and do the least harm to productive entrepreneurship and innovation. But let's also recognize that it will be a losing strategy in the present environment to stonewall and argue for no new regulations.  

By Blogger Deplorable Dave, at Mon Mar 23, 03:38:00 AM:

Most people know that corporations exist to enrich the stockholders. And that the managers are stockholders. So the pleas from corporate "leaders" not to harm the investment climate sound like shameless complaints from bank robbers pleading with people not to withdraw their money from the banks.  

By Blogger UNRR, at Mon Mar 23, 06:59:00 AM:

This post has been linked for the HOT5 Daily 3/23/2009, at The Unreligious Right  

By Anonymous Anonymous, at Mon Mar 23, 07:27:00 AM:

From Link:

Obama on 60 Minutes last night:

“You're sitting here. And you're— you are laughing. You are laughing about some of these problems. Are people going to look at this and say, ‘I mean, he's sitting there just making jokes about money—’ How do you deal with— I mean: explain. . .” Kroft asked at one point.

“Are you punch-drunk?” Kroft said.

“No, no. There's gotta be a little gallows humor to get you through the day,” Obama said, with a laugh.  

By Anonymous Anonymous, at Mon Mar 23, 08:30:00 AM:

Did everyone notice Obama just sent off a letter to Jaques Chirac, saying how much he looked forward to the next four years of working with him...Of course, Chirac was replaced as President of France by Nicholas Sarkozy two years ago. Obama seems to think he can either ignore the present day President of France, or he is unaware of that person's name. I was never a Bush partisan, but I can only imagine the press reaction if it had been Bush sending this letter!  

By Anonymous Anonymous, at Mon Mar 23, 10:51:00 AM:

From Link:

As I write on Monday morning, markets are acting like Geithner's plan will happen. Instead, I fear that Geithner ... and his plan ... will be torn to shreds by the end of the week. There's no reason that Geithner needs to be in front of Barney Frank tomorrow about AIG. It can make all the difference.

The government should have stepped in as the "buyer of last resort" months ago. There's no reason a plan like this couldn't have been worked up quickly ... months ago. It's what TARP was originally supposed to be.

The Fed, Treasury and the FDIC already have put several patchworks programs in place already. Why the delay on this?

Developing ...  

By Blogger Georg Felis, at Tue Mar 24, 01:00:00 AM:

The delay in this is directly related to the Blame/Credit cycle in Washington. None of the clowns running the circus know if this plan will be a success, or explode like the last dozen cigars they tried. So *everybody* has to carefully position themselves to avoid Blame, but still be in line to grab as much of the glory as possible.

Me? I expect this to blow up so bad that Light-Years away, alien astronomers will be saying "What was that?"  

By Anonymous Anonymous, at Tue Mar 24, 10:02:00 AM:

From Link, re Timmy's plan:

For the last year, the only buyers of "toxic assets" have been sharks -- sharks who can't get leverage, because no one will loan against this stuff -- so "mark-to-market" has forced writedowns to the level of sharks who value these assets to hit 30% returns, but with no leverage. This crushes valuations. In normal times, you should be able to get a lot of leverage against these kinds of assets. Leverage lowers the total blended discount rate closer to 10% ... which makes a world of difference in valuation.

Mark-to-market says you have to take "paper losses" even if you haven't been selling ... because someone else has sold a comparable security to a shark who couldn't get leverage.

Timmy's plan is all about the government providing the funds to give the leverage to create a proxy for a normal market. If it works, trades will be at higher values. Market values will still be set by sharks, but sharks with government-supplied leverage. Banks would then sell "toxic assets" into Timmy's plan because they expect gains from current marked-down values. E.g., they originally bought at 100, they had to mark to 25 ... even though they didn't sell ... Timmy's plan will let them sell at 50 ... or at some point the banks could even mark up to 50 without selling.

It's all about the government creating a market with normal leverage to work within FASB's mark-to-market rules.

Banks won't play unless they expect that they'll get 50, not 25. If they do, they'll realize gains from marked-down distressed levels. The value of the "toxic assets" on their books could double, even though it would still be down from original value.

So this isn't about banks "selling at a loss." It's about banks making gains from crazy distressed levels.

Let's see what Barney Frank & Co think.  

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