So:
1. Part of me is pleased with Obama’s $500,000 cap on CEO salaries of TARP Takers.
Have some friggin’ pride, execs. If you’re taking bailout money, take a salary/bonus haircut for a couple years, just so you keep my blood pressure down. You still have huge upside on the stock options.
2. However, another part of me (and you), the taxpayer part, owns a big chunk of Bank of America. Citi. Wells Fargo. Etc.
Part #2 of me does not want to lose my best execs.
Now the details aren’t out yet.
And let’s say they restrict this to TARP biggies. Top 50 getters. Top 10 execs at each firm.
Out of 500 affected execs, let’s say the best 100 will get raided HARD by headhunters for private equity and hedge funds.
“You used to make $5++ million. Now you get $0.5 million. How about joining us and getting back up to big numbers?”
Those bankers will get hired in ANY market. The talent. The kahuna.
The 400 other execs will stay for a while, til the hedge fund and private equity market bounces back.
So let’s say we strip out 500 execs * $5 million they don’t get to have = $250 million of compensation (Part 1 of me feels great) that DOESN’T go to the Big Shots. It stays with the company.
Hmm…but now the folks who are steering my $145 BILLION (so far) in bank holdings are less capable.
If the departed execs are even 5% better than the “stayers” — then Joe Taxpayer loses $7.25 BILLION.
And I suspect they’re a lot more than 5% better.
Slow motion.
We taxpayers will save $250 million. Limiting salaries. Sometimes paid to jackasses. Yay.
We taxpayers lose $7.25 billion in market value on our $145 billion (and rapidly rising) portfolio of banks, managed by lesser stewards.
What am I not understanding here?
This is a pretty expensive feel good gesture, no?
Let’s say that the affected leadership all gets cleared out for making a mess of the situation (which sounds good to me). So now Korn Ferry or whoever is trying to find the savior who can come in and right the ship for Bank Owned by America. However, the only little sticking point for this new blood is that you can only be paid $500k. Who’s going to take that situation on?
<
p>Reminds me of OBRA ’93 and the Clinton’s populist attempt by eliminating the deductibility of executive compensation over (Austin Powers sound effect) ONE MILLION DOLLARS. Of course, what happened was a rampant movement in the 90s to stock options and performance “incentives” to get around the situation.
it’s not just a sound effect. finger, too.
<
p>
Maybe less income tax revenue for NYC. [Insert Dr. Evil laughter here]
<
p>Yes, yes, I know. It’s their fault to begin with. But why institute a policy which only makes it worse?
Employees of these firms can still receive compensation over $500k. It just has to be put into a trust and can’t be paid out until the government loans are repaid. So if these guys are so damn good, they have nothing to worry about đŸ™‚
<
p>I would also differ with your description of the “top talent” as being irreplacable. Indeed, the idea that some employees, especially CEOs, are “superstars” led to out-of-control compensation. If the past two years have shown us anything, it’s that these guys just aren’t that special. And if they walk because of this, fine. With financial firms laying off people left and right, there will be 10 qualified applicants for each spot.
<
p>These guys are about to learn The Golden Rule: he who has the gold, makes the rules.
I re-read my post to see if I said top talent was irreplaceable….didn’t say it, didn’t think I implied it.
<
p>Instead, I said some people will leave for greener pastures, and those people are disproportionately likely to be people who make money for companies.
<
p>I estimated that the leavers (targeted by many people who know them) are just 5% better than the stayers (getting far fewer offers).
<
p>* * *
<
p>There are two poles we can look at for approach to compensation.
<
p>1. Anyone who meets the bar is roughly equally good.”
<
p>Example: Taking tolls on the Pike.
<
p>2. At the other extreme, sometimes a slight difference in “total talent” leads to gigantic differences in results, because their decisions are multiplied over a large enterprise.
<
p>Example: Steve Jobs
<
p>Now there are more than 10 “qualified applicants” who can replace him. Scott McNealy from Sun. Carly Fiorina from HP. Tim Cook and a ton of Apple VPs.
<
p>And you’re saying if “they’re all reasonably qualified” then great. It’s like toll takers. No big deal if Steve Jobs leaves. Or Doc Rivers. Or Bill Belichick. There are other people with CEO, NBA, and NFL experience….so it’ll come out the same.
So this is an argument for massive increases in the pay of government decision-makers, right? After all, the U.S. government is the largest enterprise in the nation.
We would all be much better off if government officials were paid salaries comparable to what the private sector pays. One reason our economy is in such dire straits is that the government regulators have been captured by the private sector that offers them juicy contracts to go through the revolving door, again and again. Private industry would have much less leverage over regulators if the latter were better paid.
Ok, “irreplacable” might have been a bit overstated. But discussing a 5% difference in outcomes (net returns or principle? the post indicates the latter), in the context of a public company, might as well mean the same thing.
<
p>But I still have problems with this concept. First, these guys aren’t Steve Jobs or Bill Belichick. These bank execs did not deliver 1) performance or 2) differentiation from other execs. It’s not like there weren’t some people who saw the credit crisis coming (e.g., some of the guys at PIMCO). So I reject the idea that the people we have in there now is “the best of all possible worlds” and changes will inherently mean lower returns.
<
p>Second, I reject the idea that these guys have options right now. Where are they going to go? PE? That’s dead. Foreign firms? They are facing the same issues right now. Hedge funds? They are closing right and left. The “productive” economy? That’s probably for the best. Look, if these guys are so offended by 500-large (plus options if the government gets paid back) that they would rather sit on the beach and write the Great American Novel, that’s their call.
<
p>Third, in the “new” American banking system, even if these guys were Steve Jobs, that’s irrelevant. I actually think that a ton of “merit” in this area is actually luck (trading) or connections/relationships (IB). But set that aside. The whole point is going to be limiting the risk-taking an individual or firm can take. You don’t need to be Steve Jobs to run a commercial bank’s investments.
<
p>Finally, I still think that because of the massive reduction in these companies, you would have a “deep bench” to draw on. Right now, the “replacements” would probably be comparable to current employees. http://en.wikipedia.org/wiki/V…
who will be thoroughly insulted and driven away by a pay cap, the taxpayers will eventually reap a boon, a huge return on investment in “our” bank holdings? For some reason I can’t imagine this happening- the most we can probably hope for is to get back the original TARP infusion, and Obama’s idea seems to provide an incentive for managers to work toward that repayment.
Just can’t get that talent anywhere. The talent to stay with the trends, follow beaten path and ensure that no more than the end-of-quarter earnings look good. What greatness. If you press these guys, maybe they’ll just leave and become beachcombers. Then where would we be?
<
p>Mediocrity yesterday, today and tomorrow!
<
p>Of course they’ll be able to weasel a couple billion bucks from the carcasses of their businesses. They have whole legal departments to work on such things. Maybe even write the laws…
They’re a failure. I want them all gone. GONE. GoldsteinGONEwild Gone. Freaking-done-let-the-door-hit-you-on-your-ass-on-the-way-out gone. If this gets their execs “gone” good fucking riddens! A monkey’s ass could run these institutions better.
The thing you may be missing is that the CEOs in there may not be the best possible candidates. Sure, they got hired based on paperwork and connections, but that doesn’t mean that they did the best possible job running their companies. We have ample evidence to the contrary…
Here’s the emerging, first result of government interference with the banking industry.
<
p>Of course, it’s more important that Barry Obama and Barney Frank spank bank executives by capping their salaries rather than firestop the American financial system. Moralize about $250 million versus trillions. Excellent.
<
p>I wouldn’t have given one sh*t about this grandstanding because I didn’t have any financial interest in Bank of America except my FDIC insured checking account which I will now move to a local bank not accepting TARP funds. I didn’t care whether BoA survived or not because I was not a shareholder.
<
p>That was until the federal government decided to (a) give it billions of taxpayer money, and (b) effectively take control of it. Without my consent, and against my will, I now own BoA.
<
p>But thanks to the fear of nationalization (i.e., assh*les in Congress now get to run a bank), the government is driving the value of BoA down. It’s a two-fer! Not only did they invest my money for me, but by their very actions, the fear of future government intervention, they’re making that investment worthless. Not even the Soviet Politburo was that clever.
<
p>Go ahead, as I’m sure you will, and blame this on Bush, but now the Democrats are throwing (my) good money after bad.
<
p>They will come to regret this come the next election cycle.
No tears for BofA.
I never wanted to invest in BoA.
<
p>This is why shareholders of publicly traded companies are at risk … they control who sits on the boards, who is CEO, they have a voice in the management of these companies.
<
p>If the management they selected — twice, once by buying shares of companies with known management teams, and again through shareholder votes — sucks and drives the company bankrupt, why do I care? I wasn’t a shareholder.
<
p>Now I am. So now I disapprove of the government’s silly interference. I would never vote for a salary cap because it’s stupid corporate policy. But I have no shareholder rights since essentially Treasury and the White House are calling the shots.
The problem with the current bank bailout is that we’re buying the bad debts at inflated values and thus protecting the shareholders and management teams. This encourages business as usual. It might even make people think the management team is worth $500K salaries.
<
p>Krugman spells out a better solution, one that worked in the past:
<
p>
http://www.iht.com/articles/20…
<
p>When the worthless assets of these banks are correctly valued as worthless, it will be clear that to paying half-million dollar salaries to these execs is a lavish gift at taxpayer expense.
Shep .. you have quite the imagination. The factors driving down the value of BoA include the excessive risk taking and the toxic assets that created this crisis (esp. once the acquisition of Merrill Lynch closed); not the government rescue of the banks.
I’m linking to the article which claims there is investor fear of the federal government’s de facto control of BoA.
<
p>I knew all about the excessive risk taking and toxic balance sheet before the shit hit the fan. Warren Buffet’s been preaching against these fancy and uncontrollable derivitives for a years now so I never invested in BoA, FNMA, etc.
<
p>I disagree with your assessment that the government “rescue” hasn’t effected the value of BoA. The mistake is that Treasury tried to make solvent the institution rather than guaranty (or support) the instrument.
<
p>Hence the Superbowl parties, jets, and bonuses. That’s how private corporations act. If the government wants to turn BoA into a department of the Treasury, BoA’s stock will go to zero because government has a very low, zero, or even negative return on assets.
<
p>That’s what the article suggests is scaring investors.
BoA went down well before the government gave it any money. It wouldn’t even exist right now, in all likelihood, without government funds.
<
p>And we don’t even need to get into the government-backed FDIC program you seem so enthused about.
<
p>So much for that argument.
<
p>Hey, $250 million here, $250 million there, and eventually you’re talking about real money.
<
p>And by the way, the last I heard the Congressional Democrats are actually attempting to provide a “firestop” for the American financial system. The Republicans are content to oppose everything. That’s their prerogative, I suppose…but it would be nice if they actually contributed new ideas to deal with the crisis.
Of course he was talking about the federal government.
<
p>Please point out where the congressional D’s are attempting to provide a firestop. I read all 300+ pages of the first draft of HR1 and it was 90% nonsense.
<
p>It’s little stimulus, and mostly pork. How is expansion of an existing SCHIPs program stimulus? Look, SCHIPs is a legitimate social policy issue so let’s have that debate. But don’t try to sneak it into an emergency bill meant for stimulus. This is what the Republicans oppose.
<
p>And public opinion is following with a majority now opposed or skeptical.
<
p>Congressional deception is hurting the President’s credibility. Republican opposition has zero cost politically, and is an excellent issues platform to differentiate themselves with better proposals.
How did anyone try and “sneak” SCHIP into an emergency bill? It was debated and passed as a separate bill. Republicans opposed it, but not because it was “part of the stimulus”. It was a separate bill that was just signed into law. Your facts here are simply incorrect.
<
p>Also, you say the stimulus bill is “little stimulus, and mostly pork”. First of all, there is no “stimulus bill” yet until we see what comes out of conference. Second, can you provide examples of “pork without stimulus”? Stimulus by definition is government spending, which is what this economy requires at this very moment. Whether it goes to building a highway or re-sodding the National Mall, it’s still stimulus because it is pumping money into the economy that otherwise would not be spent.
<
p>Third, I disagree that Republican opposition has “zero cost politically”, though I agree that Republicans can use the stimulus package to “differentiate themselves with better proposals.” Too bad they don’t have any.
for Barry comment.
<
p>Also, um, “grandstanding?” Are you serious? These companies are BANKRUPT. They exist because we pay what they can no longer afford to. That means they don’t get to pay their CEOs $60 million a year. That means they don’t get to give $18 billion in bonuses anymore. Grandstanding my ass.
<
p>The fear of nationalization is driving the cost of BoA down? ROFL. Don’t you think their impending nonexistence has something to do with it, should we stop bankrolling them? Moreover, have you looked at all into the history of nationalizing bankrupt banks? The Government almost always profits in the end, after the sell off the profitable assets.
<
p>Blame this on Bush? I haven’t thought of Bush in weeks, thank you very much. The only one who will have regrets next election cycle are Republicans for being obstructionists as they look at a senate with 63-65 Democrats. In case you haven’t noticed (and you obviously haven’t), Democrats are looking toward an extremely favorable cycle based on which seats are up for grabs.
<
p>See, I live in the reality-based world. Make believe facts only exist in the imaginative world. But thanks for playing! Everyone’s a winner! Don’t forget your ribbon on the way out.
Treasury and the US federal government don’t need to “save” BoA. Our banking and investment system dwarfs BoA so the feds should be looking at firestopping markets and not individual banks.
<
p>BoA SHOULDN’T exist right now. Neither should GM, Chrysler, and possibly Ford.
<
p>This is simply warmed-over 1970’s European and 1980’s Japanese industrial policy, policy which was shown to have retarded investment, growth, and recovery.
<
p>So much for your argument.
Ford? You do realize they haven’t taken a penny of government dollars. Digging yourself deeper is not a very good debate tactic.
<
p>As for the government, I would just assume we seize the bank, but politicians in this country are still afraid of the red scare and such things as “nationalization” even if it doesn’t mean what people think it means, because it would only be a temporary measure. While BoA shouldn’t exist as is, it’s assets should exist. If BoA went under without nationalization, it would be horrifying for the economy and hundreds of thousands of people would lose their jobs, with no readily identifiable place for them to find new ones.
<
p>Moreover, it’s only a few troubled assets that keep the company down, something the government could fix should we nationalize it and sell off its profitable assets at a large profit. That would provide us with the necessary funding to deal with the bad assets until we can solve that problem. This is the historically successful model of dealing with imploding banks.
certainly is a factor in driving common stock down to zero (bankruptcy or no), because the preferred equity issued as part of TARP to the government dilutes existing shareholders.
<
p>My brother works for Wells Fargo and is reasonably well informed. They wanted no part of the TARP money, but they and 9 other banks were brought into a meeting with Paulsen last fall and told that they were taking the funds whether they wanted to or not to “calm the markets”. They’re now taking pot shots over this Las Vegas trip. My brother was fuming about that one as this wasn’t any “high roller” CEO trip, but rather than an incentive bonus trip for a bunch of folks working in the trenches for about 30-50k a year. Stupidest thing about the whole deal since Wells Fargo had to bow to public opinion and cancel it a week before is that the “cost savings” by this grandstanding move is essentially zero. Try cancelling thousands of hotels, plane fairs, entertainers at the last minute and see how much of your up front money you get back…
because the bank is essentially bankrupt and should be nationalized. But whether the government was willing to do so or not doesn’t factor into the bank’s free fall on the stock market. Generally companies that lose billions aren’t worth very much on the stock market. LOL.
I hear this argument argument often, but I think it’s clear the massive compensation packages that existed in the past few years didn’t attract “better” execs. They basically ruined their companies (as well as the overall economy). So I don’t think it follows that more money equals better execs.
<
p>In any case, more important than pay caps would be a requirement that compensation is based upon long-term performance. So you’d have to look at (say) a five-year time-frame to determine bonuses rather than a single year. If s/he is a good exec, the s/he will be amply rewarded. But the compensation won’t be based upon artificial profits for a single year.
I find it nearly impossible to believe that these huge corporations would not be able to find competed top executives who want to run them for a mere $500k + deferred stock. Especially since a) these are the same people who are likely to be on the boards of other corporations where they can make more money for very little work, and b) many of the likely candidates are already so wealthy they could afford to pay to work these jobs, and are usually motived by other reasons.
The $500K cap is a political gesture. It’s trying to send a the banks and the public a political message. But couldn’t there be more meaningful gestures?
<
p>I don’t like the idea, frankly, of anyone making over $500K although maybe it’s unavoidable. But if we want these banks to reflect the fact that they are now, at least temporarily, quasi-public institutions, how about requiring something more socially useful than a CEO pay cap?
<
p>Maybe a certain percentage of money invested in socially useful investments? Some kind of standards (environmental, labor, etc.) on some percentage of investments? Targeting investments in areas of high unemployment?
I don’t think it’s purely political. There’s a very good argument to be made that overpaying top executives at extreme levels, is an incentive for them to prioritize short term risk over long term financial health. They get rich quickly and then if things fail, they’re personally okay. They have no real personal stake in the long term health of the company, and take dangerous risks.
<
p>Putting socially useful requirements on banks can go too far. In theory, what we need most from these banks now is credit/lending/capital for the rest of the economy. Requirements we put on them should, first of all, make them provide those things.
<
p>Since the government is about to try a massive bout of Keynesian stimulus spending, it can more directly put money into socially useful things without trying to redirect banks’ missions.
If a private company cannot decide to pay its chief executive whatever it wants, no matter how excessive, why should Brad Pitt make more than $500,000?
If Brad Pitt were about to go bankrupt and needed a government bailout, and could in some weird inconceivable way convince us that he deserved it, then limiting his pay would make plenty of sense. As long as he’s a free agent, negotiating with companies for his contracts, and not directly receiving government money, he’s in quite a different situation than the banks we’re talking about.
<
p>Now, I understand some movie studios were going to get some grants to buy some stuff as part of the stimulus bill, though that has now been removed. However, even if it had not been removed, they were getting relatively little money, and the money was directly attached to the buying of stuff, which goes directly back into the economy, and they also weren’t going to go bankrupt and depending on a government bailout. The money that would’ve been given then (in the form of changed accounting rules, I believe) was specifically targeted to expand their economic activity beyond what they might choose to do on their own. So even that was a far reach from the TARP bailouts. But Brad Pitt is another couple of steps removed from that.
Any private company that wants to pay top executives more than $500K is free to do so, they just aren’t eligible for major TARP bailout funding. If they need a huge TARP bailout from the government in order to survive as a company, and choose to do so, they’ve entered into a deal where the government is perfectly justified in asking for some standards.
<
p>The question to debate is whether the standards the government asks for are in our collective best interest, or not – and that’s what this post has been about. The question is not about the legitimacy of demanding these standards from companies in exchange for massive bailouts.
I’ve read some people who think these massive salaries and bonuses that top execs get in the US corporate world actually leads to bad business decisions. Why? If you’re making tens of millions a year, you don’t need to work very long. Take huge risks and make big bonuses off of them and you earn a lifetime’s worth of pool-side living in just a few years, before you put your company to wrack and ruin. Forcing reasonable salaries for execs in corporate America may just lead to competent leadership filled with such novelties as long term thinking and an avoidance of risky behavior. Imagine that!
Goldmans wants to pay back the Stimulus money to the Fed. That tells me that they don’t want the salary cap.
<
p>Now if you’re the government and believe that Goldmans’ stimulus money is beneficial to the system in its entirety, AND the reason for them declining TARP money is because of the pay cap, THEN the pay cap is dumb, with regards to Goldmans.
<
p>Now, extrapolate that to the other banks: if pay caps cause banks to decline TARP when their balance sheets are weak, then the pay cap is dumb. It’s contradicting the policy from the start. Seems like most if not all roads lead to dumb.
If the point of TARP was to get banks to lend more, and banks decline TARP because they don’t want the pay caps, and if the banks still don’t lend more thus keeping the economy down then what’s happening?
<
p>Corporate leaders are holding up America.
<
p>A good argument for nationalization.
“…the only real way to control the banks is to take a majority stock ownership position…”
<
p>Freudian slip? Or sub rosa nationalization of banks? Either/or, bad juju for America.
Salary Cap, good for banks, bad for the MBTA