Now that the Obama administration, pursuant to the EESA, is capping executive compensation in bailout recipient firms at $500,000, it's time for a bit of we told you so. The previous Treasury Secretary, Henry Paulson, asked for lots of flexibility in setting executive compensation standards once it became clear that Congress would insist on them as a condition of the bailout. This flexibility was sought one month before an election that the government was extremely likely to lose, at least if you trust Ray Fair or Jack Balkin (this post by Balkin was written in February, 2008). Are the standards that the Obama administration will adopt the ones that Paulson would have wanted? Even a median term political strategist might have suggested that he negotiate for some hard targets on executive compensation (or, you know, a Trojan horse) in the bill rather than unfettered discretion. Which suggests, as Steve Davidoff and I have written, that the government was thinking more about the next deal than the long, or even median, term.
Is the Obama compensation limitation legal? Pending a close reading of the yet to be released provisions, I bet it will be. Though the TARP exec comp provision contemplated asset purchases (which the government never did), it indicates that companies in which the government takes an equity position shall be subject to "appropriate" limitations, which grants a lot of discretion to Treasury:
There's some detail for senior executive officers, and said officers might be able to argue that capping executive compensation at $500,000 does not prevent them from taking excessive risks - an argument I think is risible:
Moreover, since "senior executive officer" is defined a the top five best paid at the firm, it's not as if you can cut the CEO's pay, but fork over big bucks to the star traders, at least, not unless the Obama administration wants it that way.
It will certainly incentivize paying off the bailout money as fast as possible.
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1. Posted by Jake on February 3, 2009 @ 20:37 | Permalink
Ack. What a Leninist mess the Obama administration is fostering.
Let's see. In the 1970s our government experimented with price rationing of gasoline, a policy step that led to artificial shortages and long lines at gas stations.
Now, with the support of many voters too young to remember the very painful folly of the economic policies of the 1970s, the Obama administration seeks to price ration executive talent in managing complex industrial concerns.
Hugo Chavez smiles.
2. Posted by fedgovernor on February 4, 2009 @ 3:22 | Permalink
The good news is this:
These banks can end the Leninist mess any time they want. All they have to do is risk their own capital.
You see, the owner of Bank of America is the US taxpayer. We put up the capital, and the bank executives accepted that capital.
They have a choice. They can dilute their current shareholders by raising their own damned capital, or they can dilute their current shareholders by accepting TARP funds and cutting executive pay.
The solution for any whiney millionaire bank executives being forcibly pulled from the bonus teat is to BUY US OUT.
We (the taxpayer) will happily accept our TARP capital back the moment the bankers are willing to risk their own capital in the market.
But they aren't willing to do that. They'd rather risk taxpayer dollars and keep their million-dollar offices and multi-million dollar bonuses and Vegas junkets.
Not gonna happen boys.
3. Posted by wilky on February 4, 2009 @ 7:26 | Permalink
It was my understanding that there were banks that were forced to take bailout money to stop runs on the bad banks. Wells Fargo has been saying they didn't want the money and when Paulson did this, Bank of America was on 60 Minutes say they didn't need nor want the money. So if these companies didn't want the money and were forced to take it, why are they being treated as if they need the oversight of our press and government? Or am I wrong here?
4. Posted by Peg C. on February 4, 2009 @ 8:01 | Permalink
I can foresee another possible ramification. If exec. compensation is capped at $500K, doesn't this make the jobs much less attractive to high quality managers and execs? Doesn't this make bailed out companies that much more vulnerable to poor management and poorer, not better, results?
5. Posted by fedgovernor on February 4, 2009 @ 8:13 | Permalink
Yes, wilky, you're wrong.
It's true that the Fed forced its member banks to increase their capital. The Fed is a private banking institution overseen by the government. Members of the Fed are appointed by the government, but it's a private banking organization. It is free to require its members to meet any capitalization requirements it feels are in its best interests, whether an individual banker believes that to be in his interest or not.
Any of these banks can return the money any time they want, by increasing private capitalization (in other words, by risking their own money). All bankers, however, given a choice, would rather risk someone else's money. They'd rather use someone else's money to build their million-dollar offices.
So, they gladly took the money, rather than forfeit their charters.
Our bank capitalization laws protect consumers by forcing banks to be maintain appropriate amounts of liquidity. Our laws are not designed to ensure bank executives receive unlimited amounts of income, Vegas vacations, or $100,000 toilet seats in their cushy private bathrooms.
Remember: At any time, the banks can buy the taxpayer out by raising their own capital.
I'd suggest they quit whining and get busy doing that.
6. Posted by shane on February 4, 2009 @ 8:26 | Permalink
Why is it that panic leads to us turning our back on the very principles that made this the greatest nation in the history of mankind? We can easily make excuses as to why the federal gov is justified in their actions, but what is the true cost of destroying the foundation used by our forefathers.
These companies are responsible for Billions of revenue and profit each year. I think I would rather see them spend a few million more a year to bring in the talent it takes to actually lead a multi-billion dollar corp. This decision, like many decisions made in Washington, is not about making a difference. It's about advances big government, more government control, and winning favor from the "little people" so they can feel some type of sick satisfaction in seeing the "Fat Cat Corp Execs" being forced to take a pay cut.
Think of it this way - If you had millions of dollars in GM stock who would you rather have running the Company? A proven leader with a history of making smart and profitable decisions making $10MM a year OR an unproven exec that's okay with making $500K a year. Geuss what, the people that can command millions won't be taking difficult jobs with troubled company for $500K a year, it's not worth risking a reputation to them.
7. Posted by hp on February 4, 2009 @ 8:26 | Permalink
a couple of points, the new executive comp rules are not retroactive, so it only applies to any new bail out money.
the firms can give out equity above the 500k limit but it only vests when the govt gives the money back
and for all of the talk about bonus pools on wall street they have been paying 50% and much higher for higher paid executives in Stock not cash to begin with. If you look at the stock performance of these companies you can see the values of these pay packages is off a lot. Especially as most of the time they are 3 yr vesting periods and sometimes 5 yr restrictions on selling it. You could have been well paid for 5 yrs and have very little left to speak of.
8. Posted by good idea on February 4, 2009 @ 8:42 | Permalink
These companies are responsible for Billions of revenue and profit each year. I think I would rather see them spend a few million more a year to bring in the talent it takes to actually lead a multi-billion dollar corp.
Well, if these companies were well-run and profitable, they wouldn't be asking for government handouts, now would they?
The idea that you can't find talented people to work for a half-million dollars a year is absurd. And if these corporate leaders were so bright and talented, why are their companies in such bad shape?
I'm no fan on increasing government, but I do believe in accountability. If these companies accept billions in taxpayer money, then they need to be held accountable for how they spend it.
If they don't want to accept these compensation limitations, then don't accept taxpayer money, end of story.
9. Posted by fedgovernor on February 4, 2009 @ 8:49 | Permalink
You're missing an important piece of the puzzle: We (the taxpayer) bought the bank. We own it. We're the owners.
Our employees - the bank executives - are wasting our money on Vegas vacations and million-dollar office redecorations.
We can't allow that any more than the owner of a gas station could allow the cashier to purchase, for himself, a golden chair to sit in behind the counter.
Banks used to be privately owned. They ceased being privately when they sold the taxpayers preferred stock.
We're the boss now because the bank sold us its stock.
You have to keep in mind ... they can buy our stock back from us whenever they think the deal isn't good enough.
They can buy us out.
In the meantime, they're using OUR capital to make THEIR fortune. It is reasonable for us to put some limitations on the use of our capital.
10. Posted by J on February 4, 2009 @ 8:55 | Permalink
"If exec. compensation is capped at $500K, doesn't this make the jobs much less attractive to high quality managers and execs?"
If there was some evidence that amounts in excess of $500K bought better management, I might buy that argument. It's unlikely anything we got for $500K would be less competent than what we have now. As FedGov says, they can get rid of the pay cap anytime they want by paying the money back.