4
The say on pay
I've done as much reading as possible about the new rules on executive compensation. Here are some thoughts from a variety of sources:
First, from the horse's mouth. The man in charge of the government's effort is Kenneth Feinberg. Feinberg's plan is to cap compensation at the seven companies that received "exceptional assistance" from the government: AIG, Bank of America, Citigroup, GM, GMAC, Chrysler and Chrysler Financial.
Why just those seven? The PBS NewsHour interviewed Feinberg:
... the reason that the focus is on these seven is so that the taxpayer ultimately can get their money back for those loans that were sent to these -- keep these seven companies in business.
JEFFREY BROWN: Well, I did want to ask you, why not go further? I understand, OK, those -- these seven still owe money. But is not the principle the same for a Goldman Sachs or someone else that took the money, did OK, and fairly recently have told us that they're going to be -- have very large compensation packages?
KENNETH FEINBERG: I would hope that corporate America, privately, might endorse and adopt some of these very principles that we have announced today.
But I do not think it is a good idea for the federal government to expand its role into all of these other corporate entities. I think that would be a bad idea.
JEFFREY BROWN: Because?
KENNETH FEINBERG: Because it -- it is -- the -- the private marketplace should be able to have the flexibility to adopt these programs on their own.
The president has said, the secretary has said, we do not want to micromanage these companies, beyond these seven. And I think Congress, wisely, limited my jurisdiction to these seven companies where the taxpayer is the major creditor.
But former Goldman Sachs executive Nomi Prins says that's just not good enough. She writes this at the Daily Beast:
To be sure, these companies owe their very existence to the federal government. Bank of America still owes the government $63.1 billion, AIG sits on top of a $181.8 billion pile of federal help, and Citigroup has a $368.7 billion public cushion, The auto industry? $89.4 billion.
The problem is, by simply tying compensation caps to the TARP program (a year late), Feinberg and the Obama administration are completely ignoring the rest of the $14.6 trillion federal bailout and subsidization of the banking industry, which has helped propel many key banks to 2007 levels of compensation, unfettered. If this is the best he can do, all the other Wall Street bankers can breathe a huge sigh of relief.
Goldman Sachs, in particular. Goldman must be jumping for joy at the idea that other banks will have to cap their pay. Why would a talented executive stay at a bank where compensation is capped when he or she could go elsewhere? By the way, I'll be talking to Prins on today's After the Bell podcast, so you'll get to hear more of her thoughts as someone who used to work for Goldman.
The Federal Reserve will also do its own cracking down on executive pay, starting with the 28 largest banks. It's possible that could be good for the taxpayer, says the Washington Post's Steven Pearlstein:
... if it turns out that these pay rules wind up steering the riskiest activity to smaller, more focused institutions whose failure won't require them to be bailed out by the taxpayer, that might be a good thing.
After all, we know what happened when the button-down commercial bankers were let loose a decade ago to start competing with, and behaving like, investment bankers. And we can be pretty sure what will happen in the future if Citigroup, J.P. Morgan Chase and Goldman Sachs continue down the path of competing with, and acting like, hedge funds.
But the New York Times' Joe Nocerra says these rules don't solve a key problem. The shareholders should be making the rules:
As well-meaning as Mr. Feinberg is, and as diligently as he worked through his assigned task, he shouldn't be the pay czar. No one person should be. That's a job more properly reserved for shareholders. You know, the ones who own the company.
As for responses from The Seven, The Atlantic has some fun interpretations of their press releases. And on that note, maybe Feinberg is right about one thing. From Time magazine:
"At the end of the day, if Wall Street is unhappy and Main Street is unhappy then I have probably struck a good balance," he said.
So, to sum up: The goal of these measures is to make everyone miserable.
I think making bonuses payable 3-5 years as a company stock option would make more sense then capping or dictating pay levels. If you were given stock/options in the company that could not be sold or traded for 3-5 years from date of pay but must be sold at the time of expiration, it would keep you motivated to keep the price up for a long time. If many employees are scheduled to leave around the same time, it would be a huge red flag.
Obviously, the compensation packages in financial institutions selling / manipulating derivatives magnified risk rather than reducing it as the more financially sophisticated wanted to believe. Bonuses exist to reward Alpha, exceptional returns adjusted for risk. Now we see that the risks swamped the returns, in fact the returns were so negative and on such a massive scale that they caused a global recession. Therefore, the bonuses and perhaps the salaries are not only not deserved they should be clawed back, if not by institutions that offered them then by the government who saved those institutions. Otherwise, failure, irresponsibility and fraud on a massive scale are rewarded and will continue.
The claim that investment banks (now masquerading as financial holding companies, again at taxpayer expense) and insurance companies like AIG (a hedge fund masquerading as an insurance company) need the “exceptional talent†that created this mess and so must reward them by making them wealthy is absurd. Derivatives must be regulated and transacted in an open market like the CBOE not OTC. The regulations must preclude excessive risk and use of excessive leverage. Contrary to Bernanke, Summers and others the last thing we need is financial innovation. Just the opposite is needed for stable economic growth in the banking sector. Innovation is better left to other sectors of the economy.
Further, a case can be made that Goldman Sachs, JP Morgan, Citi, AIG, etc. acted like financial terrorists. They did not dramatically destroy peoples’ lives with bombs and bullets like Islamic terrorists. Instead they destroyed many more lives and created far more suffering and destruction than the bin Laden’s of the world. Just because they are “our†terrorists does not mean we should let them off the hook much less reward them.
