Free Markets, Free People

Daily Archives: March 21, 2009


Obama to seek caps on all executive pay

The CEO’s of banks and financial firms that received bailout money may not be the only executives to see their pay regulated:

The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.
[...]
The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

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.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.

You are not free to make as much money as you want. You are not free to succeed because government will tax you at the point of a gun to make sure you aren’t making more money than they approve of.

Welcome to Obama’s America.


The Banking Plan

Thanks to last night’s White House info dump, we now have gotten the outlines of the White House’s banking recovery plan.  As I mentioned earlier this week, the banking problem is the fundamental issue in the current financial crisis.  We’ve been waiting for the White House to give it to us.  Now that we’ve got it, I don’t like it much.

The details, as reported, are as follows:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending…

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

That last paragraphs is a howler, since it’s so self-evidently untrue.  As Ezra Klein at The American Prospect–hardly an enemy of the Obama Administration–notes:

You almost wonder if that’s a typo. It seems to imply that the protection comes because private investors will accurately price the assets. After all, they don’t want to lose money.

But it’s not their money. It’s our money. The plan uses public funds to protect and subsidize private investors. As such, a private auction will not price the assets. It will price the potential upside of the assets given that taxpayers will assume the brunt of the losses. [Emphasis mine--EDF]

As illustration, imagine an art auction. Now imagine an art auction where Sotheby’s loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby’s or the private investors? As Calculated Risk says, “With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.”

As for the contention that “the government will be buying the troubled loans of the banks at a deep discount to their original face value,” I’m not even sure what to say about that. Their original face value was a lie. If I pretend this beautiful bic pen is worth $60 million and then sell it to you for $1.00, you’re not getting a $59,999,999 discount because I’ve come down from the imaginary price where I started. The question is what these assets are actually worth, and whether taxpayers are paying more or less than that. We’re in this mess because the original face value is wrong.

I don’t know how to explain it any better than that.  Moreover, Ezra links to Yves Smith, who further comments:

First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.

Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank’s reserve, which would be the value on the bank’s books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

The last point is another big problem.  There are a number of other ways to accomplish recapitalization, from just purchasing the assets from the banks for cash to outright nationalization of the banks.  Whether we would actually like those options is another story, but at least they have the virtue of simplicity.  Even laymen would be able to grasp their essentials.  That certainly isn’t true is the case of what the Obama Administration has released. It is complicated.  It’s made of three different parts, all of which are complicated in their own special ways.  Ezra Klein again:

If it goes bad — and it really might go bad, and the details might prove galling in much the way that AIG’s bonuses did — the byzantine approach could well leave voters feeling tricked. That risk might make sense if this were the only viable path forward. But it’s actually hard to imagine the set of questions you ask that ends in this particular answer.

And it’s difficult to see how this  actually becomes an answer in the real world.  The trouble with these kinds of complicated plans is that they so often crash against the rocks of reality.  When one part of the plan goes awry, the whole plan breaks up.  With the triple complications of the plan leaked by the administration, there is a not insignificant chance that the plan will fail due to it’s unnecessary complexity.

I don’t think that will be helpful.


The Danger Of Trying To Be Funny

Barack Obama accepted an invitation to be on the Jay Leno show for a number of reasons. One was to show he was hip, cool and could be funny. He apparently felt the timing was right for another charm offensive. Secondly, he wanted to go where no sitting president had ever gone – a late night comedy show. Three is related to two – he hoped to reach an audience that he may have otherwise been unable to reach with his budget message. And four, the media coup that would result would hopefully reverse his seeming slide in popularity.

Of course the risk was that he wouldn’t be funny and thus bomb or that he’d say something he shouldn’t have and everything else would be forgotten while the gaffe dominated the coverage. Looking at the risk vs. the reward and completely involved in the hubris surrounding Obama, his handlers obviously thought the risk was minimal. Sure enough the gaffe scenario materialized and completely overshadowed the hopes he had about his appearance.

Sometimes, it seems, you can be too clever for your own good. And Obama’s “Special Olympics” remark, meant to be self-deprecating, was instead taken as an insult to Special Olympians. The irony, of course, is the petard upon which he was hoisted is one of the left’s own making.

Humor has become a “no tolerance” zone when it comes to some subjects. Offending an underprivileged, “special”, racial, ethnic, or in a few cases, religious(you have to be of a “protected” religion to qualify) group has become a mortal sin.

Everyone knew what Obama meant when he used the term “Special Olympics” concerning his attempts to bowl. It wasn’t mean, it certainly wasn’t meant to denigrate the effort of Special Olympians nor was he attempting to purposely offend them. Instead he was taking a shot at himself and his inability to do better than he has in that particular game. And he did so with a poor choice of words, the result of an unthinking attempt to be humorous on a humor show.

Had he instead compared his effort to a white guy trying to play basketball or a Christian trying to win converts in Saudi Arabia, approved hilarity would have ensued and his all of his hopes for his appearance might have born fruit.

You’d think, as a child of the left, he’d know that, wouldn’t you?

~McQ


Zombie Ideas And Moral Hazard

Paul Krugman has seen the new Treasury plan (the “Geithner plan” as he calls it) that addresses the problem with the banks and he finds it wanting:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

The plan itself is a three part plan as described here:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The Geithner Plan

The Geithner Plan

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

 As noted, Krugman is not impressed. In fact, he suddenly discovers the problem of “skewed incentives” and “massive” moral hazard:

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

How in the world could the level of intrusion contemplated by the government create anything but “skewed incentive” and “massive moral hazard”? But that aside, will it work?

Per Krugman, probably not:

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Indeed. And an amazing admission by Krugman who was as sure as anyone in the tank for Obama that he’d be “the answer” to all of our problems. Instead he’s discovering what a lot of Obama supporters are discovering – Obama’s an empty suit who is more interested in the perks and rewards of the office than the work it entails.


Quote Of The Day

From, of all people, Paul Krugman (discussing the AIG debacle specifically and financial policy generally):

This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Uh, I guess the honeymoon is over?!

~McQ