Many progressives thought that Pres. Obama had abandoned them after the election, but I’ll bet they’re singing a different tune today:
President Barack Obama on Wednesday imposed a $500,000 cap on senior executive pay for the most distressed financial institutions receiving taxpayer bailout money and promised new steps to end a system of “executives being rewarded for failure.”
The limit would apply to top-paid executives at the most distressed financial institutions that are negotiating bailout agreements with the federal government.It also would apply to other banks that receive aid, but they could get around the limits by publicizing to shareholders plans to exceed the salary cap.
The “most distressed financial institutions” will not include those which have already received TARP funds, such as AIG and Citigroup. However, those firms are already subject to caps on executive pay under the statute authorizing the bailout last Fall. And because these companies have all come to the government “with hat in hand,” in Obama’s words, not too many people outside of Wall Street are upset. Yet, Obama does not seem content to stop with these “distressed” companies:
The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.
Those proposals include:
• Requiring top executives at financial institutions to hold stock for several years before they can cash out.
• Requiring nonbinding “say on pay” resolutions — that is, giving shareholders more say on executive compensation.
• A Treasury-sponsored conference on a long-term overhaul of executive compensation.
This is exactly the sort of creeping socialism that many of us were worried about with Obama’s election. Mind you, McCain would not have been much better, but this sort of heavy handed government interventionism would not have been proposed by his administration, much less tolerated by most Republicans in Congress.
Obama’s proposals are somewhat tolerable with respect to the bailed out companies since they are being funded with tax payer dollars. If these companies are going take the money, then they should have to abide by whatever rules are attached to the funding no matter how onerous. But trying to impose such draconian restrictions on companies that are not being bailed out is nothing more than a direct assault on freedom.
Even if you think that no executive should be paid more than $X more than the lowest paid employee of a firm, or are just angry at the seemingly wasteful and lavish life styles of Wall Street bankers, you still have to find this sort of proposed legislation abominable. Why? Because no matter what you think about executive compensation, the owners and operators of these companies think otherwise. It’s their decision to make about how their companies are run and how well their employees are paid. Unless, of course, you would just fine and dandy with some government bureaucrat deciding that you are overpaid for your position, and that no matter how hard you work you can never make more than $Y.
The only people who would ever agree to such slavery are those who have no ambition and little, if anything, to offer the world in terms of work product. They are not the people who invent the items, create the ideas, or provide the services that make our lives better over time. That is not to say that their efforts are not appreciated, nor that they shouldn’t be rewarded. But neither should we base the engine of wealth creation on their hopes and dreams of sinecure.
Beyond the egregious assault on freedom these proposals represent, there is also a huge question as to their efficacy, regardless of whether the firms are troubled or not (my emphasis):
Compensation experts in the private sector have warned that intrusions into the internal decisions of financial institutions could discourage participation in the rescue program and slow down the financial sector’s recovery. They also argue that it could set a precedent for government regulation that undermines performance-based pay.
“One of the big questions is whether it will make it more difficult to recruit and retain executives at these companies,” said Claudia Allen, chair of corporate governance at the Chicago-based law firm of Neal, Gerber & Eisenberg.
The $500,000 cap “is a very tight limit,” she said.
Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president’s actions are a unique situation given the government’s role bailing out troubled institutions.
“We do not view it as something that ought to be extended beyond this circumstance,” he said.
I don’t think there’s any legitimate doubt that these will be the effects. Indeed, here are some of the reactions to Obama’s proposals:
Goldman Sachs said yesterday it wants to repay $10 billion it got from Treasury under the TARP to signal the firm is healthy and to escape limitations that came with that infusion of money. “Our financial condition is sound and, subject to approval from regulators, we hope to repay TARP money as soon as practicable,” said Lucas van Praag, a spokesman for New York- based Goldman Sachs.
JPMorgan CEO Jamie Dimon said Feb. 3 that the firm didn’t need capital and didn’t ask for TARP funding. The lender accepted the $25 billion it received from the first capital injection at the request of the government and to help stabilize the banking system, he said.
Goldman has to get permission to repay the government? Does that make sense? Only if the reason the funds were distributed in the first place was to give the federal government control over the market place. I think that’s exactly what Bush (“I’ve abandoned free-market principles to save the free-market system”) and Paulsen had in mind with TARP, and I think Obama is prepared to carry the ball even further into socialist territory.
As far as retaining talented executives, why would any of them stay? If you were making $10 Million per year including your bonuses (not uncommon), why would you stay somewhere that’s forcing you take a 95% pay cut? Of course, many will say good riddance to bad rubbish, and perhaps their right. It’s not like a firm that goes crawling for a federal handout was performing all that well. Except that (a) it’s far from clear that bad management led to the current crisis (although, surely that had something to do with it), and (b) even if it were clear, not every executive or potential executive was responsible. If you are a rising star in your investment bank who has put in exhaustingly long hours to get ahead in hopes of a big payday in the future, why would you stick around where you know your options are limited? These are very smart, industrious and capable people. There are plenty of places where they can go and not be subject to such pay strictures, and that is where they will end up.
Moreover, a part of the proposed regulations practically eliminates the fabled “golden parachutes” for executives:
Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. “We’re taking the air out of golden parachutes,” he said.
This displays a fundamental misunderstanding of what golden parachutes are. Contrary to popular belief, they are not generous giveaways to failed executives, but instead incentives for failed executives to get out of the way and allow new management. Without these sorts of incentives, management becomes entrenched and complacent. If a proposed takeover threatens to take away the goodies they can vote themselves, then they will forego such proposals and keep cashing in. In order to align management’s interests with the shareholders, golden parachutes were introduced to incentivize firm managers to sacrifice their jobs when the best interests of the company warrant it. Since one of the major problems that everyone seems to have with Wall Street is the failure of effective management, one would think the new rules would make it easier to bring in new blood, not harder.
But none of that matters to Obama:
Mr. Obama said the cap strikes the right “balance” between fair compensation and proper stewardship of taxpayer funds. “This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset –and rightfully so–are executives being rewarded for failure, especially when those rewards are subsidized by U. S. taxpayers.
“For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy — and I will not tolerate it as President.”
Again, it’s hard to generate much sympathy for executives who’ve come begging to Washington. But at the same time, what point is there to heavy handed measures that don’t do anything more than satisfy some people’s jealousy and outrage? Shouldn’t these proposals be designed to put people back to work?
Marshall’s premise is that we are, without a doubt, headed for the “Greatest Depression Ever” if Republicans don’t just capitulate and spend a trillion bucks on whatever it is the Democrats say we should spend it on.
The discussion of what to do on the Democratic side tracks more or less with textbook macroeconomics, while Republican argument track either with tax cut monomania or rhetorical claptrap intended to confuse. It’s true that macro-economics doesn’t make controlled experiments possible. And economists can’t speak to these issues with certainty. But in most areas of our lives, when faced with dire potential consequences, we put our stock with scientific or professional consensus where it exists, as it does here. Only in cases where it goes against Republican political interests or economic interests of money-backers do we prefer the schemes of yahoos and cranks to people who study the stuff for a living.
The link, if your wondering (or even had to wonder) is to Paul Krugman.
So let’s recap. Only the sacred texts hold the answer. But it’s also true that “macro-economists” can’t conduct “controlled experiments”. And it is also true that economists can’t speak to these issues with certainty.
But, by George, we should listen to them anyway. And certianly not to Republican “cranks” and “yahoos” who only have the interests of “money-backers” at heart and are truly only opposing this for political gain.
No word from Marshall as to why a Senate of 57 Democrats and 2 Independents caucusing with the Dems can’t seem to get this passed, but assuredly the reason is the Republicans and their repudiation of the sacred texts.
And correct me if I’m wrong (speaking of controlled experiments), but the last time we did the Paul Krugman macro thing in the ’30s, the results were less than stellar.
Of course, at some level, why would Republicans be trying to drive the country off a cliff? Well, not pretty to say, but they see it in their political interests. Yes, the DeMints and Coburns just don’t believe in government at all or have genuinely held if crankish economic views. But a successful Stimulus Bill would be devastating politically for the Republican party. And they know it.
Obviously Marshall hasn’t paused long enough in his rant to take a breath and realize that the stimulus package is going to pass in some form. What he’s whining about, and casting aspersions over, is the fact that the Senate Republicans (and the House Republicans as well) refused to bow at the altar of the the newly annointed and take that package of bacon without checking to see if it was spoiled. And besides, if the Republicans only have the interests of “money-backers” at heart, I’d be pleased to hear an argument which logically supports their desire to “driv[e] the country off the cliff” economically.
Yup, doesn’t resonate with me either.
If the GOP successfully bottles this up or kills it with a death of a thousand cuts, Democrats will have a good argument amongst themselves that Republicans were responsible for creating the carnage that followed. But the satisfaction will have to be amongst themselves since as a political matter it will be irrelevant. The public will be entirely within its rights to blame Democrats for any failure of government action that happened while Democrats held the White House and sizable majorities in both houses of Congress.
The public, of course, is showing much more sense than Marshall, with support for this massive mistake dropping to 37% according to Rasmussen.
And, to be clear here, if (and when) the bill does pass (since it is clear that Marshall hasn’t figured that out yet – it isn’t “if” but “when and with what”) then Republicans will be able to hold Democrats responsible for creating the debacle that follows, correct?
So either way – the failure to pass it or the responsibility for the failure that occurs when it passes – rest in the lap of Democrats.
Works for me.
Hope and change.
Bruce wrote earlier that the stimulus bill, in it’s current form, invites a Trade War with the rest of the world. Naturally, the protectionist elements of the bill had many of our trading partners both worried and miffed.
The EU, for example, has been struggling with the issue over there, and began tossing off warnings of a trade war. The EU Ambassador to the united States, John Bruton, expressed those warnings frankly.
The EU warnings came in letters to US political leaders in Congress, Timothy Geithner, the Treasury Secretary, and Hillary Clinton, the Secretary of State. Mr Bruton urged them to respect the decision taken by the G20, the world’s leading economic nations, in Washington last November to resist protectionism as a defence against the crisis. They are expected to meet again in London in April.
“Failing this risks entering into a spiral of protectionist measures around the globe that can only hurt our economies further,” he wrote.
“Open markets remain the essential precondition for a rapid recovery from the crisis, and history has shown us where measures taken contrary to this principle can lead us.”
Back in Europe proper, the language was bit less guarded and diplomatic.
The European Commission’s powerful trade department, a bastion of open markets formerly headed by Lord Mandelson, said yesterday that the “Buy American” clause was “the worst possible signal” that could be sent to world trade.
A spokesman said: “We are particularly concerned about the signal that these measures could send to the world at a time when all countries are facing difficulties. Where America leads, many others tend to follow.”
In responding to those concerns, Pres. obama seems to have backed down a bit.
Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.
“I agree that we can’t send a protectionist message,” he said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”
Congratulations to Pres. Obama for realizing the toxic effect that outright protectionism would have on world trade, and economic recovery.
MoDo is in full anti-capitalist mode and boy I guess it feels good to finally let loose:
The president’s disgust at Wall Street looters was good. But we need more. We need disgorgement.
Disgorgement is when courts force wrongdoers to repay ill-gotten gains. And I’m ill at the gains gotten by scummy executives acting all Gordon Gekko while they’re getting bailed out by us.
18 billion taken from the government vs. 885 billion taken from the people. In which case are you sure “disgorgement” will never occur?
And that begs the question: who’s the looter here?