Thursday, February 05, 2009

Hang Onto Your Wallet

February 5, 2009, 1:15 p.m.

Wrong Target and Too Many Loopholes
(brought to you by*)

There are at least two things wrong with the President Obama-Secretary Geithner plan to limit executive compensation.

It's a relatively superficial and unsuccessful public relations effort to put lipstick on the Wall Street pigs that fails to turn them into hockey moms.

It's a diversionary tactic to take the public's eye off the ball. So what's the real problem? The real problem is not the $18 billion in undeserved bonuses, it's not the $50 million private jet plane. So what is it? It's the now some $2.5 trillion the Fed has given these guys (but refuses to tell the public and media about), plus the $350 billion we gave them with no strings attached that produced no measurable benefit for the country's taxpayers, plus the New York Times report that "the administration is expected to unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks" (presumably on top of the $350 billion Congress has already appropriated for this purpose).

["The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral." Mark Pittman, "Fed Refuses to Disclose Recipients of $2 Trillion,", December 12, 2009.]

Even if executive compensation and other personal excesses were 99% of the problem, instead of 1%, what Obama and Geithner have proposed (so far) is little more than a collection of loosely woven loopholes.

The Times also reports:
Past administrations have also been critical of excessive pay, but corporate executives have found ingenious ways around limits, often hiring consultants to create new forms of compensation. . . .

In 2007, the latest year that figures are available, the largest participants in the bailout program paid their chief executives an average compensation of $11 million, including salary, bonus and benefits. Of that amount, according to a review by Equilar, an executive compensation firm, only about $844,000 was cash salary. About $2.5 million was in a cash bonus, with the bulk — $7.4 million — in stock awards, and the remainder in benefits and perks. . . .
Stephen Labaton and Vikas Bajaj, "In Curbing Pay, Obama Seeks to Alter Corporate Culture," New York Times, February 5, 2009.

In other words, even if the Obama proposals weren't riddled with loopholes, even if they were seriously and successfully designed to restrain abuse, as we've already learned from painful past experience, including that of last year, "corporate executives have found ingenious ways around limits" (see, e.g., Nicholas Johnson, "It's Not Their Behavior, It's What It Reveals" in "No More for Wall Street!," October 1, 2009).

But wait, it gets worse as the Times story continues. Corporate executives won't have to "find ingenious ways around these limits." Geithner has kindly written those ingenious ways into the very rules to be applied to his friends and former colleagues. Just look at these loopholes -- which I've excerpted and numbered 1 through 12:
President Obama . . . needs to deflect a growing populist outrage over sky-high pay among the banks and other companies now on the public dole. His announcement comes just days before the administration is expected to unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks.

The new rules would set a $500,000 cap on cash compensation for the most senior executives, curtail severance pay when top executives left a company, restrict cashing in on stock incentives until government assistance was repaid and prod corporate boards to closely scrutinize luxury perquisites like private jets and country club memberships. . . .

Past administrations have also been critical of excessive pay, but corporate executives have found ingenious ways around limits, often hiring consultants to create new forms of compensation.

Even the new rules allow companies some leeway.

(1) While giving shareholders a say in bonuses above the cap and restricting when stock incentives can be cashed in, the rules do not place limits on the size of such awards, which have become the biggest part of many compensation packages.

(2) [T]he toughest new rules apply only to large companies seeking government assistance to survive.

(3) They do not apply to the more than 350 institutions that have already received bailout funds, only to those that seek aid under the next phase of the bailout program.

(4) [C]ompanies that seek aid but do not need exceptional government assistance can waive the $500,000 pay cap, as long as they submit their executive pay policies to a nonbinding shareholder vote. . . .

(5) If banks return to the government for more money, the new rules would require a reduction in pay, but not in stock awards . . ..

(6) The rules would not prohibit a lower-level executive, like a stock trader or investment banker, from continuing to receive tens of millions of dollars in pay.

(7) Officials also emphasized that several of the proposals would not be made final until after public comments had been considered.

(8) During the Bush administration, the Securities and Exchange Commission adopted new rules promoting better public disclosure of executive compensation . . . but none of that put a significant dent in executive pay. A recent study by Equilar, a compensation research firm, found that the chief executives of the 10 largest financial services firms in a survey of 200 companies with revenue of at least $6.5 billion were awarded a total of $320 million last year, even though the companies had mortgage-related losses of $55 billion.

(9) The plan does not limit the size of bonuses that can take the form of restricted stock above the $500,000 cap — though companies would have to give shareholders a nonbinding vote on such awards. Indeed, troubled financial institutions are already giving executives significant sums of restricted stock . . . in some cases . . . making up 60 percent of executives’ total compensation.

(10) The plan does not appear to prohibit a financial institution from sponsoring a major golf tournament . . ..

(11) At a White House briefing, senior officials repeatedly declined to answer whether the plan would prohibit a company like Citigroup from paying $400 million to have its name on a baseball stadium.

(12) It is also unclear whether lucrative pension plans would be banned.
So far as I'm concerned, before we even think about loading any more trillions of cash on bank executives, and debt on my great-grandchildren, I want three things:

1. Some benefit to flow from the current "stimulus package" or other programs to those Americans who aren't paid millions of dollars a year and who don't fly around in their own private jets -- adequate appropriations for and distribution of food stamps, unemployment compensation, healthcare, and jobs.

2. A full and transparent report of what was done with the first $350 billion for bankers and $2.5 trillion in loans from the Federal Reserve -- who got it, what did they do with it, what did the taxpayers get in return, and what perks and benefits were paid to the recipients' top executives while this was going on.

3. Something resembling the kind of business plan and assurances a small town banker would want to see before loaning $50,000 to a new start-up business. Who will this new money be going to? What do we predict the recipients will do with it and why? How and why will that help the economy for the rest of us? What enforceable, meaningful conditions will be written into the grant/loan to make sure that happens? What will be the cost/return to taxpayers? How does "buying up toxic assets" differ from "a gift"? What is the "exit strategy" -- that is, what are the mileposts, what is the likelihood additional multi-billion-dollar "loans" (gifts) will be required in the future? Why will the oversight/transparency be adequate/effective? What is the rationale/historical precedent/theory as to why this program will correct our economic ills? What is the worst case scenario regarding the impact of this massive debt on a future runaway inflation or other adverse consequences?

Those are some of the things I'm going to be looking for next week when Obama-Geithner "unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets."


Related Blog Entries on Global Economy and Bailouts

Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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