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Reverse payday
23 Sep 2008 07:24 pm
I'm still gathering my thoughts on bailout and regulatory solutions, hopefully for an omnibus post tomorrow morning. Here's a question: a lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally? I mean, yes, they make the law. But my understanding is that while you can grandfather in benefits, you can't retroactively punish people for behavior that was legal when committed. Can Congress reach in and retroactively void a private contract? I'm not asking for commentary on the wisdom or morality of such a move, just whether it would withstand a court challenge.
Congress wouldn't be voiding anything. The executives themselves would be doing that in exchange for the bailout. Quid pro quo.
MLaJ is right. They would have real trouble actually forcing the execs to give up their pay (seizure of private property without due process and all), but they certainly can condition disbursements from the Treasury on private actors doing what they want.
Congress cannot just seize lawfully obtained bonuses.
Doing a quid pro quo will be done for show, small amounts by prominent people, but not for real money.
If you made $10 million in bonuses why on earth would you return that? In return for what? Your employer not going bust or not firing you? Well you can just retire, or, if you are really talented, someone will want to hire you anyways (not like European and Asian billionaires would not want a few insiders to know what stuff to buy at panic prices). And besides, not that likely that a bailed out company is going to have any similar level of pay. It's like saying, please return last years bonus and if you work for us for 30 years more you can make it back........
Don't forget the real bailout money is in bailing out BONDHOLDERS.
IMNAL, but look what happened to those KPMG executives who were prevented from receiving company funded legal advice because the govenment demanded it. (Thompson Memo Slapdown) The courts didn't like that one bit. I imagine something similar would apply here.
Maybe it won't matter, maybe they'll just quit if they think it isn't worth their while to stay under the new conditions.
Only problem with the quid pro quo theory is that the individuals are not party to the bailout, their employer is.
Ex post facto laws are forbidden in the constitution, and generally that would apply here. Anyone else have an idea?
Ed
They can certainly do it against *future* earnings as part of the agreement. But what's done is done and the only incentive for CEOs to agree to such a deal against past compensation is if they personally would be better off from the bail out than from keeping the extra $100m they "earned". And in some cases this may be the case.
Megan: Great question.
Suppose they found that there was some element of fraud -- would that be grounds for clawing back past compensation (saying it was based on fraudulent financial statements)
IF a lot of the bad actors have already been shown the door or are on the way out, I see problems in trying to break a legal contract.
If congress enacts an ultimatum: bailout or your golden parachute and bonus, it would make more sense for the CEO to say "Screw you guys, I'm going home", and take bonus.
I am not a lawyer, but there may be an issue of forcing someone to sign something under great coersion.
Yes, it is legal since the companies have the freedom not to participate in the bailout program. Basically, Congress would be setting the terms for the contract between the Treasury and, say, Morgan Stanley. If the Morgan Stanley execs want to participate, then they agree to the terms, including a cap of their pay or re-payment of already earned/banked compensation. Or they decide not to participate. Congress isn't retroactively "voiding" a private contract, it is creating a new contract with the company.
Would there be any constitutional obstacle to adding a huge (say, 95% or more of what remains after state and local taxes) surtax on all compensation in excess of $1 million from any corporation that has received a bailout. payable next April?
Generally speaking, retroactive tax cuts and hikes don't automatically trigger ex post facto problems, do they?
> Congress cannot just seize lawfully obtained bonuses.
They seize about 30% of mine every year.
I believe that the top marginal rate reached 99.25% during FDR's reign..
If Congress wants to stop the bonuses, they can just pass a tax law.
The courts have read the "no ex post facto laws" out of the Constitution, except for crimes.
So: I have no doubt that Congress could confiscate anything they wanted under color of law.
Not that it seems at all legal to me, in a deeper sense.
You could change the tax code to include these types of payments as income and then increase the marginal tax rate above say 2 million a year to 90%. Or you could amend the constitution.
To claw back pay and bonuses, the government would have to show fraud. There is no problem with making such conditions for a bailout, but only a moron would give back pay and bonuses for a bailout unless the ultimate upside were worth even more.
Such proposal from politicians doesn't surprise me- it is pretty stupid.
> Congress wouldn't be voiding anything. The executives themselves would be doing that in exchange for the bailout.
Most of the execs that we're discussing aren't going to be keeping their jobs anyway. They have no reason to agree to anything, and if Congress tries to cut a deal with their employers (the firms), then there's a good court case about reneging on promised compensation.
The US government needs the bailout far more than any particular exec does.
If Congress tries to seize compensation, they'll do it via the tax code... the way they always do.
Hell, if congress is going to rob every holder of dollars by printing 700,000,000,000 new ones why not rob a few more people?
Since this bailout ridiculously leaves both stockholders and bondholders intact, Congress could certainly require that any agreed upon payments be discounted by the amount of golden parachutes, etc. paid out in the last year and take it from the company's equity instead of the taxpayers pocket. C
Related note: I'd bet that at least part of what the FBI is investigating is whether some of the profit based bonuses at the recently failed companies were inflated through fraud.
"I'm still gathering my thoughts on bailout and regulatory solutions, hopefully for an omnibus post tomorrow morning." -- Megan McArdle
Well, yeah, seeing how you used to be a libertarian and now you're favoring (while, of course, grossly understating the impact and precedent of) a 3/4 trillion plan for socialization of part of Wall Street and a bail-out of some of society's richest and most irresponsible people I would image you have quite a lot to gather, dear.
When you're done gathering those before-mentioned "thoughts" perhaps you can begin an on-going series of posts on topics like 'Things I Was Wrong About' or 'Why Neither Libertarianism Nor Total Deregulation Works In The Real World' or 'Ways My Buddies In Finance Have Perhaps Profoundly Damaged America.'
Really, I don't want to be too snarky but it would seem some reflection, both serious and prolonged, would be in order.
Think about it. This is your chance to be more than a well-intentioned hack occupying an admittedly original niche in the blogosphere, i.e. cute libertarian MBA gal and all around shill for high finance. This is your opportunity to do more than, oh, simply find folks you respect (on Wall St. or in right-wing think tanks or economics dept.'s) and then regurgitate their takes (in-between oddly endearingly posts about cooking and your Mom), all the while rolling your eyes at anyone who hasn't mastered the terminology of the people who got us into this disaster.
Have none of your ideas and precepts been challenged by the events of these past few weeks? (Perhaps it's too early to ask if you've actually learned anything, but, my God, shouldn't you, at least, be questioning yourself? Libertarian to corporate socialist is some journey, lady.)
Rise to the occasion. I doubt you will, frankly, but here's hoping I'm wrong.
Instead of all of this nonsense, lets just get at the underlying fundamentals:
The mortgage securities are bad because some fraction represent loans people cannot pay. Some of these people cannot pay loans because they don't have jobs or their income is too low.
Why don't we cut payroll taxes? This would immediately boost the economy, resulting in job creation and also boost take home pay. The number of mortgages facing foreclosure would fall, meaning the value of these assets would rise. Reduce interest rates to help this process.
Combine this with allowing commercial banks to borrow from the fed's discount window freely, and we would buy the time we need to get out of this crisis.
The only costs would be potential inflation. To head that off, how about direction some of this 700 billion dollars in spending to creating new energy sources. That is the primary driver of inflation anyway.
As above, it seems like these are voluntary contracts between firms that would like to sell their assets and the government. The government can ask for whatever it would like. The firms may not choose to participate.
Damn. Beated. I have one other idea I'm sure no one else has come up with. Consider the meltdown a ticking time bomb threat and torture the CEOs so they make the correct decision.
They probably can't and the whole thing is a cheap political exercise. It's pathetic. They have their money and that's that.
The thing to do is to delegitimize them. Use some good old fashioned demagoguery to make them objects of scorn, with names and pictures. Put them behind their gated homes and on their ocean going yachts and keep them there. Then let's move on.
Paulson is worth maybe $600 million. Finance which accounts for 15% of GDP has accounted for as much as 40% of corporate profits in recent years. Thus Paulson's $600 million. They are pigmen.
Only problem with the quid pro quo theory is that the individuals are not party to the bailout, their employer is.
The execs have fiduciary duties to act in the best interest of the shareholders and maximize shareholder value. It would arguably be an actionable breach of the duty of loyalty by a corporate executive not to sign onto the bailout because he doesn't want to give up his bonus.
Can Congress reach in and retroactively void a private contract?
They're talking about changing the interest rates on existing mortgages, are they not?
How is that different?
Fines for fraud = de facto "clawback"
Re: 'bailout and regulatory solutions,' Becker has the best critique so far. Several of your commenters suggested that the money market mutual funds should not be protected (Becker agrees) and gave good commentary on this view. One thing the BP proposal did was to give time for GS aand Morgan Stanley to become commercial banks and avoid the 'mark to market' CDO rule in Sarbanes-Oxley and that is done. The present danger is too try to protect too much from my vantage point. Becker states that he doesn't think the FMs bondholders should have been necessarily made whole. So what if the money market mutual funds contract. An FDIC guarantee was not written in invisible ink notable when you put flame near the paper. Besides we're taking about a minor correction. As for people not wanting WAMu paper well maybe w/o a guarantee it should be more expensive. As for a run on the bank, most people don't want to carry $6,000 in bills to the car, a check from a Federal Reserve Bank would seem safe. It may be that the small platoon that was really running this financial combat was beginnng to get stressed, fatigued and asked for more artillery than it really needed to give them and the system room to operate.
Just a reminder/agreement with the commenters above: the constitutional prohibition of ex post facto law is largely toothless. It only applies to criminal law, thanks to the atrocious (but ancient) decision in Calder v. Bull. I'm not sure how that plays in here, but it is important to remember that ex post facto civil penalties (e.g. cash) would seem to be legal.
Acme Finance Company: Would you to give us back $10M in pay so that we can get a government bailout?
Discraced Ex-CEO: Um... No.
Acme Finance Company: Oh, look, I just dropped a scrap of paper with the access codes to a numbered account opened by our Swiss subsidiary containing $11M.
Discraced Ex-CEO: Okay, here's my $10M.
Let's say the ex post factor clause is considered not applicable because it is not a criminal matter--I don't think that should be the ruling, but hey, courts do what they want these days...
I still think a clever lawyer could and *should* argue that such a money grab against a non-willing exec (who cares not what happens to his company and isn't going to play ball just because John McCain and Barney Frank are on moral high-horses) is a "bill of attainder"--a removal of a person from the protection of the laws (usually used in the past of Merry Olde England so that the Parliament could punish someone without actually using legal processes that they weren't sure they could win). I think this would absolutely apply in this case--otherwise you could use civic actions or administrative rulings if they had actually done something legally actionable.
In other words, despite what Congress does and despite whatever whimsical mood a judge is on decision day if a ruling is issued, this kind of thing being proposed is exactly what the bill of attainder and ex post facto clauses were designed to prevent--the use of leglislative power to hound someone and hurt them physically and financially, via the law, because the legislators didn't like them for whatever reason.
For all the fall-la-la about "fascist Bush regime" we hear today, both left and right now routinely do stuff with governmental powers that would have made the Founders howl (how do I know this...well, when it was done to them they did revolt. Unless I missed "God Save the Queen" being played at the last baseball game I went to).
We have forgotten why some clauses in the Constitution are there. Its not because Madison and gang spent the night after a trying trip to Restoration Hardware relaxing at the ye olde Starbuckes trying to think of what the most noble way to run a government should be, and what penumbras of rights they could tease out. No. There is a reason each clause is there, and it ain't because they were reading their Chomsky. To truly understand the document, I think you have to understand the history of English abuse of power and corruption of the rule of law for political purposes, circa 1530-1775 (keeping in mind that English adherence to rule of law was probably the best in the world at that time).
For the Founders, it wasn't just ideology or some abstruse theories they kicked around while law clerking and hoping to get that great community organizer job. As a class, while they never agreed wholeheartedly with each other, they were all basically trying to prevent abuses that had happened once before from happening again. Some of the abuses they had seen first hand, some they knew about because they knew their Greek, Roman, and English history.
If we forget why they did what they did, and what motivated them, and continue to treat absolute clauses in the Constitution as less important than what emanates from penumbras, than we deserve to be ruled *via* law, not to have rule *of* law. We will have hammered our chains for ourselves, and have richly deserved them.
Generally speaking, Congress can impose retroactive civil laws, though I think SCOTUS has imposed some restrictions on this. Congress could probably create a new retroactive system of civil penalties designed to hit the execs in question.
Timeout, guys.
-No, the quid-pro-quo route doesn't work, because the CEOs might not even work there anymore. What do they care if their old employer gets the bailout? This isn't Japan, folks. No one here commits suicide for dishonoring the firm.
-Yes, there are other ways it could happen, without retroactivity. For one reason, the overwhelming majority of these CEOs' earnings were on fraudulent pretenses and they can likely be sued (if regulators cared about that kind of thing) on that basis. So, it's simple: they give up the earnings in exchange for immunity from such a lawsuit. I can imagine a chilling effect, but not if it's narrowly tailored enough.
Keeping in mind Mark Twain's saying that "if I had had more time, I would have written a shorter letter", my answer to why we should not go after the legally obtained earnings of those who got us into this mess if they choose not to play in a quid pro quo arrangement with their companies:
"Good cases make bad law."
I.e., A method that gives a righteous result today will give a tyrannnical one tomorrow.
You ask " a lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally?"
Following precedent established in drug cases, law enforcement will simply arrest the bonus, golden parachutes and retirement packages granted these scumbag CEOs (in drug cases "scumbag" is a legal term referring to the guy whose money and property was arrestd). Because the bonus etc are not human beings, they do not have civil rights and may be held without bail and without being charged with a crime. The property that has been arrested is assessed for the costs of confinement and apprehension including legal fees (which are enormous)and is usually sold to auction to reimburse the law enforcement agencies for the high costs of making the arrest and enforcing the law.
The Fourth Amendment still stands but it only applies to property which is human.
From Section 9 of the United States Constitution: "No bill of attainder or ex post facto Law shall be passed."
Of course, I'm sure there are legal theorists out there who could figure out away around this.
The execs have fiduciary duties to act in the best interest of the shareholders and maximize shareholder value
This is a common misunderstanding. The officers and board of directors of a corporation have a fiduciary to act in the best interests of the corporation only. They do not have any fiduciary duties to individual shareholders, and they certainly do not have any duty to "maximize shareholder value."
As for the substance of Megan's post, I agree with MLaJ. If a company wants to take advantage of the government's bailout offer, then the government can condition the terms by which the bailout is delivered just like any party could before entering a contract with another party.
To follow up on sol's point, I think if the feds want the money back they will be able to get it.
If I was the government and I wanted the executives to give up their retirement accounts I would get the executives' lawyers on the phone and say "RICO". All the financial firms are so interconnected and over-leveraged that it would be easy to allege a conspiracy to commit fraud, especially with people that have a fiduciary responsibility to shareholders.
It would be hard to prove fraud, but the government usually doesn't have to prove fraud to get what they want in a case that can come under RICO. RICO changes the evidence laws and it would be easy for the feds to find someone willing to explain exactly how the "conspiracy" operated.
The executive would choose between giving the money to their lawyers and possibly spending their retirement in jail or just giving the bonus to the feds, who will freeze the assets early in their investigation anyway.
I'm not an attorney, but it seems like another possibility is a fraudulent conveyance approach. Under fraudulent conveyance law, a company that is insolvent is prohibited from making preferential transfers. I don't think would work for pure employees, but it might for the bonuses of employee-shareholders and directors, and it might for dividends to shareholders and possibly bond payments.
Suppose someone in some other field is grossly overpaid by contract, while grossly underperforming.
Kevin Costner gives us Waterworld, Katie Couric gets lower rating than Dan Rather, Mo Vaughn hits on the Interstate while pushing his belly around in a wheelbarrow for the Mets ... all for around $15 million per, give or take.
Following public outrage, do you tear up their legal and valid contracts and use force to make them give the money back?
No ... you (should) fire the person who handed out the contract (the Mets' former GM Steve Phillips has now moved on to be an "expert", ahem, commentator at ESPN) ... the owners of the business that paid the contract get stuck eating it ... going forward, they learn from getting burnt to look for better business managers and to design better contracts that maybe are more performance related.
That's the way things should be.
If you think contract terms are often underhanded and outrageous now, let populist rage revoke them retroactively then wait to so see how under-the-table and outrageous they become as the parties try to figure out ways to protect themselves from retroactive rage in the future.
a lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal
This should be in the tutela valui section of the bill. It arises out of the sense that the taxpayers are being violated. Things proceed from there like a negotiation between ex-Governor Spitzer and one of his escorts: 'If you are going to violate me, then how do I get to violate you?' Tutela valui, "I've been well and remain that way because I have protection," is the pretty girl's tattoo.
I really don't want to go down that road of ex-post-facto laws and bills of attainder. What's to stop Congress from passing such against a previous administration of the opposite party? What greater motive would an executive have to declare a state of emergency and martial law?
That is the sort of thing that happened in Rome, in the waning days of the republic.
Public shaming! That's the ticket! Detail, in simple terms, just who was in charge for the last ten years in each financial institution and what they were paid.
They already have their walking-away money. If they want it to grow let them invest it with a brokerage.
Section 10 of Article I of the U.S. Constitution prohibits states, but not the U.S. Congress, from enacting laws "impairing the obligation of contracts." However, the Supreme Court held that state laws imposing a moratorium on mortgage foreclosures, at least during the economic emergency of the depression, didn't violate the contracts clause. Home Building & Loan v. Blaisdell, 290 U.S. 398 (1934).
A U.S. Congressional effort to impair contracts might run afoul of the Fourth Amendment prohibition on taking property without due process, and contract rights are usually considered property; but my guess, without researching the issue, is that it's far from a sure thing.
sve: nice astroturfing. youlre clearly a leftist posing as neutral-but-upset-with-megan's-supposed-change-of-views. from my pov megan's view that fractional reserve banking needs occasional rescues is not socialist. sure, it ain't randian either, but then neither is fractional reserve banking, now is it? so she's consistent and you're making believe that she's not. jerk.
The issue is not shaming or punishing the CEOs, satisfying though that would be. The issue is limiting the bailout to companies that really need it. Limits on future executive salaries and board compensation gives them an incentive not to simply take the federal bucks because it would be easy money. The idea is that the only companies taking the money should be those in extremis. It both limits the exposure of the public and forces careful calculation on the part of the bailees.
And count me among those readers looking forward to Megan's rethinking of the real-world limits of her "free market" philosophy. I'll give her a couple of more days, but I do want to hear about the soul-searching.
""The mortgage securities are bad because some fraction represent loans people cannot pay. Some of these people cannot pay loans because they don't have jobs or their income is too low.""
That's probably on its way, but its not the source of the _current_ problem.
At the moment, people may or not be able to pay. The problem is that they'd be STUPID to pay, whether they can or not. The property covered by their mortgage is only worth a fraction of the outstanding debt. The market is still falling. And in most cases, the lender has no personal recourse against a borrower who just walks away. The lender's remedy is limited to claiming the property. So lots of borrowers have done the perfectly sensible thing and walked.
In many, perhaps the majority, of cases the defaulting borrower never had any real equity tied up in the property, was often not even living in the property, and was engaging in fairly blatant real estate speculation. The mortgage broker knew the borrower was a speculator, but got them an owner-occupied rate anyway. Often, the mortgage maker knew the broker was pulling their leg, but made the loan anyway. After all, real estate loans are a risk free investment nowadays...prices never go down.
Anyone expecting these borrowers to ever pay anything is going to be disappointed.
I think the only precedent to date is Dick Grasso, the fmr. head of NYSE.
Ex post facto laws apply only to criminal laws, but bills of attainder apply to civil laws:
"[L]egislative acts, no matter what their form, that apply either to named individuals or to easily ascertainable members of a group in such a way as to inflict punishment on them without a judicial trial are bills of attainder prohibited by the Constitution." United States v. Lovett, 328 U.S. 303, 315 (1946).
Based on that language, I'm not sure that any congressional act can force executives to disgorge their compensation.
As to fiduciary duties, a director is personally liable for losses to the corporation that are proximately caused by a breach of those duties. This is not a disgorgement remedy--unless the director misappropriated corporate assets. Otherwise, the director ponies up for the losses actually caused by the breach (and nearly every director pays huge insurance premiums to cover such a breach). It would be very difficult to prove that any loss to the corporation was caused by a director choosing not to enter into an asset purchase scheme. Presumably, the company was already going down the tubes, so it would be difficult to show that the failure to accept the bailout caused the losses.
As to fraud, it's too soon to conclude that directors or officers were engaged in such practices. Even if they were, the remedy is disgorgement of funds to the defrauded buyer or seller. This means that the money would not go to the government or even to the company that they worked for (unless they defrauded the company).
As to civil asset forfeiture, the government can only seize the assets if it is traceable to certain criminal activities, including criminal fraud, terrorism, narcotics sale and trafficking, money laundering, and RICO. It's a civil case, so the burden of proof is only "more likely than not" and the initial seizure only need be based on "probable cause." Still, you have to lay out a criminal case showing that the bonuses amounted to pay for criminal activities. Seeing as how the government has yet to prove a criminal options backdating case, I very skeptical about this as an option.
Plus, any of these punitive measures would be ineffectual, and they provide no incentive for directors and officers unload all of these illiquid assets on the government. If that's the case, then why bother funding a $700 billion program that no one will use while letting the country fall apart?
Immoralist: I hope you're not a corporate lawyer. Corporate executives owe fiduciary duties to BOTH the corporation and the shareholders. Which is why executives can be sued in a derivative action (on behalf of the corporation) and by individual shareholders or classes thereof suing on their own behalf. If this is a common misunderstanding, it's one shared by every Chancellor and Vice Chancellor on the Delaware Chancery Court and every Judge on the Delaware Supreme Court.
It's not a bill of attainder. A bill of attainder can't apply to such a large class of persons.
By definition ex-post facto laws are laws designating an act as a crime after the act has already been committed. Bills of attainder are legislative acts declaring someone guilty of a crime, typically but not necessarily treason, without a trial, thereby forfeiting the person's life and property. The constitutional language prohibiting bills of attainder and ex-post facto laws simply doesn't apply to Megan's question. My earlier post referring to the due process clause of the Fourth Amendment was in error; it's the Fifth Amendment, which als prohibits taking of property, including contract rights, without just compensation. The due process and just compensation clauses of the Fifth Amendment appear to be the clauses applicable to answer the question. Obviously, if the contract was procured by fraud, it's voidable; but that's hard to prove and unlikely in any event. If the executive failed to perform his duties, he's breached the contract and is liable for damages; but again that's an extremely difficult case to make in court. It's doubtful congress could legislate a forfeiture of a fired executive's contract rights.
Immoralist: I hope you're not a corporate lawyer. Corporate executives owe fiduciary duties to BOTH the corporation and the shareholders. Which is why executives can be sued in a derivative action (on behalf of the corporation) and by individual shareholders or classes thereof suing on their own behalf.
I'm sorry, but this is simply incorrect. You mention derivative suits in an attempt to bolster your argument that corporate officers and directors owe fiduciary duties to individual shareholders, but you subsequently note (correctly) that such suits can only be maintained on behalf of the corporation. This undermines your entire point: A derivative action is only maintainable upon a showing that a director/officer has violated his or her fiduciary duty to the corporation.
You then go on to argue that a fiduciary duty exists between corporate directors/officers because a shareholder can file suit in an individual capacity against direcotrs/officers. My answer is: so what? The capacity of a party to sue and be sued does not necessarily imply the existence of a fiduciary relationship. Anyone can file suit against anybody else for any number of reasons--tort, contract, etc. A fiduciary relationship does not arise between corporate officers/directors and individual shareholders merely because the latter can sue the former.
Geez, did you guys get your legal education from watching Law & Order? wph has the right idea, "fraudulent conveyance". To back up a step-- most companies faced with insolvency don't have the taxpayers bailing them out,so they end up in bankruptcy court. This means the existing shareholders are wiped out, the creditors call the shots whether to continue the enterprise or to liquidate and there's a 2 year clawback period on fraudulent conveyances.
Surprise surprise, these banks won't be required to file for bankruptcy to get government relief from their debts. I suspect these well established (and clearly constitutional) "reverse paydays" are a big reason why.
11 USC § 548(a)
(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)
(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)
(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
Ex post facto constitutional provision only applies to criminal cases. But why can't Congress tie the aid to companies that have required executives to pay back huge bonuses? If companies don't want the aid and to impose that condition on executives, then go with God.
The problem with the "fraudulent conveyance" piece is that while it's legally correct, in most cases these companies weren't insolvent until they were insolvent. In other words, for a firm that is always operating at 30 to 1 leverage, it may be always "insolvent" in one sense, but not in fact solvent until it can't borrow money at low interest rates. That's what happened to Bear Stearns, Lehman, etc. So, fraudulent conveyance would be exceedingly hard to prove.
Of course, "difficult to prove" and legal-acts-that-it-wants-to-prosecute has rarely stopped the USA for the SD of NY.
But why can't Congress tie the aid to companies that have required executives to pay back huge bonuses?
Because at least some executives will say no, and at that point the only way for the company to get it back is to go to court on some pretty dodgy legal theories. The executives will fight, the whole thing will bog down, and the financial aid, which is supposed to be needed NOW NOW NOW, will be, presumably, held up pending the litigation, rendering it useless for its declared purpose.
Can Congress just seize what it wants, in a naked grab? I really doubt it. The implications are just staggering, and I think even Charlie Rangel and his cronies would hesitate to cross that Rubicon. Even if they did, I doubt the courts would let it stand. Aside from the bill of attainder clause, there is also the takings clause.
Perusing the arguments above, I see that no one, not even the staunchest right-winger or the most die-hard libertarian, is maintaining the pretense that these captains of industry were 'worth' their compensation. Iow, yet again, certain parties were wrong (surprise), while others were right (again, surprise).
What is galling, of course, is that this will never be admitted, or admitted in such a way that those concerned will change their behaviour: witness those who were right and wrong about Iraq, for instance, and who's still calling the shots, and who's being shut out.
So how about a compromise? Let's say that those companies wanting to avail themselves of federal aid must first specify that their high-rankers publicly apologize on national TV, and admit that they were never worth that much money to begin with. But that's as far as it goes, let them keep their ill-gotten gains.
And of course, if they refuse . . .
I suspect an apology blasted through the MSM will do much more to avert this sort of bad behaviour in the future than simply confiscating the booty after the fact. And of course, if this aids in the cause of specifically crafted punitive taxes, so much the better.
Immoralist: I don't have time to cite you a litany of cases, so just google "officers owe fiduciary duties to shareholders" and look at the first result:
"A fundamental tenet of corporate law is that directors and officers [1] owe fiduciary duties to their shareholders. Those general fiduciary duties owed to shareholders include: (1) duties of care; (2) duties of loyalty (i.e., no self dealing); (3) duties of disclosure; (4) duty to act in good faith; and (4) duties to act in a manner reasonably believed to be in the best interests of the shareholder."
And, yes, the fact that a shareholder can sue an officer or director in his/her individual capacity for breach of fiduciary duty means precisely that an officer or director owes fiduciary duties to the shareholder. If there's no duty, there's no valid claim for breach of the duty. If there is valid claim, then a duty must exist. Seriously, are you an attorney?
Past bonuses are probably safe from Congressional intervention. Retirement packages, however, are just obligations of the respective corporations, and the gentlemen who got us into this mess can damn well get in line with the other creditors.
Beowulf:
The problem with your example is that the Bankruptcy Code (the "Code") provision you cite does not apply unless a petition is filed seeking the protection of the Code (aka filing for bankruptcy). The Code only applies if a voluntary (or involuntary) petition is filed. In the case of the bailout, the whole point is to avoid all of the other onerous provisions of the Code that would treat equity holders in a manner that could shake confidence in the market.
That said, each state has its own fraudulent transfer laws that may provide for the disgorgement of bonuses paid, particularly those paid to insiders, provided the company was insolvent at the time of the transfer. Now comes the hard part... determining the solvency of each company subject to the bailout, and whether bonuses or other compensation may qualify as fraudulent under applicable law. Not impossible, but don't hold your breath waiting for the Delaware AG to follow up.
ERISA be damned?
Yes, let's just ignore the laws to punish those deserving of punishment. Since it's taking too long, let's just mob up and kill them. It works in India, so why not?
Oh please. You guys are sitting here talking about the compensation being based on false pretenses, but what were those false pretenses and fraudulent earnings?
The earnings statements were a product of Mark-To-Market rules, the same thing that is killing the banks now. At the time these gains were realized, the ABX index was trading very tightly, so all the ABS desks were marking their Super Senior CDOs at essentially 0 loss and paying a rather small premium on the equity and mezz tranches they bought protection on from investors. That's mark-to-market rules for you. The market-implied-probability of loss for what the banks had was 0, and they made a killing in fees and bid-ask spreads. But the actual probability of loss was probably quite high, so everyone was mismarking their books because they had to, by law. Otherwise, they could be accused of hiding earnings and subject to stiff tax penalties.
What's fraudulent here except the homeowners who decided to get a $500,000 mortgage on a $60,000 salary?
BKWhopper:
Yes, the Code only applies in Bankruptcy. Think of this as an out-of-court restructuring, where the lender is using its leverage--as the party saving the borrower from (get this) having to file for bankruptcy--to demand consessions from the insiders of the borrower. These often include forgoing bonuses and reducing (or deferring) retirement packages; and (get this) often the insiders even agree to forgo the bonuses and retirement packages. Why? Because they realize the alternative is to file bankruptcy and they realize (or maybe just believe, incorrectly) that they'd be worse off in bankuptcy.
And if you doubt that there will be a bunch of shareholder suits seeking to recoup bonuses and other payments, you're fooling yourself. There's no need to wait for the Delaware AG.
What's fraudulent here except the homeowners who decided to get a $500,000 mortgage on a $60,000 salary?
Let's see, taking toxic paper, slicing it up and combining it with other sliced up toxic paper. Then they somehow get the new paper rated at AAA and sell it off as AAA paper. If you think that there was no fraud present in these deals, you're naive.
Zaleriana:
We appear to be in agreement regarding the application of law and I made no comment regarding out-of-court agreements. I agree that consensual out-of-court restructuring proposals with voluntary disgorgement provisions do not require any application of fraudulent transfer law and likely offer the best avenue for limiting executive compensation. My point is simply that fraudulent transfer law may be an ineffectual tool for the disgorgement of bonuses and executive compensation. Even if there is a rash of shareholder suits, factual determinations of solvency and adequacy of the compensation are no sure thing (to say nothing about the likelihood of actual recovery).
"Let's see, taking toxic paper, slicing it up and combining it with other sliced up toxic paper. Then they somehow get the new paper rated at AAA and sell it off as AAA paper. If you think that there was no fraud present in these deals, you're naive."
How do you think the AAA rating is given by the ratings agencies? While I disagree with the government's policy of granting S&P, Moody's, and Fitch's an oligopoly over the last 15 or so years, not sure how this is fraudulent. Do you even know how the ratings are given? The AAA ratings were on super-senior tranches. That is because no one expected (given historical data of mortgage default and housing prices) that a 15-100 tranche of such a portfolio would get wiped out. Sure, they were subprime, but the earlier vintages of subprime loans did not give losses to such portfolios. The biggest problems were with 2005 and 2006 vintage bonds. To a great extent, that was due to lax underwriting standards by the mortgage lenders (nothing to do with the investment banks), and outright fraud committed by appraisers, brokers, and home buyers. Yes, people have been warning about the crisis for years, but the AAA ratings for SS tranches were given based on historical data, which of course doesn't apply when lenders relax underwriting standards and buyers commit fraud.
To put another way, say that a BBB rating implies 30% prob of default in 5 years and AAA implies 1% prob. If there are 100 bonds in a portfolio and if the correlation is at like 40% or so, with 70% assumed recovery in the ABS market, to get a AAA super-senior (15-100) CDO tranche to suffer losses (as opposed to just notional write-down), you would have to have a huge number of the bonds default. Even a 30% prob of default in 5 years would not yield more than a 1% prob of any loss. The problem was that the correlation was more like 90% and the actual mortgage bonds were junk-level given underwriting standards, but Moody's, et al. weren't really looking that way. They were just looking at historical data.
I can see how it might be difficult to condition a bailout on clawing back compensation already paid out. However, my understanding of what was being proposed was that the clawback was only on such compensation granted based on fraudulent claims. That's kind of different. If a CEO basically lied about doing a good job and got a big bonus for it, he should give it back. Personally I hate those big bonuses as a general principle, garnered fraudulently or not; but that's not what was proposed.
Of course, it doesn't matter to the corps; they're already crying about how they'll not be able to attract "qualified executives" if they can't hand out these giant perks to bribe them into working for them. Which is baloney, but that's their argument.
Of course, it doesn't matter to the corps; they're already crying about how they'll not be able to attract "qualified executives" if they can't hand out these giant perks to bribe them into working for them.
Does anybody else think you could find Indian executives willing to do the same job at 1/10 the cost (or less)? It works for call centers and engineers, why can't it work for the people in the corner offices?
Even if they fail miserably, we're only at the same place the high paid talent led us to. If experts are to be believed, the current situation closely approximates the worst-case scenario.
But they'd probably do better, if for no other reason than (for awhile anyways) the "investment community" would be keeping a much closer eye on what they were doing.
The "golden parachute" agreements that I have seen were in consideration for the executive taking the job. Once the executive accepted the job and started work, I think the executive had a property right that the government cannot void without just compensation.
What's already been paid out is water under the bridge, except where it's recoverable as part of a fraud prosecution (c.f. Franklin Raines).
The most potentially offensive aspect for taxpayers (at least this taxpayer) is the possibility of executives receiving outsized compensation because of the bailout.
For example, the CEO gets a bunch of stock options at the (currently depressed) market price, and, due to the bailout, the stock rises precipitously and he walks away with a big payday. This strikes me as pretty easy to deal with within the framework of the package.
John McCain's statement that the executives at these companies shouldn't make more than POTUS strikes me as idiotic. The kids in the mailroom make more than POTUS. However, requiring renegotiation of future retirement payouts seems within the realm of reasonableness.
While it's difficult to establish in statute what will and won't be allowed, what could be required is that the company's incentive plan and the retirement packages of the officers be approved by an independent, non-partisan oversight board prior to purchase of securities from that company.
Butbutbut, but Matt, that would mean the Free Market didn't accurately price the compensation of these high-flyers!!
It would also mean that you favor government intervention into the free market. What are you, a Socialist or something?
I still say let the chiefs keep their loot; instead, make it a condition for companies seeking relief that their corporate echelons publicly apologize on TV with no weasel words. No "I regret that in retrospect some actions taken by the executive controllers may be seen by some to have been responsible for this collapse in value"; instead a sincere mea culpa "It is _my_ fault that this happened, and I others who were paid not to let this happen bear full responsibility."
_That's_ what needs to be seen on TV during prime time.
Back to the question at hand:
"[A] lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally?"
Probably not without the consent of those who would be affected by the disgorgement unless there is some showing of actual (and not constructive) fraud. As you point out: "you can't retroactively punish people for behavior that was legal when committed."
The freedom to enter into a contract and receive the benefit of that contract is fundamental to the Constitution. That said, courts (but not Congress) may find contracts related to compensation packages void for a variety of reasons including that they violate public policy. As for Congress, any law that altered the terms of executive compensation retroactively would not likely stand up to any legal challenge.
I suspect that all of this talk about executive compensation is election cycle bloviation to address the sense of unfairness felt by most of their constituents.
No, it's to get these malefactors to 'fess up. To take responsibility. To admit that they were wrong. To admit that the Free Market did _not_ allocate resources the way it's proponents said it would.
I notice that no one on the libertarian side has even remotely admitted to anything like this; which makes them (still) part of the problem and not the solution.
SOV:
Who exactly would you identify as the malefactors? The problem with the notion of getting malefactors to stand up and take responsibility is that this meltdown is the result of millions of very small bad decisions enabled by a lack of regulation and oversight. The problems were systemic and too many people were complicit from the homeowner who borrowed too much (based on optimistic projections of future earnings), to the broker who facilitated the mortgage (based on a commission/bonus structure), to the bank who sold the mortgage (based on a commission/bonus structure) to the I-bank who securitized the mortgages to the rating agency who overrated the mortgage backed security, to the investors who failed to recognize the risk in their investments, to the government (both parties) who deregulated the industry.
The list of malefactors is not limited to just those who negotiated high compensation packages. Almost everyone involved played the game according to the rules as they knew them to be. Hedge fund and mutual fund investors, brokers and individual investors all played their part too. At this point we cannot single out malefactors, we are all in this together like it or not, we elected the politicians who deregulated the financial services industries, and they did exactly what they promised us they would do. It may seem fundamentally unfair that some should walk away with golden parachutes, and it is, but life isn't fair.
You are not going to get your pound of flesh on this one. You want to make things better, pay attention to what the people running for office tell you they plan to do and vote according to who will produce the outcome you favor if they are able to achieve those goals.
Nice to see the maoists are out in force.
You're all still genocidal criminals who should have no place in society and should be hanged for your crimes. Stop trying to continue your crimes by hounding capitalists and accept your responsibility for th murder of 100s of millions around the globe.
Megan, why are you joining such a genocidal cause?
Congress screwed up, lead by leftist criminals like Barney Frank (genocidaire and pimp).
Truck, why don't you actually read what I write? The point is not to get my 'pound of flesh' (yeah, that's a real argument against my proposal - somebody, somewhere will think that this is just 'what they got comin' to em'. So of course we have to scuttle the proposal on that basis), the point is to get some unambiguously acknowledged accountability so that the same thing doesn't happen again further on down the road.
That's not a difficult concept to get, nor does it speak well of you that you either don't get it, or pretend to not get it.
As to assembling a dragnet where everyone involved is caught up: no, I don't think that everyone will be picked up. But that's not what I'm asking. I'm asking that those who made millions over the last few years (and there's not _that_ many of them) because of generous compensation packages which include stock awards be made to publicly acknowledge they messed up.
It looks to me as if you're trying to pretend that no one is at fault. If that's not the case, you need to elaborate. But if you don't, I'm going to assume that you're just doing the same old same old 'mistakes were made' passive defense.
Which makes you part of the problem, bub.
So, care to respecify what you meant?
SOV,
Is it your position that anyone who made millions over the last few years because of generous compensation packages which include stock awards is a malefactor?
Perhaps they should have been bright enough to foresee the meltdown and protect the long-term stability of their corporate entities over short term gain (a debatable point), but suggesting that amounts to malfeasance per se does not add up. I would also bet that among those who have golden parachutes, no one thinks that they have anything to admit because they were operating within the letter of the law.
Like professional athletes, they negotiated for their compensation with their employers and they are entitled to be compensated based on their contracts. The amount of money that was made is not relevant to the level of culpability.
With the exception of those individuals who broke the law (and should face criminal liability), the problem is systemic and accountability should come in the form of regulation that prevents these problems prospectively. You really want to find fault, let's start with Phil Gramm and Bill Clinton. Phil proposed deregulation and Bill signed it into law.
Short answer: no, they can't take it back.
Telling firms that trying taking it back is a condition for participation in the bailout is like telling someone that their livelihood will depend on their pet not peeing for the next week.
This policy is also an invitation to litigation that will surely penalize their shareholders.
More idiocy here from Senator Baucus who, for some reason, reminds me of Mr. Magoo.
Led:
The article you cite has no references to case law to support the assertion that directors owe fiduciary duties to shareholders.
The reason I argue that directors lack such duties to shareholders is because having identical fiduciary duties to both the corporation AND shareholders creates a significant conflict of interest. Sometimes, the interests of a corporation and its shareholders are not in alignment. Suppose I am a shareholder who has come to expect annual distributions of cash dividends. Suppose the corporation in which I own stock has fallen upon hard times, and needs the extra cash to invest in a new product. The shareholder thinks it is his best interest to receive the dividend; the corporation's best interest is to invest the cash. What does a director who owes fiduciary duties to both the corporation and shareholder do?
Anyone who made the big bucks, and who defended it by saying they were worth it, and were being paid to make the sorts of decisions that only they could make. And who then oversaw the decline in value of their companies as they ran them into the ground. Yes. Exactly.
Point one: They should have been (bright enough to forsee the meltdown and protect the long-term stability of their corporate entities over short term gain). It's not as if lesser lights, not nearly as generously compensated hadn't been saying the same thing for years. The "Who could have known" defense simply does not fly, given the number of people who did know.
Point two: Don't conflate malefactor used in the general sense with malfeasance used in the legal sense. If I had thought that these people had committed crimes which should be followed up by prosecution and jail I would have said so.
Point three: Again, never said anything about the law. That's your invention. I want them to admit that they were not worth what they were being paid. I want them to admit that they did a very poor job of managing other people's money. That's not illegal, the last I heard.
And - you know I'm going to say this, right? - it's been pointed out for years that the groups are simply not comparable in terms of performance. You don't see people kicking nearly as much about the salaries of professional athletes or other entertainers because the metrics for measuring their performance are both obvious and objective. If someone is signed up in the major leagues to a $20 million contract on the strength that their batting average is 0.328, and hit 47 home runs in one season, then yeah, I'd say they were worth it. The business types who say they are 'worth it' can't point to any such metrics. If they could, people wouldn't be so het up about their out-of-line compensation.
And again, it's not a matter of compensation, it's a matter of - as you say - culpability. I want them to acknowledge that they are culpable. What is your problem with that anyway?
I'm glad we agree that the problem is systemic. That's exactly why I'm making the sorts of recommendations I'm making. Until we get this free market nonsense disposed of once and for all, until we finally banish the notion that what people make have much to do with what they're worth in a large number of cases, until conservatives and liberatarians admit that governement oversight and regulation is necessary, etc., we'll just be seeing more of the same ten and twenty years down the road.
No, it's not the case that what we have here are a few bad actors and a few ill-considered regulations, or alternatively, good legislation that was repealed. The problem is, as you say, systemic.
I'll close by asking again, since you don't seem to want to answer the question, what is wrong with setting as a precondition for aid getting these people to publicly admit that they were not worth the money that they were paid, and that they performed badly? Your opposition seems to be rather refelexive, rather than thoughtful.
It has been a long time since I went to law school and this is nowhere near my area of expertise. I do recall that for years, trustees would make extremely conservative investments for fear of running afoul of their fiduciary obligations (which is a bit like strict scrutiny if you want to analogize to a scale more people are familiar with. N.B. My recollection is that the rules were significantly relaxed over time). Corporate managers are subject to a far lower level of scrutiny: the Business Judgment Rule. This means managers can pretty much do whatever they want unless they run afoul of the much harder to pin down Public Outrage Rule. This generally leads to the classic Human Sacrifice Stratagem--see, inter alia, Nick Leeson.
Immoralist:
I think the direct duties referred to are to minority shareholders in close corporations. Such shareholders certainly can sue for actions that harm them (freeze-outs and the like) and directors and officers do owe them fiduciary duties.
Not so public corporations, whose minority owners can just sell out if they don't like it.
But I'm too lazy to dive into the issue deeply enough to be sure.
SoV: what do you hope to accomplish with an apology? I'm fine with it, but I don't see what it will accomplish; talk is, after all, cheap. In 5 years, who will remember it, and how many people will think it was anything but given under duress/
Rob:
Agree completely with you about the rules re: close corporations. If I'm not mistaken, shareholders in a close corporation actually owe something akin to fiduciary duties to each other because of the nature of the business entity, i.e., the small number of shareholders. Also, in close corporations, the shareholders frequently manage the business itself; hence, the need for fiduciary duties towards one another, to prevent the kinds of actions (freeze-outs) you mentioned.
Thanks for the elucidation.
What do I hope to accomplish? A failure to repeat this mess. As someone else said, and I agree with wholeheartedly, the problem is systemic. And one of the biggest problems is the 'conservative' or libertarian take on economics that is so often put forth as the justification for quite horrendous policies.
And while you might be right about the efficacy of my proposal, you have to admit that it won't cost much. By your own estimation :-)
I think you're wrong though. Once the apology and the admission is on record, if any of these tarnished titans tries to recant, a skeptical quizzer can then ask if they really do think their efforts on behalf of the company was worth $100 million even as its stock was been sold for cents on the dollar. I don't think anyone, even the most sycophantic host on FOX news will be anything but skeptical at that point.
Public apologies are not worth the paper they are not written on. As I recall, McCain apologized profusely for his role in the Keating 5 scandal and that does not seem to have hurt him at all. In fact, his ability to publicly acknowledge his mistakes has been cited as one of his most endearing qualities.
Maybe. Maybe not. I happen to think that 'fessing up to the fact that these upper echelons were being paid way more than they were worth is something the public kinda thinks already. To recant would cause more harm than good. There's also the fact that it seems to be pretty much a done deal that CEO-type compensation is going to go waaay down(at least, that's what I hear from the WSJ, the NYT, the Post-Dispatch, NPR, etc.)
It's kind of hard to take back what you said five years later if in point of the industry standard for top echelon pay is less than one half of what it was in 2007.
In any event, why are _you_ kicking? I don't see that these sorts of public acknowledgements would harm anyone; the worst that could happen is that they simply wouldn't stick. And on the up side, if they _do_ work as intended, for very little cost a great deal of good has been done.
Not kicking, just pointing out that you are tilting at windmills. If you think it is worth it, have at it Quixote, just don't make resolving the crisis dependent on it.
Really? That's not what you initially said at all. You do realize that in fact, your two posts cannot both be true, don't you?
Hmmm . . . let me ask: do you think that these head honchos, Mozilo,Fuld et al were worth their salaries?
No evasions, please. I wish to discount the possibility that you think conservative ideology has not been roundly refuted and shown for the empty shell of justifications that it really is.