I'm not sure what to think of Ken Feinberg's restrictions on executive pay at firms that received extraordinary help from the government. On the one hand, like everyone else, I'm outraged at the sight of bankers paying themselves big bonuses out of profits made on the backs of bailouts and implicit guarantees that they can't "pay back". On the other hand, this doesn't touch the current worst offenders, who have paid back their TARP funds. Restricting bonuses only at the companies in which we now have a gigantic stake is emotionally satisfying, but bankers aren't just talking their book when they complain that talent is getting poached from bonus-limited firms. I know it's fashionable to believe that traders are all a bunch of lucky, arrogant idiots, but there is some skill involved, and firms that lose their top people will probably underperform.
So how much am I willing to pay, in tax dollars, to make this well-deserved gesture? Some. But the recession has lowered the amount I'm willing to spend on gestures.
I suppose there's always the hope that this will encourage firms still in hock to the government to work as hard as possible to pay us all back. But it's not a hope I'm awfully confident in.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Megan,
Be careful not to get too far out in front of this story. Steve Labaton is so far in the tank he looks like the Tid-E-Bowl man.
Pay particular attention to this line in the story: "The plan, which was written by Kenneth R. Feinberg, the official at the Treasury Department in charge of setting compensation for bailed-out companies, will be made public in a few days."
The plan hasn't even been publicly released.
You are clearly being spun by the New York Times - which wants you to think that Obama is ending multi-million paydays for bankers.
But nothing could be further from the truth. Tell me ... is there a substantial difference between a TARP banker earning $20 million this year rather than $40 million last year? He's still rich beyond anyone's wildest imaginations. Only now the government is paying him with our tax dollars.
Before Feinberg's plan has even been released, it is being spun by the New York Times. I ask you: Given their history of support to the Obama Administration, can you trust stories like this from the New York Times?
The Wall Street Journal story is far more informative. They quote Citigroup employees admitting that the Feinberg salary slashes are a hoax.
"... several Citigroup officials briefed on the company's dialogue with Mr. Feinberg's office said salaries and total compensation of the company's highest-paid employees aren't expected to shrink dramatically.
"Partly as a result, some Citigroup officials on Wednesday dismissed as political posturing reports that Mr. Feinberg intended to slash pay packages by 50% or more.
"One executive described it as "a bit of a hoax."
The fix is definitely in. Obama is guaranteeing that the gravy train continues unabated. Citigroup employees are openly mocking Feinberg in interviews with the nation's largest newspaper.
"He's still rich beyond anyone's wildest imaginations."
To quote my favorite political philosopher Han Solo: "I don't know, I can imagine quite a bit..."
Well, I for one am glad that our multi-billion dollar banks are run by guys who think there is, in fact, quite a substantial difference between $20 Million and $40 Million, and prefer the latter.
Let me ask this: Do we know how much these banks owe right now, and how much they are in the process of paying back right now?
I would think that a more effective solution would be to tie executive compensation/bonuses to a level consistent with the amount the bank owes to the government and the payoff of that loan.
Just off the top of my head:
1. If 100% of the original loan value is owed, then executive compensation is limited to 40-50% of what would otherwise be paid..
2. If 80% of the original principle is owed, and 20% paid back (plus interest), then executive compensation is limited to 60%.
Etc.
Instead of punishing executives for being at firms that suffered the worst (through bad decisions that the entire financial planet was making), why not incentivize them to structure their bank operations in such a way that they pay back the people as soon as possible and end their obligations.
That, of course, would also improve their balance sheet and most likely yield much better stock prices, further rewarding said executives.
So far, all I've read (which, granted, could be 10% of the story), is that those executives should have their play slashed.
The problem with that is that will mean that these executives will do whatever it takes to get their firms out from gov't debt (not that they aren't already doing this, given all the other gov't restrictions on them). That means they will pay off what they owe the gov't regardless of long or even medium-term effects on the bank, or the bank's abilities to loan out money. Which, of course, means you first have to ask why we were lending money to these banks to begin with, since at the end of the day they're going to go belly up and they aren't going to help alleviate the credit crunch.
At the end of the day, we should have either let these firms fail, or nationalized them outright. This half-assed stuff is just exacerbating our problems.
More clumsy moves from this brilliant administration... But then again, I'm one of those "no such thing as too big to fail" people. Had these giants fallen, this would be a non issue.
The root cause of executive (including bank) pay being so out of touch with reality lies with a lack of regulation and transparency at Boards of Directors. Instead of being governing bodies, they have become essentially good'ol boys.
If Obama & Co. wanted to impress people with their populism, this is where they should have focused. The trouble, of course, is that this would deeply alienate the very same billionaires who were paying $30,000/plate to have dinner with POTUS a couple of night's ago. Who do you think the good'ol boys are, if not these very people.
Kabuki populism is one thing, but real reform would bite the hand that feeds Obama and the rest of the establishment.
"Instead of being governing bodies, they have become essentially good'ol boys."
And girls! Ruth Simmons probably tapped into your deep sense of justice born out of her African American studies background when she signed off on those Goldman pay packets.
It would behoove you to read a textbook on corporate governance. Pretty much everything you have written here is wrong or misleading. I don't have time to explain how in any detail, but maybe somebody else here can do so.
A quick summary. Regulation of boards is not normally a matter of federal law but rather of state law. In Delaware, there is a huge, extensive and thorough set of legal rules governing what directors can, can't and must do. Federal interference would disrupt this settled law and lead to a great deal of uncertainty.
Directors are not billionaires. Sometimes they are what you call "good ol boys" but more often they are not. The reason that their stewardship is often lacking is not primarily a function of a smoke-filled-room mentality. Directors are poorly equipped to carry out the roles they have been given.
Real reform of corporate governance is needed, but it is an enormously complicated problem that needs to be handled, at least in part, at the state level. It can't be done in a big rush by a federal administration.
Question:
I haven't heard anyone say that AIG's aircraft insurance unit wasnt' anything other than a profitable and well run part of the company. Why shouldn't the executives at AIG Aircraft Insurance get the pay they were promised?
I can only assume that having lost considerable sums on AIG stock and finding out they are having their pay slashed, they will be more than happy to head over to Alliaz or AXA's aircraft insurance division.
If I were an AXA or Alliaz executive I'd be calling the guys at AIG to see what it would take for them to leave so I could use them to taking all of AIG's business.
"Why shouldn't the executives at AIG Aircraft Insurance get the pay they were promised?"
Because they agree not to when their boards sold the company to the US taxpayer.
AIG is no longer a private company. It was sold to the United States Department of the Treasury.
These people are no longer employees of a private company ... they are employees of the Federal government. And so we should absolutely limit their pay since we don't want government employees making these obscene salaries.
It's important that, as taxpayers, we screw these people ... so that other companies have an incentive not to become recipients of tax dollars paid for by middle-class Americans.
Then why won't they just take their business to AXA or Allianz?
They can. But they might be a bit skittish about doing something at AXA or Allianz that would result in those companies becoming wards of the state. Or so we can hope.
I hope they do.
I don't care if they do. As a taxpayer that is the best possible outcome.
I want AIG to go bankrupt. Horribly so.
I want the taxpayer to lose billions and billions and billions of dollars on AIG.
That would create the only incentive for the government purchase of AIG to never, ever occur again.
As a taxpayer that is the best possible outcome.
Then our stake in AIG won't be worth anything and we'll have lost all that money.
@Jmo, who wrote: "Then our stake in AIG won't be worth anything and we'll have lost all that money."
Yes. Exactly. You've got it.
That's the best possible outcome for the taxpayer. Although we'd lose money on AIG, we'd save trillions by teaching the government that it is never wise for Washington to take over private businesses.
We'd also secure our freedoms that way.
The very last thing we want to teach the political class is that they can profit by taking over.
Yes, but one of the inherent weaknesses of our democratic/republic government is that you can't "teach" the government stuff. Even if you taught Obama, or taught all of today's voters, or taught the staffers in the agencies, there'll be a new administration and a new set of voters and a new set of staff in 10-20 years, ready to make the same mistakes again.
@movertyperguy, one would think we're teaching them that lesson pretty firmly with GM and Chrysler.
So if your company is sold, can the new owners invalidate your contract?
Just which of the Constitution's enumerated powers are being exercised to 'place restrictions on executive pay?' Perhaps the administration's abundant supply of toffs will enlighten us poor boffins?
Which of the Constitutions enumerated powers were exercised to bail out these firms in the first place?
This is all a joke though. Goldman Sachs would have gone belly up last year if it weren't allowed to become a BHC. It should be paying tribute to the American taxpayer in perpetuity. Instead, having raked in profits from proprietary trading (which produces nothing of societal value) after the Fed's QE goosed the prices of risky assets, it paid back the life-saving loan, so now it can go back to partying like it's 2006. This isn't sustainable, politically or economically.
If history doesn't repeat itself but instead rhymes, what will rise out of the rubble of the next collapse will be shmascism.
AIG (to cite one example) is not a private company.
It is wholly owned by the United States government, which can set the pay of its employees wherever it wishes to.
In the case of Bank of America and Citigroup, they were offered tax dollars only if they would agree to limits on executive pay. So, they are not being forced to limit the compensation of some employees. Their boards of directors willingly agreed to it.
The key question will be: Are these really pay cuts? The Administration, with the assistance of the media, is trying to convince Americans, in the absence of Feinberg's actual plan which hasn't been released publicly, that the Obama Administration is ending multi-million-dollar paydays for greedy bankers.
In fact, Feinberg's plan guarantees that multi-million-dollar paydays continue now and forever into the future. Only now these multi-million-dollar paydays will be funded by taxes paid by middle class Americans.
For example, the media is touting that Bank of America chief Ken Lewis has had his pay cut to zero. In fact, the government is giving him a $53 million retirement package.
Fifty-three million dollars.
That's some pay cut!
It's not a gesture. These cuts will completely fix the unacceptable situation of moral hazard caused by the TARP funds.
sigh...
Cuts? You really think there will be cuts? Not according to the Wall Street Journal:
"The largest single compensation package will be less than $10 million and is destined for a Bank of America Corp. employee, according to people familiar with the matter."
How is someone making $10 million a year getting a pay cut - in any substantial way?
$10 million a year is $192,000 a week. That's not a pay cut. That's a guaranteed lottery winner ... every week!
$192,000 per week is not a pay cut.
Every two weeks, that banker gets a check for three times more money than 99% of all Americans make in an entire year.
These are obscene amounts of money to be being paid for with your and my tax dollars.
Obama is the banker's best friend. Anyone who hands me a government check for $192,000 each and every week is definitely my friend.
Meanwhile, 7,000 more working men and women exhausted their $200 a week unemployment insurance benefit today, according to CNN.
Moverty, that's a pretty crass post.
$10M is a pay cut when you used to make $100M.
Andrew Hall essentially left Citi -- taking his $100M paycheck (a peak) from last year. He generated an *average* revenue stream is $371M.
Why kill the golden goose? He's taking less than 1/3 of his eggs.
So who will stay at the TARPed institutions? The losers that can't go anywhere else.
That said, these "cuts" might well be fiction.
In any event, this isn't going to end well for the taxpayer.
"$10M is a pay cut when you used to make $100M."
No, it really isn't. The average person just cannot fathom this because the average person is incapable of understanding numbers this large.
But once you are making a certain salary, the next million dollars has virtually no meaning. It isn't going to alter your life one whit.
Imagine for a moment that you make $90 million annually. What can you NOT purchase for yourself, your family or everyone else that you know? If I "cut" your pay to $80 million annually, would that change your lifestyle in any way whatsoever?
There is no fundamental difference between making $100 million a year and making $50 million a year. Is it technically less? Sure. Is it a cut in real life? No.
And since, for the most part, we're talking about government employees being paid with my tax dollars(AIG, GM, Chrysler, etc.) I'm having a hard time generating any sympathy for these oppressed peoples
Barack Obama is promising them million-dollar paydays as far as the eye can see and those who can't see through the charade are bitching about it.
You can't buy a sports franchise on 10M a year, but you can on 100M.
It was a joke...
mrpovertyguy,
your posts make me sick to my stomach. No wonder you are poor, with your entitled attitude.
you say the average person cannot fathom $10 million... that is you.
that doesn't mean it is right to deny others what was guaranteed to them before.
Just imagine you are paying your mortgage, and because you are doing better than someone else, you must give up your house and instead live somewhere else, forfeiting your equity built up over the years.
How is this just? Your views are so wretched.
Your tax dollars? Hell no. The top 1% pay 50%, and the top 10% pay 80% of the taxes. that means the people who owns the companies are the rich, which you do not qualify. So it is not your tax dollars that saved these companies. The rich essentially saved themselves.
Your substandard contribtion to the tax pool is indicative of a loser, because you failed at your career, you can only look at those who succeeded and be jealous.
I would predict that there will be more surprises in store for the TARP banks and bankers. I like to believe, and I think it is true, that at the bureaucratic level the Federal government doesn't really care if a debtor to the government succeeds or fails. The forms need to be filled out correctly, is all. Citi and BofA may find they need to install 1.7 gal. flush toilets, Energy Saver lightbulbs, and directors may need to put up jars of peaches and have those inspected to comply. Down the line, there may be an auction sale where every desk and chair are accounted for properly, including the rope we gave them. I think the reality of the situation is beginning to dawn on some people, after all Ken Lewis just wrote a check for a year's pay and skedaddled.
Well, the people whose pay is affected are government workers for all practical purposes. They're lucky they weren't forced into the civil service pay system.
Maybe (we can but hope) in the future executives at firms being offered a taxpayer bailout will consider this. Or not. But it may somewhat reduce the moral hazard.
wiredog,
What do you do for a living? You can be as general as you need to be to protect you anonymity. I'm just curious what business you could be in where you dont' understand how someone could be paid $10 million a year.
But I guess if you goal is actually:
I want AIG to go bankrupt. Horribly so.
I want the taxpayer to lose billions and billions and billions of dollars on AIG.
That would create the only incentive for the government purchase of AIG to never, ever occur again.
Then you've hit on the best way to accomplish your goal. Limit pay.
Oh right, you worked for a "non-profit" before you got laid off....
So.... help me here. It seems like what you are advocating would slow the recovery in the short-medium term and make it harder for you to get a job. I just dont' understand your rationale.
Software developer. Mostly government contracting. Where I have the same benefits as a govvie, but higher pay. Lower job security however.
I understand how someone can be paid 10 (or 100 (or 1000)) mil/year. But if, while being paid that, they run their company off the road and have to be bailed out by me, you, and that guy down the street, then they should be paid like the government workers they have become.
Then, in the future, others will understand the personal cost of running their employer into the ditch, and presumably avoid doing so. Or avoid taking a government bailout. One can say that this model (assuming the company collapses) collapses to the two possibilities of either becoming a civil servant, or losing one's job.
That's the theory of course. Practice often disagrees with theory. But it should reduce the future moral hazard somewhat.
. But if, while being paid that, they run their company off the road and have to be bailed out by me, you, and that guy down the street, then they should be paid like the government workers they have become.
Again, everything I've read says AIG Aircraft Insurance is a profitable, well run company, how can you say the executives in the aircraft division "ran their company off the road"?
The guys senior to them, in AIG overall, ran it off the road. Perhaps the guys in other parts of AIG are blameless, but they're still, now, government workers. But they are free to take jobs at other insurance companies if they want to.
My concern isn't with getting back every dollar the taxpayer put into AIG, which isn't going to happen. I want it understood by other players in the game that working for a company that gets government bailouts has consequences. If accepting a government bailout is just a guaranteed way of going bankrupt more slowly (as the quality workers flee for the exits) then that's OK. Front loading all the bad news last September would've probably made things much worse for all of us now.
I want it understood by other players in the game that working for a company that gets government bailouts has consequences.
So, if I'm running aircraft insurance business or the Asia life insurance division, I'm supposed to keep track of my own business and keep an eye on my own people, all the while keeping track of every other random division of the company? How can I run my unit if I also have to manage the team of spys I need to keep track of every niche business the company may be involved in?
So sell it off and pay off the government bailout. The new owners can pay whatever they want.
If AIG had gone bankrupt, that is what would happen. Any good assets would be sold. And the money paid to creditors. Since the government already paid off the creditors, they should liquidate. Failure now would not have the effect that it would have in the spring or late fall last year.
That would solve some of the moral hazard problems. Bail out, own lock stock and barrel. Apply government employment rules strictly, since they work for the government. Liquidate whenever the reasons for the bail out no longer apply. The reasons are that everything would have collapsed. Is that still the case?
I still don't know why they didn't do chapter 11.
Derek
Derek
This is an argument for the government not getting involved in the first place, which they shouldn't have.
But once they've spent the money, especially for the rationale that was proposed, it should be viewed as a sunk cost - a one time (hopefully) expense that was paid out in order to save the system from collapse.
This is unlike GM, which is failing because of a bad model.
movertyperguy, I don't understand what you are doing on this thread.
First, you either didn't read the articles or are having some trouble understanding the difference between stock grants and cash compensation. Cash compensation is being severely limited. Stock compensation is being less limited, but it is also restricted for four years and can't be touched. So in terms of take home pay, nobody is getting anywhere near 192,000 a week.
Second, the WSJ article quoted some Citi execs who were obviously spinning the article to put their best face forward. Why might Citi people try to make it seem as if their employee's bonuses won't be cut very much? Oh, I don't know, but I'm sure if I think about it a little. . . .
Meanwhile, the WSJ used that spin to deliberately distort what Feinberg is doing, and to deliberately distort what he claimed to be doing. But you cite the Citi insider's self-interested speculation as fact.
I'm relatively new here. Is this sort of thing fun for you? It seems like such a waste of brainpower.
"First, you either didn't read the articles ... "
How can you say that when I quote the article itself?
But since you say you're new to this game, let me educate you on how it works: The Obama Administration is selectively leaking Feinberg's proposal to favored reporters who they know will spin it positively in advance of its public release so they can spin it as a massive cut in compensation for bankers.
Why?
If it was a real cut they wouldn't have to spin it. It would be obvious. They could just release Steinberg's report and let it speak for itself. But they aren't doing that, are they?
People who have actually spoken with Mr. Feinberg's office as part of the negotiations of these pay discussions characterize what is going on as "political posturing." And I agree that is exactly what it looks like.
Those at Citibank admit Feinberg's plan is a hoax. And they openly admit this. In interviews with the largest newspaper in the country. Which I've quoted.
"... ome Citigroup officials on Wednesday dismissed as political posturing reports that Mr. Feinberg intended to slash pay packages by 50% or more. One executive described it as "a bit of a hoax."
Gee, I wonder why the Obama Administration would want to characterize its payment of billions of dollars of taxpayer money to the very bankers who ruined our economy as a "cut" in pay?
Why would the Obama Administration, in the words of Citigroup employees, be foisting this hoax on the American middle class who will pick up the tab.
I would wait on the actual plan being publicized before commenting on it. Also, I would be extremely curious about the absolute numbers of people affected.
Without that information, I am inclined to think this leak about a plan is nothing more than a political ploy without any real effect.
"'I'm outraged at the sight of bankers paying themselves big bonuses out of profits made on the backs of bailouts and implicit guarantees that they can't 'pay back'."
Are you any less outraged if those "profits made on the backs of bailouts" go to Goldman Sachs' shareholders instead of their employees? Why the bias for shareholders over employees? Presumably the shareholders WANT to pay their employees these big bonuses. If the gov. is still a shareholder, then I see why you have the bias, but not once the bank has paid back any government funds that it received. If your problem is the cost of implicit government insurance, then perhaps there needs to be a corprate level tax imposed on financial services firms, but I don't see how a transfer from employees to shareholders solves this problem.
Are you any less outraged if those "profits made on the backs of bailouts" go to Goldman Sachs' shareholders instead of their employees?
I think so people are more outraged at employees getting a big chunk of the profits. If all exmployees are being exploited equally then thats ok. But, if one group of employees has figured out a way to capture a big chunk of the profits - well that just makes the rest of rank-and-file America feel bad about itself.
I've worked at companies that only give 2% raises and the only way to get ahead is to switch jobs. Someone will stick around for 10 years and be making 75k and then they will bring in someone from the outside and pay them the going rate of 150k. The employee is often more enraged at the other guy making 150k, than he is at the company for massively underpaying him.
It's funny how people think.
The only times I've gotten raises bigger than 3% have been when I've changed jobs. That's normal these days. At least in gov contracting.
If they want to escape hanging, they might be wise to accept big pay cuts. But then if they were wise, the world wouldn't be in this fix.
Force them to recapitalize at a 2:1 or 1:1 rate to the level of compensation they pay until they are no longer propped up by government cash and guarantees. Or remove guarantees equal to the amount they pay out.
If these banks won't ever pay back what the U.S. has loaned them, is the U.S. control over things like salaries perpetual, or at some point will the U.S. write off the debts. When that happens, what happens to the powers of the salary czar over said company?
There is also a major risk of employees donating large sums to the party in power in order to sweeten their pay situation.
As for the examples of "the aircraft unit is making money" then I suggest we allow managers to take their units over as owners or encourage them to spin themselves off.
This should have been part of the original plan, in fact, to shrink these beasts.
Oh, and AIG....didn't they keep their experts to "wrap up" their business as only the insiders could? How is that coming? Is it "wrapped up" or not? Its only been a year now. How many years will they need to "wrap up" the business?
ABCNews confirms the Wall Street Journal' report that the Obama banker pay plan is an elaborate hoax. It's merely political posturing.
"The details of the Obama administration's efforts to curb excessive compensation on Wall Street emerged Thursday, with dual announcements from pay czar Kenneth Feinberg and the Federal Reserve Board. And while the potential loopholes do not appear large enough to drive the proverbial armored truck through, the securities industry is already set on finding ways to continue to pay traders and investment bankers exceptionally well, by any measure.
"Whether by deferring compensation over a couple of years, or paying more of it in the form of stock, the majority of Wall Street firms will still be able to pay people very well, in some cases more than before," said Eric Moskowitz, head of compensation consulting at New York-based Options Group, a global executive search firm focused in the financial industry.
Multi-million-dollar paydays with taxpayer funds for as far as the eye can see.
Cite: http://abcnews.go.com/Business/wall-street-firms-find-ways-government-pay-cuts/story?id=8894602
You are mistaken. Taxpayer funds yes. But not from yours, because you contribute less than 20% of tax, if at all. If you are really poor, you actually take money from the rich while sitting on your ass and complaining. The top 1% of incomes contribute 50% of taxes, and the top 5% of incomes contribute 80% of taxes.
don't flatter yourself. the rich people saved themselves, without your help.
What good is money, past a certain point ?
A means of keeping score.
A Patent of Nobility.
Power.
Anyone care to estimate the importance,
utility, and use of the above,
to the Players ?
why no action on Fredie Mac compensation?
http://www.google.com/hostednews/ap/article/ALeqM5iZnfNIDibBZ2lgBu_KVRX_wauO2AD9B32MUG1