The Wall Street Journal reports that the pay czar, Kenneth Feinberg, is going to cut executive comp at 7 TARP recipients for the 25 most highly paid employees.
Does this really mean anything? The press will noise it up as significant (and some outlets will no doubt finger wag at this “interference”) but the short answer is no.
First, recall Feinberg’s hollow mandate. He is limited to only TARP recipients, not the beneficiaries of other forms of government largesse. And as anyone who has an operating brain cell knows, the number of firms on the dole and the degree of subsidies is much greater than the TARP. Have a look at the Fed’s balance sheet for a reality check. Even Larry Summers said,
There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.
So let us look at the list of companies affected. AIG, Bank of America, Citigroup, General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial. AIG is effectively nationalized but is allowed to operate as a private company, a simply bizarre state of affairs. Pay cuts falls well short of the oversight the government should be exercising (any private owner with that big of a stake would have thrown out the board and installed new management, for starters, and be all over AIG like a cheap suit). So this is an overdue, token measure to appease the public over the AIG retention bonuses that were also extended to clearly non-essential support staff, which is a clear tipoff that they were also extended to non-essential management.
Four of the companies are auto bailout related, so we can exclude them as far as implications for big financial firms are concerned.
Citigroup is an obvious ward of the state too, and he AIG argument applies there. The government should have more control there too, which does NOT mean micromanagement. When the Swedish nationalized their banks, they replaced management and set strict goals and targets, but did not interfere in operations. Bank of America may look like a borderline case, but it would be dead now had it not gotten emergency infusions. Given its credit card losses, Merrill, and Countrywide (for starters) combined with the sudden exit of Ken Lewis, it may well be in worse shape than is now perceived.
The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.
If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.
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Very succinct takedown, keep up the good work.
I wonder if the federal judge(Rakoff?) overseeing the B of A/Merrill post-merger litigation will have anything to say about a $125 million going away present for this Lewis.
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Stuart
If they are worth that much money to the american taxpayer they should be locked away in a vault and heavily guarded.
These guys are worth WAY more than gold ounce per ounce.
How does the government intend to keep these businesses competitive when the top business minds in these particular companies will move elsewhere to get properly compensated for their efforts. Altruism is fine in fantasy land, however we are dealing with the harsh reality of a competitive business environment that is going to see the energy and intellect of these companies stripped dry.
I suggest you look at Virkam Pandit’s work history. He did not have anywhere near the experience you would like to see in a CEO of a bank as big and diverse as Citigroup.
I am certain you can find someone with at least as good credentials for far less money. And that is true throughout finance. Many people lose their perch in their middle age by being in the wrong place at the wrong time, rather than lack of skills. There is a tremendous amount of beached talent in America that would be delighted to work for the paltry pay of a mere million or two a year.
As DeGaulle said (quoting Clemenceau), “The graveyards are full of indispensable men.”
“The graveyards are full of indispensable men.” True that.
I can only imagine that Christopher has never met one of these CEOs or executives. Unfortunately, I have. Peter Principle, my friend.
Yeah competition is a bitch isn’t it? Maybe those companies taking the bailouts don’t deserve the top performers?
I am quite skeptical that you cannot find good people to run an organization for under $1,000,000/year. That maybe true if you are an NCAA football or basketball coach but even the big football and basketball powerhouses manage to find someone to run the actual university for less. The Chancellor of the University of California was picked up for the bargain price of $750,000 which, itself, raised some eyebrows.
The United States Navy, Air Force and Army manage to find qualified commanders to run their organizations for what, to Wall St., would be chump change.
Maybe if we gave our auto and bank executives spiffy uniforms and awarded them decorations for superior service they too could find career satisfaction in other ways than trying to extract as much money from their companies in the shortest possible time as they can.
Maybe if we gave our auto and bank executives spiffy uniforms and awarded them decorations for superior service they too could find career satisfaction in other ways than trying to extract as much money from their companies in the shortest possible time as they can.
You do realize that’s a pretty good working definition for fascism, right? Corporate managers working closely with government for their mutual benefit?
There are a few names conspicuously absent from that list, notably JPM, WF, GS, and MS. The public has been duped into thinking that bailout is synonymous with TARP. As if FDIC guarantees on a firm’s bonds, backstopping of losses on assets, and the Fed’s alphabet soup programs (and the conversion of a couple of firms to FHCs to be able to access them) do not count. Pathetic.
The Pay Czar is going to cut compensation? What goddamm great theater! Not only should their pay be cut, they shouldn’t even be employed.
I’m reluctant to engage Yves Smith in argument, but fools rush in where …
Here’s another flavor of consideration: “Pay cuts” do not logically exclude “the oversight the government should be exercising” nor is it impossible (in the literal sense) to encompass the remaining “direct or indirect beneficiar[ies] of trillions of dollars of taxpayer support for the financial system.” The latter policy is as much a political question as the current policy is. I believe that your best argument is that Feinberg’s doings camouflage little or nothing else being done – and for that, we do have evidence.
So then why should Feinberg do it? Because somebody must clearly indicate to the community at large – and the finance community in particular – that we reject (in paraphrase) that State and Economy are separable like State and Church. Apart from the cultists, most people – despite the wide range of particulars – have two conditions on justifying extreme inequalities in their community: 1) We are better off with the inequalities than we would be without them and 2) The inequalities, at least, harm no one. (One might recognize the Rawlsian character of this, but even as a “marxist”, I know that class struggle is to eliminate the inequalities between classes, and not the inequalities between personal talents, attributes, etc.) So people might find it a bit ridiculous that men playing children’s games make millions a year, but accept it since they feel no abuse about it. But bring an economy to a near grinding halt – well, somebody needs their pay docked.
The NY Times (http://www.nytimes.com/2009/10/22/us/22hire.html?ref=todayspaper) today reports of 500 applicants for a $13 an hour job. That’s less than 28 grand a year. That means two people both making that kind of money could barely squeeze themselves and a kid or two into the middle class. The problem isn’t that Feinberg’s scalps don’t address the causes – the problem is that not enough scalps have been taken. The cultists will, of course, dismiss this as “envy”, but to people for whom a concept of “fairness” is never anything more than to what parties in a bi-lateral exchange “agree” regardless of the bargaining power of the parties, nothing much can be said.
Still, I’m as congenitally cynical about the prospects of more being done as I sometimes sense you are. But even if it is futile and pointless, I feel no empathy at all for the 175 people who have lived, I am quite confident, better than most people in the entire history of life on Earth. If life is just unfair, it’s their turn. They may take their skills and talents and expertise in search of a $13 an hour job …
The pay cuts are window dressing to provide the appearance of having done something when more fecal matter hits the circulating blade down the road. Yves is right; the USG should be doing much more in terms of effecting management changes within these organizations. We also should extend this control beyond TARP infusions. We should also clawback the AIG passthroughs that provided GS with more funds (with no strings attached) than their original TARP funds.
As far as hobbling these firms relevant to their non-TARP competition, why not figure out other ways to hobble the non-TARP firms? We need to drive down the percentage of GDP occupied by the financial sector; it’s simply not productive for the rest of society or future economic growth. We might actually see an improvement in productivity and standard of living if some of our best and brightest focused on making stuff again instead of trying to divine ways to extract fractions of a cent from artificially inflated stock market churning (does anyone actually believe that HFT was beneficial?).
“We need to drive down the percentage of GDP occupied by the financial sector; it’s simply not productive for the rest of society or future economic growth.”
That is the most basic, simple truth about this whole issue. Until we drive down the percent of GDP occupied by the financial sector, we will remain in trouble.
Oh, Look: NO GOLDMAN SACHS!!!!!!! Who’d’a thunk it????