Exec Comp Restrictions Get Tougher

What's wrong is it puts us right back in the place we were before we spent $350 billion bailing out the banks. If we want weak banks to fail, let them fail. Don't prop them up, then hamstring them so they have trouble competing.

Would you consider JPM and Wells Fargo government institutions? The only reason they took TARP money is that the government forced them too. They didn't want or need the money. Also, the only reason Bofa is in trouble right now is that the government essentially forced them to close on the ML deal and told them they would guarantee some of their losses if they closed the deal. So the money Bofa has received is basically payment for doing the governments work of bailing out Merrill Lynch. It's absurd to punish these companies in the same way as say, citigroup, which clearly would not be around right now if it weren't for government assistance.

Also, I agree with the unintended consequences comment. Can you imagine a private investor investing money into a Company and then demanding that the company only hire the cheapest available talent for upper management??! I mean imagine you invested $10 billion in Microsoft or Mcdonalds or Wal Mart and then you told them to essentially fire every executive that makes over a half million a year. By restricting the comp of the top 25 people the government is essentially firing them because, if these guys have any value at all, they won't stay. The only one's that will stay are the ones that are so crappy they can't go elsewhere. And the replacements for the execs that leave will be someone that's willing to work at a failing bank that has no top talent for a miniscule salary that's lower than what they made 5 years out of business school. And the government thinks this is protecting taxpayer money??!! Ha! Yes, let's ensure that only the worst of the worst are managing billions of taxpayer dollars. Smart.

We can actually look at this lesson from a real life example.


In January 2009, Circuit City filed for bankruptcy.

Exactly...they should've never done them in the first place. But we're really focusing on the wrong issues here. What's "hamstringing" the banks isn't, and will not be, their ability, or lack thereof, to overpay for terrible management. You think some guys making $500k will make worse decisions as the geniuses who made $50M per over the last several years?

I use to work at CC - funny thing about that story is that some of the big sales people were making 50-60k (rumors that some made 75-85K) usually more than the managers of the stores and the upper end pay they would have been offered was $12 an hour.

While I don't disagree with what was said above but CC was getting killed by BestBuy who was paying $8 an hour to its sales people and CC was over paying its sales people like crazy on low margin products. So it didn't work out for CC in the long run but from what I saw on a micro scale was the sales people who got laid off went to work for BBY for $10 an hour and went back to work for CC later because they liked the no one cares, easy going nature of CC and they took the $12 an hour.

Man those were the good ol' days.

I'm not debating whether current management is any good. Certainly several executives deserve blame for what has happened on their watch. But I do think that top executive talent, given the option between a job where comp is capped and one where comp is not capped, will choose the unlimited comp. Therefore, the bailout banks will find it harder to attract and retain top talent.

And in terms of the govt "forcing" the banks to accept money, there have been several published accounts - especially for the BofA-ML deal - where the government made strong hints to the CEOs that should the bank not do what the government was asking, then the govt would remove the management team from the bank.

https://www.telegraph.co.uk/finance/comm ... blems.html

If you want to make banks safer - if that is the ultimate goal - then pass a law that bans prop trading on the company's account. Just about every other function in an investment bank has a relatively small downside risk, whereas prop trading has a huge downside risk (as well as a huge upside). If you want to make banks more risk averse, then move all prop trading to the hedge fund industry. Let banks buy minority stakes in hedge funds if they like, but prevent them from owning anything outright. It has been proven that a small number of limited partners are better stewards of a firm's capital (their own money) than shareholder's in the public market. Then you do not need to regulate any company's executive salaries'. You can leave that up to shareholders' to decide, where I believe it belongs.

Every public outrage needs a whipping boy - remember Walmart, Exxon, Banks, Executives, goes on endlessly - they have the money others don't so obviously it's their fault.

**the use of the word obviously makes all statements that come after it a fact**

The Becker Posner blog does a nice job of arguing why the pay caps aren't a good idea. https://www.becker-posner-blog.com/

(Becker, Posner are profs at UChicago)

When Paulson was Treasury Secretary he fought against salary caps as a condition of TARP money. More recently Geithner and Summers both unsuccessfully lobbied Congress not to include a pay cap in the stimulus.

I'm not going to argue the issue. Just for your own information though, it's a fact that Wells Fargo was forced to take the funds against their will.

https://online.wsj.com/article/SB122402486344034247.html

This is true. It's been reported on Bloomberg, CNBC, WSJ, etc. Geithner and Summers were adament that the new restrictions not be included in the stimulus legislation but they failed in that effort. The Obabma administration was very upset they were included and plans to work with congress to find a way to water them down. The original salary caps put in place by the Obama administration a few weeks ago (led by Geithner and Summers) was just a smoke screen. It was to appease the masses that Wall Street was being punished but in reality it did nothing. It was only for firms that took exceptional assistance in the future, it was only for the very top executives, and it allowed for unlimited bonsues paid in restricted stock. However, these new restrictions put in place by congressmen that have never worked in business, never taken a business course, never taken economics 101 are far more stringent then Obamas original comp restrictions and are widely agreed by economists, business leaders and the Obama administration to be a terrible idea.

That doesn't sound "forced" to me. Mr. Kovacevich could have rejected the offer.

I completely agree. If your company is on it's knees begging for a bail out: YOU HAVE FAILED. Your "executive talent" doesn't exist.

These kind of comments drive me nuts. It's become so in vouge to just say "they have no top talent, their banks are in trouble" without any kind of actual thought or analysis. It just strikes me as a meaningless off the cuff comment thrown out by the populist we hate bankers and want to blame them for all of our problems crowd. I mean give me a break. It's like saying "Why should we pay Kobe Bryant 10+ million? He shot 1-20 tonight and only scored 3 points. He has no talent". Just because Kobe had some poor performance does not mean that he has no talent. He is still one of the greatest players in the game today I don't care if he averaged 3 points a game for the last month. Similarly, just because some bankers screwed up (and so did the government, consumers, mortgage companies, etc, etc by the way) does not mean there is no talent there. I mean these guys all went to HBS, Wharton, etc (earned the degrees we dream of), landed the toughest jobs out of those schools (BB IB) and worked their way up to the top of highly competitive organizations where they were surrounded by (and competing with) some of the top people at the top schools that we all plan to attend. If these guys are talentless bums what are we?