[R-G] [BillTottenWeblog] Is Obama Running Interference to Protect Bankers' Pay?

[Bill Totten]

by Rolfe Winkler, CFA

Option Armageddon (March 22 2009)


According to the New York Times, the administration is considering all
kinds of new rules in the wake of the AIG bonus scandal. These include
tougher rules for mortgage lenders, new oversight powers for the Fed,
and a new exchange/clearinghouse for derivatives trading. Most
interesting in terms of intra-governmental politics, however, may be
Obama's proposed restrictions for executive pay (emphasis mine):

"The Obama administration will call for increased oversight of executive
pay at all banks, Wall Street firms and possibly other companies as part
of a sweeping plan to overhaul financial regulation, government
officials said …

"The new rules will cover all financial institutions, including those
not now covered by any pay rules because they are not receiving federal
bailout money. Officials say the rules could also be applied more
broadly to publicly traded companies …


No specific policy proposals have been made yet, so it's tough to offer
firm opinions about the above. Nevertheless, I'd like to chime in with
early thoughts on the pay proposals. In a nutshell, I think Obama may be
trying to wrest control of the pay debate from pissed off Senators and
Congressman. This is a shame because Congress, in all its outrage, might
actually have stumbled onto sensible policy …

The administration's proposed pay restrictions sound to me like a
rearguard action. Friday the House passed a bill that would essentially
confiscate bonuses paid to all employees making over $250,000 at
companies that have received $5 billion+ of bailout money. You know
Timmy Geithner and Sheila Bair don't like the sound of that. Both have
made clear that Wall Streeters should get paid whatever amount
appropriately incentivizes them to clean up their own mess. How to
compromise with angry lawmakers that want stricter restrictions? Perhaps
by cutting a wider swath in terms of companies affected while limiting
the restrictions at any one company to only its most prominent corpulent
felines.

The House proposal, remember, confiscates bonus income (including,
potentially, non-cash bonuses!) for everyone making over $250,000. It
would only impact a handful of companies in particular, but the total
number of affected employees would run well into the thousands.

Contrast that with Obama's nascent plan, which, according to the New
York Times, affects executive pay. "Executive" tends to be code for the
top guys listed in the proxy: CEO, CFO, General Counsel, COO, those
types. To placate House members who want more sweeping restrictions, the
administration says it would regulate "all financials" and possibly
other publicly-traded companies - not just those receiving the biggest
bailouts.

The House's version is superior for two reasons: It hits the right
companies and is appropriately draconian.

First of all, government has no business making compensation decisions
on behalf of the private sector, which is what Obama would do by
subjecting so many companies to executive pay restrictions. The House
bill doesn't do this. By hitting only those companies that have received
over $5 billion of bailout money, it dodges the private sector entirely.
How so? The companies that have received the lion's share of bailout
money really aren't in the private sector any longer. For one thing,
they continue to draw breath thanks to TARP, FDIC and Fed life support;
they owe their lives to forgiving taxpayers who've not yet chosen to
pull the plug. For another, the risks on their balance sheets have
ostensibly been socialized. For all intents and purposes, this makes
their staffers public sector employees. As such they should be subject
to whatever pay restrictions taxpayers' representatives see fit to
establish.

And the pay restrictions are so draconian they might accomplish needed
banking reforms simply by driving those most responsible for the bank
crisis out of the business. At the very least, it would reduce
individuals' incentives to take big risks.

In recent years the biggest profits - and the biggest bonuses - were
generated by largely dubious activities. To take two examples,
investment bankers and propriety traders have been vastly overpaid
relative to the value they've added.

Investment bankers intent on maximizing fee income basically abuse their
companies' balance sheets in order drive deal flow. They leverage their
leverage. They aren't paid to care about the quality of their deals, or
the risk borne by the boss's balance sheet. And far more often than not,
their deals destroy value anyway. As for propriety traders, they are
little more than ultra high-stakes gamblers. It's beyond foolish that we
allow them to make their bets with the same balance sheets responsible
for generating the majority of the economy's credit. Of course some are
great traders, but it's a zero sum game. For every Boaz Weinstein
(vintage 2007 and before anyway) there's a Ralph Cioffi. The industry's
collective balance sheet isn't strong enough to withstand the failures -
counteryparty risk anyone? - so the profits earned by the good ones are
largely a mirage.

Trading and investment banking need not disappear of course; they just
need to be gone from the commercial banking sector, for which the only
remaining charge should be the prudent allocation of credit. If bulge
bracket banks face the severe pay restrictions outlined in the House
bill, they probably would lose much of their rock star "talent".
Fantastic. I can think of no better indicator of progress on bank reform
than to see the industry return to its stolid past.

In the old days, when Wall Street firms were still partnerships,
everyone took a hit when times got tough, including top producers. They
all understood it was a survival issue for the firm.

Now that survival is not a question (government: "there won't be any
more Lehmans") these employees have the luxury to retain their sense of
entitlement. "But we earned these bonuses". Nonsense. But for taxpayers,
their firms would have gone horizontal months ago. Is $250,000 not
significantly better than $0?

Yves Smith from Naked Capitalism notes "everyone used to complain about
welfare queens. What would you call this level of entitlement? They are
every bit as much wards of the state as welfare recipients, and fail to
recognize it. No wonder the public is furious."

Perhaps the best indication that the House bill is good policy: bulge
bracket bankers are vociferously opposed …

http://optionarmageddon.ml-implode.com/2009/03/22/is-obama-running-interference-to-protect-bankers-pay/


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