Thursday, June 11, 2009

Compensating the Captains of Finance

Toxic Timmy Geithner and his pal Ben Bernanke are men on a mission. They want to give the Fed more muscle in telling the Wall Street mavens how much money they can steal…er, earn each year.
The Fed is the outfit that regulates banks. They want the SEC, the Securities and Exchange Commission, which oversees financial markets, to also have greater power in reining in the exorbitant pay at financial institutions.

Tuesday, we saw a flurry of activity at huge financial institutions, which are for reasons hard to understand called “banks”, although they’re not the kind of thing you think of when somebody says “I gotta talk to the bank about that”. The big banks, as they’re now called, rushed around Tuesday to get permission to pay back the TARP money so they wouldn’t fall under the new rules Timmy and Ben want to advance.

By the way, for the scores of academics in our community, TARP in this sense is not “Tenure and Related Promotions”, but “Toxic Asset Relief Program”.

In other words, Tuesday quite a few of the financial institutions (“banks”) that took bailout money quickly got permission to pay back the money so they could continue to pay their captains unrealistic amounts of money every year, and continue the so-called “bonus” plans those Wall Streeters love.

Sorta like the bonus programs the UW coaches have - a lot of money that’s easy to get.
This is exactly what the new administration is trying to get rid of. President Obama’s economic team wants Wall Street to start paying people based on long-term performance, versus short-term gain.

In other words, you get bonused for helping your institution grow everybody’s money - not for thinking up some new way to make side bets on other investments. (Derivatives.)

For the big outfits that didn’t squeak in under the deadline this week, companies like CitiGroup, B of A, AIG, Chrysler, and GM, the bad news (for them) is that their execs this year will likely be limited to a bonus no greater than a third of their annual salary.

In other words, stuff like that sweet pot of 165 million bucks in bonus money paid out in March by AIG ain’t gonna happen again.

I think the execs will survive.


  1. You are correct that the purpose of bonuses was to provide incentive for raising the company's profits, and damn the details. A clubhouse laugh line was ... "Where are the customers' yachts?" The nouveau po'boy exec's may indeed eke out an existence on fewer millions per year, but, man, the cutback is KILLING the real estate market in Greenwich!

    Have a look-see for yourself: //

  2. Oh, bollocks, Timmy! This whole discussion of greed and stratospheric executive compensation and "bank" bailouts and obscene profits, etc., just means that we, once again, are focusing our attention -- to the delight of the pols -- on capitalism as the root cause of our troubles.

    None of the "banks" can raise your taxes. They can't declare war. They can't command massive media attention to their every bloviation as the encumbrances in Congress can.

    I'm reading "The Revolt of the Masses" by Jose Ortega y Gasset. One of the many cogent and pertinent things he had to say was this:

    "This is the great danger that today threatens civilization: State intervention; the absorption of all spontaneous historical action, which in the long run sustains, nourishes, and impels human destinies. When the mass suffers any ill-fortune or simply feels some strong appetite, its great temptation is that permanent, sure possibility of obtaining everything -- without effort, struggle, doubt, or risk -- merely by touching a button and setting the mighty machine in motion."

    That "mighty machine" is now rolling over the banks. Is there anything in the past history of federal regulation that persuades you that those greedy bastards on Wall Street will never be able to squeeze illicit profits out of questionable financial dealings ever again?

    Isn't what's happening now an aggravated reprise of the S&L scandal? Or the failure of that old-line British bank a few years ago due to the derivative dealings of one of their own investors in Singapore or one o' them thar furrin' places?

    So we'll get a brand new raft of regulations out of Washington. So what? Do you honestly think that this time we'll get 'er under control fer shur?


    Steve Erbach

  3. So you'd just "leave it alone", Steve? We've seen how that worked out, over the past five years..

  4. Tim,

    >> So you'd just "leave it alone", Steve? We've seen how that worked out, over the past five years.. <<

    Well, we certainly have NOT let it alone: TARP and the AIG bailout and Wall Street subsidies and interference. I can only sit in stunned wonderment at the amazing amount of money being thrown around.

    I am reminded strongly of something old Harry Browne said: "Government breaks your leg, then hands you a crutch and tells you that without government you'd be worse off." Trite? Yes. Lots of "truthiness"? Yes again.

    I probably haven't bored you yet with my balloon animal metaphor for the economy. Now is the perfect opportunity:

    The economy is like a big balloon animal. Whenever the government attempts to control the economy, it's like squeezing the balloon animal to control the air inside of it. But the balloon animal pops out here and here. Squeeze one of those popped-out places and that darn balloon pops out a couple other little air pockets. Then the government squeezes that last little tip a bit too hard and the balloon pops.

    By inclination, preference, and temperament, I'm agin' guvmint regulations. It's similar to the way I feel about government planning in general.

    So rather than "leave it alone", I'd be more inclined to remove regulations than simply stand pat with the ones we've got.

    Steve Erbach
    Neenah, WI