Posted by Marc Hodak on April 30, 2009 under Politics | 
Unfortunately for Obama, the government doesn’t control the whole financial sector yet. If it did, then it could have forced all of Chrysler’s lenders to bend over for the country.
As of last night’s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.
As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end — although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.
…We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well established legal framework and cannot be rationalized as being commercially reasonable.
This was signed: “The Committee of Chrysler Non-Tarp Lenders”
Translation: We know you want the capitalists to subsidize the workers. We read Marx, too. You might be able to get away with those kinds of demands with the banks under your control using whatever forms of financial waterboarding you’re employing on them. But that’s not how we’re going to play this. Our vision of what’s fair doesn’t involved screwing our investors for your politically favored constituencies. Don’t like it? Tell it to the judge.
Posted by Marc Hodak on April 28, 2009 under Executive compensation, Invisible trade-offs |
It had to come to this. After months of bonus baiting, with everyone asking “where else could they go?” After Andrew Cuomo invited every banker unfortunate enough to find himself in the Journal or Times into his office to ask why they made so much money. After the press smacked Geithner around like a pinata. We’re finally at the moment when it all comes down to taking responsibility for a choice:
Citigroup Inc., soon to be one-third owned by the U.S. government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter.
We’re talking tens of millions for certain people. Choose your outraged retort:
How can anyone be worth that much? Surely they don’t need the money.
How can they be so greedy? This is just extortion!
Why should taxpayers be paying bonuses for failure?
Why should people need incentives to do their job?
Now that you’ve gotten it out of your system, put yourself in Geithner’s shoes. Phibro generates a huge amount of profit for the Citibank. It’s not the machines. It’s not the building or furnishings. It’s not the computers. It’s the people. The people create the profit. As with anything else, it’s most likely that 20% of the people create 80% of the profit. If you don’t pay the key 20%, they walk. You lose 80% of the profit. So, we can enjoy our two minute hate, the clever rants about evil bankers, and emotional complaints about how bankers are no more special than the “working man.” Then someone has to decide what to do about bonuses.
I think the right answer may be to spin off the unit; Citibank is unwieldy and inherently unprofitable. They need to get leaner. They need to undo the failed “financial supermarket” strategy that got them here if there is any chance of creating a profitable remnant. That, or pay enough to keep the best.
But that’s the economic decision. That’s what a conscientious board mindful of their fiduciary responsibilities would likely decide. Congress is a different kind of board. What would you do?
Posted by Marc Hodak on April 27, 2009 under Reporting on pay |
And partly because we wish it otherwise so much. The NYT lead is, “The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise. Some highlights:
“I just haven’t seen huge changes in the way people are talking about compensation,” said Sandy Gross, managing partner of Pinetum Partners, a financial recruiting firm. “Wall Street is being realistic. You have to retain your human capital.”
Gross apparently trades in that human capital, so what he says may be taken with a grain of salt. What does a buyer of human capital have to say?
“We need to be able to pay our people,” said Lucas van Praag, a spokesman for Goldman, adding that the rest of the year might not prove as profitable, and so the first-quarter reserves might simply be “sensible husbandry.”
The press continues to work off of overall reported compensation expense, a very high level, messy number that includes benefits for the secretaries as well as bonuses for the honchos, and everything else compensation related. This high level number stays fairly constant as a percentage of revenue, but gets regularly misinterpreted as a harbinger of top level pay.
Still, the compensation expense is the only publicly disclosed figure related to pay at the banks, and it is the best figure for calculating pay per worker.
And, not a terribly useful one. Using “compensation expense” to discern projected executive bonus levels is like using the “gross revenue” line to predict sales of a small product line.
To try to blunt criticism of high pay, some banks have introduced reforms to take back bonuses from individual workers whose bets later lose money.
Your welcome. That would be our handiwork. Our method has other benefits besides blunting criticism, but, hey, whatever brings the clients to bright.
Compensation is among the most cited causes of the financial crisis because bonuses were often tied to short-term gains, even if those gains disappeared later on. Still, as profits return, banks do not appear to be changing the absolute level of worker pay — or the share of revenue dedicated to compensation.
Not saying either of these sentences is wrong, but can you see the contradiction in how they were put together? (Not even counting the foolishness of using conjectures about aggregates in order to comment on specific behaviors.)
But every dollar paid to workers is a dollar that cannot be used to expand the business or increase lending. Some of that revenue, too, could be used by bailed-out banks to pay back taxpayers.
…or support PBS, or buy me a Mojito on a Hilton Head beach… And therein is the premise behind the whole article: these dollars are arbitrarily allocated from a fixed pie among various stakeholders, with managers clearly stealing more than their “fair share,” which appears to be $1.
“The money should go to shareholders,” said Frederick E. Rowe Jr., a member of the pension board in Texas.
…i.e., a shareholder.
As usual for the bankers, Morgan Stanley’s CFO doesn’t help with this comment:
“The number of fat cats making loads of money is much less than you think.”
Not that many fat cats? That should calm reader envy just like that. (Mack, put a muzzle on your man, here.)
Finally, I don’t know how this got into the article. It kind of just pops out of nowhere near the end of the piece, as if the writer was just throwing up the rest of her notes onto the page:
If shareholders do not like compensation policies at banks, they can simply sell their shares.
Interesting. Sell their shares. Hmm.
Posted by Marc Hodak on under Politics |
“The lack of corporate responsibility and accountability to shareholders is one of the core problems we face,” the New York Democrat said. (It was Schumer, but does it really matter which?)
Congress is all for responsibility and accountability… from others. Schumer’s bill would include:
– Requiring “Say On Pay,” based on the fallacy that investors need more input into HR strategy
– Also “Say on Severance,” based on the widespread, but false perception that exiting CEOs of faltering firms get huge severances
– Elimination of staggered boards
– Requiring “Proxy Access”
What all these measures have in common is the increasing federalization of corporate governance. Every single company incorporates under a charter designed and approved by the original shareholders (generally founders). Every subsequent shareholder buys into the company under the existing by-laws in that charter, by-laws that explicitly lay out what rights the shareholders have. These charters and by-laws are adjudicated in the jurisdiction of incorporation, often the state of Delaware, which has highly experienced, highly respected, and predictable courts. Congress wants to trump that with central planning about how all corporations should be governed, by changing the rules for all existing corporations after the fact.
Congress commands a very different level of respect:
The Glass House of Representatives
How much accountability does Congress have when, with ratings like that, they manage to have a re-election rate that rivals the old Soviet Politburo?
The main difference between Congress and corporate boards, of course, is that even with the overwhelming advantages of incumbency, failing boards still get replaced all the time, in the market for corporate control. When a company performs as poorly as our government has, it gets taken over by another company. When a company fails to provide an honest accounting of its assets as badly as Congress has failed, the board is replaced and sued for breach of their fiduciary duties, and those directly responsible go to jail. Congress has no level of accountability that even comes close.
Posted by Marc Hodak on April 26, 2009 under Unintended consequences |
Here’s a simple thought experiment. There are ten people. They have an income distribution and a tax bill that look like this:
# Income Tax Effective rate
1 – 50 15 30%
2 – 20 5 25%
3 – 8 1.5 19%
4 – 6 0.8 13%
5 – 5 0.5 10%
6 – 4 0.2 5%
7 – 3 0 0%
8 – 2 0 0%
9 – 1 0 0%
10 – 1 0 0%
Total 100 23 23%
In other words, our little group roughly represents the distribution of income and income taxes in many developed countries. Now, let’s say that the government wanted to raise additional income by raising the top marginal rate, which would be felt exclusively by the top earner. Let’s say the effect of that increase would raise his tax from 15 to 16, or his effective tax rate from 30% to 32%. That would boost overall tax revenue from 23 to 24, a 4.3% gain.
Now, 4.3% would be considered a huge gain in total income for a government from just a tax rate increase. Here is why they would not be likely to see it.
Wealthy people are sensitive to their effective tax rates as much as the rest of us, and possibly more (they didn’t get wealthy by being indifferent to money). The wealthy and their income are highly mobile in every country except the U.S., Libya, and North Korea. All it would take is a 7% chance of the top earner decamping for, say, Switzerland to make this tax increase lose money for the government on an expected value basis. When things get too far out of whack, high-tax nations have a lot to worry about on this score. And that is before counting any effects on marginal productivity.
If a country’s tax rates were at some equilibrium, it would most likely be the equilibrium for maximizing the country’s tax revenues. I don’t know if any country is exactly at that point, but it’s unlikely that any country is on the strongly upward-sloping part of the Laffer Curve. All of which probably explains why overall revenue seems relatively insensitive to individual tax rates.
Posted by Marc Hodak on April 25, 2009 under Revealed preference |
Congressman Mark Schauer joins a chorus of politicians pressing the creditors:
The unions have made a number of concessions to ensure the survival of Chrysler. The question now is what the company’s creditors will do… They have to look at the broad economic impact (of Chrysler collapsing) and not just their own short-term financial interest.
Representative Schauer understands what it takes to look beyond his short-term financial interest. He’s a community service kind of guy. Never worked at a productive job a day in his life. And just because 25 of the top 40 campaign contributors were unions (UAW was #8) doesn’t mean he’s serving his financial interests in arguing for the altruism of others. I don’t doubt this guy sincerely believes that stiffing the creditors will be good for the economy in a “broad impact” sort of way.
But if sacrifice is what this is really about, Congressman, please show us the way. I know a Chrysler bondholder, one of the “little guys” who hasn’t accepted government money. He voted for Obama, FWIW. He figures he can get about 65 cents on the dollar in bankruptcy, a little less on liquidation than restructuring. The politicians are asking them to take about 15 cents. My friend, hearing the Congressman from the UAW asking for some sacrifice, is willing to match him, dollar for dollar.
He says, “I’m willing to take my lumps to the tune of what I contractually signed up for, i.e., a 35 percent loss. I bought the bonds. I screwed up. If you, Mr. Congressman (or Senator Levin, or Governor Granholm, or any other of the politicians standing in front of your union masters and asking us bondholders for an additional sacrifice) are willing to look beyond your short-term financial interest, and share in my loss beyond what the market says I could get from bankruptcy, then I’ll do it.”
So, if you, Congressman Schauer, put up $30,000, my friend says he will take an additional $30,000 hit, below the 60 cents he currently expects. Put $100,000 into the Chrysler kitty, and he’ll put up $100,000. What do you say, Congressman? Senator? Governor?
I will pre-emtively and perhaps unfairly say, “I thought so. You’re happy to ask for sacrifice, as long as it’s coming from others.”
I’ll give my friend the last word:
There are people who have bought into these securities at already depressed prices. I’m not one of them. We picked them up at issuance. While the unions were happy to collect their well above-market wages and benefits, I watched the value of my bonds drop. Now that they’re willing to work for only slightly above market wages and benefits, they’re expecting me to suck up much worse losses.
He closed with an unprintable invitation for the politicians to engage in something that sounded like self-copulation.
Posted by Marc Hodak on April 23, 2009 under Politics, Revealed preference |
Speak clearly directly into the mic, please. Now say again? At the moment you realized that your shareholders would be screwed by the ML transaction, and it was time to invoke ‘material adverse change’ to back out of it, why didn’t you do it?
I can’t recall if [Hank Paulson] said “we would remove the board and management if you [invoked the material adverse change clause to block the Merrill deal]” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.”
There it is. When the BAC board, including Lewis, came face-to-face with doing right by their shareholders or keeping their jobs, they chose to “deescalate.” Later they rationalized: getting fired = systemic risk.
So, Ken, you decided not to back out of the deal, what about at least telling your shareholders what you were getting them into?
Q: Were you instructed not to tell your shareholders what the transaction was going to be?
A: I was instructed that ‘We do not want a public disclosure.’
Q: Who said that to you?
A: Paulson…
Q: Had it been up to you would you [have] made the disclosure?
A: It wasn’t up to me.
So, the government ordered you to shoot your shareholders from behind a curtain, and you pulled the trigger.
Not corporate governance’s finest hour.
Posted by Marc Hodak on April 22, 2009 under Executive compensation, Reporting on pay |
. ^
I’m sure we’ll be seeing a hard-hitting article this weekend by Gretchen Morgensen, but I thought I’d take a quick look at the bonuses currently shaking the liberal establishment:
I speak for a lot of people who are just amazed at the depth and breadth of the hypocrisy here — the liberal New York Times and the liberal Globe… at one point in the negotiations, the company proposed eliminating all sick days for Guild members, like an Alabama sweat shop.
That from a sweatshop worker writer at the Boston Globe, which has been told by their NYT overlords that they the Guild must find $20 million in cuts, presumably from their labor contract, or face the shutdown of their paper. And the Grey Lady is not just picking on their Boston subsidiary; all NYT employees took a 5 percent salary cut in order to avoid layoffs.
Except for the CEO. She made $5.58 million in 2008, versus $4.14 million in 2007.
Asked if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness, Catherine J. Mathis, NYT Senior Vice President for Corporate Communications, told the Huffington Post:
“With regard to shared sacrifice, please remember that for 2008, non-equity incentive compensation (which many think of as bonuses) for these folks was roughly half of what it was the year before and stock awards were down more than 80 percent in value.”
Translation: “If we can convince you to look only at certain selected parts of the compensation equation, over here (snap, snap), you’ll see they went down versus the year before.” Of course, that means other parts went up, i.e., grants of stock and options. The NYT clearly assumes that their shareholders are as innumerate as their readers, and can be lead away from the “total” numbers to just the numbers management wants to discuss. Sorry, Cathy. The equity counts, too.
Mathis cautioned that the total compensation numbers in the proxy report…
“…include the value of the compensation — not the amount of cash they received. For example, they were all granted options. But those options are of value only in the stock price increases over the exercise price…For proxy purposes a value is assigned to the options even though the executives received no cash at the time they were granted.”
Uh, yeah. Actually, the options are valuable even though they’re granted at the money. That’s how the NYT counts options when they evaluate the pay of CEOs.
Now, if the NYT’s CEO wishes, via her mouthpiece, to insist that at-the-money, or even out-of-the-money options are not really worth anything, I will gladly give her $1 for them, and she can claim to be ahead. Just mail them to…
What? She’s not interested? How about if I offer $2? She wants how much? Oh, $1.5 million. Yeah, that is how much they’re worth.
I’m used to having my intelligence insulted by the NYT, which is why I dropped my subscription a couple years ago, apparently with tens of thousands of others. The little sympathy as I have for management in this affair is barely topped by my sympathy for those wondering “if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness.”
If the cuts improve the odds of the paper becoming profitable, that is precisely the kind of thing that should be rewarded with bonuses. If management doesn’t have an incentive to push for profits, then who can the shareholders count on to make the paper viable? The unions?
Posted by Marc Hodak on April 21, 2009 under Executive compensation |
According to Special Inspector General Barofsky, buyers or assets in the PPIP program “could be subject to the executive compensation restrictions.”
Barofsky’s boss, Geithner, disagrees. But Geithner is not the house lawyer.
If Barofsky is right and Congress refuses to clarify that buyers won’t be subject to the comp constraints, PPIP is dead. At this point, even if Congress has to act because of the way the law is currently written, a lot of potential buyers will be scared away.
HT: Megan
Posted by Marc Hodak on under Executive compensation, Self-promotion, Stupid laws |
The second installment of my Lombard Street article here. Sample:
The clearest evidence of popular envy being the root of these provisions is the clause requiring the board to review “luxury” expenditures—a kind of Optics Committee—for items like office decorations and corporate jets. Clearly, these expenditures are far more material to the press and public than they are to the shareholders. Does it really matter to the shareholders if the company’s most valued employees benefit from nice offices? Sure, there is a crude sense of entitlement that drives an executive to spend a lot on lavish appointments, but such appointments tend to be personalized, which arguably creates a retention benefit, especially in situations where bonuses are otherwise being suppressed. Corporate jets might be a frivolous expense, or they may be a cost effective way to provide efficient and secure transportation to busy executives. The ARRA law leaves it up to the board to make such determinations on behalf of the shareholders, but this is a canard; boards already make these determinations. The real purpose of this clause is use public sentiment to eliminate perks on no firmer grounds than the grade school “chewing gum rule”—if I can’t have some, nobody else can.
