Practical definition: Get tough

Posted by Marc Hodak on December 4, 2011 under Politics, Reporting on pay | Be the First to Comment

According to BBC News:

The government should not be setting pay rates, Mr Clegg stressed, while making clear he supported top executives being well rewarded if their companies were successful.

What does he mean?  Well, we need to take that phrase in the context of the speech where he declares:

We need to get tough on irresponsible and unjustified behaviour of top remuneration of executives in the private sector…What I abhor is people getting paid bucket loads of cash in difficult times for failure.

A politician will say all those things in the same speech because he wishes to whip up the mob that loves bashing the wealthy elite, but he doesn’t want to alarm that elite by saying he actually wants to determine how much they are paid.  And he can say these things without worrying that the press will call him on it, and will, more likely, lay out these points as a balanced position rather than a contradictory one.

The press won’t question that “the government ‘getting tough'” necessarily means that
the politicians in charge should use the police power of the state to get the private sector to do what the politicians want them to do.  In this case, Mr. Clegg means that the British government should decide how much an executive is allowed to make in a company deemed not successful.  This, in turn, means giving bureaucrats the authority to make the distinction of “successful,” which would necessarily have to be applied to every single company.  Is a company that loses any market value successful?  What about a company that loses value in difficult times?

In other words, having the government “get tough on pay” means having the government set pay rates, at least in some situations, and potentially for any company.

There are citizens who don’t mind the idea of bureaucrats actually setting pay rates in the private sector, and there are some who don’t mind as long as it’s not their pay.  But there are many people who would bristle at the thought of government setting pay rates for anyone not in government.  By threatening to “get tough” on pay but claiming that they “should not be setting pay,” a politician can have it both ways, and the print media that boasts its role as an agency of letters and, occasionally, as a public watchdog will go right along with.

Goldman Comp Suit Tossed Out

Posted by Marc Hodak on October 15, 2011 under Executive compensation, Politics | Read the First Comment

Cartoon characters are easier to attack

Depiction of Goldman Director (not based on any facts)

Last January, when I was still updating this blog regularly, I wrote about various unions bringing suit against Goldman Sachs for their compensation practices.  In particular, they objected to the firm’s longstanding formula that employees would get about 45 percent of net revenues, with the bulk of their pay being determined after the company knew what those net revenues would be, i.e., as “bonuses.”  The allegation was that this program (basically a profit-sharing system) created incentives toward excessively risky and short-term behavior against the interests of the shareholders.  If the latter were true, and if the board approved of such a plan knowing that were true, it would arguably constitute a breach of their fiduciary duties.  Of course, there are a couple of big “ifs” in that allegation, both of them needing some substantiation before a board’s culpability could even begin to be ascertained.

Last week, the Delaware Chancery Court decided that in the absence of any substantiation whatsoever, and insisting on these things called facts, that they had to dismiss the case.

I only wish that the fiduciaries who brought this fact-challenged suit could be held accountable for the far more provable waste of their investors’ resources for their personal profit, i.e., maintaining their union sinecures.  Wouldn’t some enterprising plaintiffs lawyer love to find that e-mail from a top union official that says, “I know this case doesn’t have any merit, but hiring lawyers to publicly poke Goldman’s eye would help me get re-elected.”  Or at least these enterprising lawyers could allege without any facts that this was the motivation.  Alas, there is no private party willing to waste their own money to bring such a frivolous suit.

Carping, sniping, and griping

Posted by Marc Hodak on January 28, 2011 under Politics, Reporting on pay | Be the First to Comment

In one of the more bizarre articles on bankers pay, we read:

U.S. regulators haven’t yet settled on rules governing pay. Since they don’t yet exist, U.S. rules are perceived as much more lenient than those across the Atlantic.


Despite the griping over Bank of America’s compensation structure, the company seems sensitive to the coming regulatory rules. Even though some bankers are receiving more cash, the total bonus pool for investment bankers and traders was down in 2010 as compared to 2009, said people familiar with the situation. In 2009, the pay for investment bankers and traders was more than $4 billion.

It’s as if any sentences strung together with “pay” and big figures is good enough to get published.

To the extent this article has any substance, it appears to be about the “grumbling” and “sniping” among banks due to differences in how they pay their bankers.

Bank of America Corp. intends to give some investment bankers a greater share of their bonuses in cash, the latest Wall Street compensation move roiling banking chieftains as they meet in Davos, Switzerland.

Still, multiple bankers gathered at the World Economic Forum in Davos grumbled that Bank of America would increase the cash portion of bonuses—news that traveled fast once the bank’s employees were told…The rancor is symptomatic of the heightened sensitivity to the issue of compensation, which took center stage at Davos. European bank executives gathered in the Alps this week are up in arms over the lack of similar rules governing payouts by their U.S. rivals.

“It’s not a level playing field,” said William Vereker, co-head of global investment banking at Nomura Holdings Inc.

If you know about HSBC’s marketing campaign, I.E., about how one thing can be viewed in distinctly different ways, then the following might seem ironic:

U.K. based HSBC Holdings PLC has threatened to move its headquarters elsewhere because of regulations that include compensation rules. The bank said it lost roughly a dozen employees to competitors with more lax rules on pay.

In other words, where some people see an overpaid banker whose pay needs to be curtailed, someone else might see talent ready to slip away.  As usual, the Europeans see anyone making too much money too soon as a social threat:

Such complaints are particularly acute from European bankers, which have to comply with new European Union requirements that bonuses be comprised primarily of stock or other noncash instruments and must be deferred for at least three years. The most cash that can immediately be rewarded is 20% of the overall payout.

Of course, anything that makes payouts more deferred or uncertain makes them less valuable.  If you’re serious about competing, your only alternative (besides changing continents) is to offer even higher compensation.

As the regulators squeezing the balloon on pay, it’s becoming clear that banks will increasingly have to go to their local legislators, with cash in hand no doubt, to plead for competitiveness.  If you think that home country legislators would be sympathetic to such pleas without campaign cash support, you’ve never been greeted by a big guy in an ill-fitting suit saying, “Nice business you got there.  I’d really hate to see anything happen to it.”  And as long as the mob is driven more by personal envy than common interest, these wise guys will keep getting elected, and keep playing chicken with the banking system.

Pay politics continues for banks

Posted by Marc Hodak on December 24, 2010 under Politics, Reporting on pay | 2 Comments to Read

U.S. regulators are considering new or expanded curbs on bonuses in accordance with regulations created by Chris Dodd and Barney Frank to prevent another financial crisis (I will never get over the irony that).  The law generally prescribes that compensation plans should be designed so as to not encourage excessive risk taking.  One of the key design elements to implement that mandate is the deferral of bonuses. The nominal theory is that deferral of awards will create an incentive for the traders to think beyond current period performance, thus avoiding the “swing for the fences” bets that the comp critics insisted were central to the financial crisis.

The assumption that perverse incentives contributed to the financial crisis is reasonable.  It does not logically follow that changing those incentives is either necessary or sufficient to prevent another financial crisis, but seeing that would require understanding the root causes of the crisis which, perversely enough, neither Dodd nor Frank had any incentive to do.

But this law assumes two other things that challenge reason:

Read more of this article »

Ribstein gets to the heart of the Goldman settlement

Posted by Marc Hodak on July 19, 2010 under Politics, Scandal | Be the First to Comment

Prof. Larry Ribstein on the Goldman ‘Abacus’ settlement.  He predicts that the end result will be confusion about what big banks must disclose:

[W]hat lesson should Wall Street take away from this case? What, exactly, does a bank in Goldman’s position have to disclose to a customer? The identity of another customer on the other side, as the complaint suggests? Only when that customer is somebody like Paulson. What does that mean? Only if the customer has selected the portfolio? What does that mean? Many deals are put together with buyers in mind. Suppose ACA (the collateral manager) assembles the portfolio here with Paulson in mind, and then Paulson says, “that’s for me. Now I’ll invest.” Is this more “material” than having Paulson take the initiative? Suppose they collaborate in putting the portfolio together?

Get ready for even more fine print in our ever less readable disclosure regime.

On the other hand, why bother.  If the government targets you, no amount of disclosure will save you.

And, yes, Barry, Larry is a lawyer.

“You can’t make promises to people”

Posted by Marc Hodak on July 7, 2010 under Politics | Be the First to Comment

From today’s news, regarding how far down the income scale that tax increases are going to hit:

Sen. Byron Dorgan, D-N.D., who chairs the Senate Democratic Policy Committee, said he didn’t think there was “any magic” in $250,000. Sen. Dianne Feinstein, D-Calif., noted “you could go lower … why not $200,000? With the debt and deficit we have, you can’t make promises to people.”

Se. Feinstein, who voted for Medicare expansion and ObamaCare, did not intend irony.

Harry Reid gets the challenger he wanted

Posted by Marc Hodak on June 9, 2010 under Irrationality, Politics | Be the First to Comment

In the Nevada Republican primary, Sen. Reid got the tea party-backed “opponent he had hoped to face.”

The Reid camp maintains that Ms. Angle holds many views that lie outside the mainstream.

That may be, but at least Ms. Angle doesn’t hold the view that taxes are voluntary.

Incentives for government managers?

Posted by Marc Hodak on June 7, 2010 under Government service, Politics | Be the First to Comment

Most people would agree that the federal budget is a cesspool of waste.  The few who disagree are those who directly benefit from the spending, i.e., our members of Congress.  The agencies that spend the money know how utterly wasteful some of it is.  Some of it is so useless that even the agencies don’t have the stomach to spend it all.  Unfortunately, few agencies have an incentive to not spend money. In my brief stint in government, I’ve experienced the last quarter rush to “use it or lose it.”  It is an ugly, cynical process.

Now, the White House is asking for an incentive to not spend it all:

The proposed change would let agencies that save money redirect half the savings to other initiatives, with the rest going toward deficit reduction, an administration official said on Sunday…

“The president’s goal has been to change Washington’s focus from figuring out how to spend money to how to save money, and we are going to incentivize savings instead of spending,” Mr. Emanuel said Sunday.

At least the administration understands economics and incentives as it applies to the decision-making right before their eyes.

Alas, the article suggests the source of opposition to this measure:

It is likely to be welcomed by deficit hawks but could attract opposition from members of Congress who appropriate money, as it would take away some of their control of the federal purse…

Brad Dayspring, a spokesman for Rep. Eric Cantor (R., Va.), said the latest plan sounded “too complex” and “constitutionally questionable.”

“If this administration and Congress is serious about lowering the debt, they should start cutting spending immediately,” he said.

Which proves that economic ignorance/political cynicism is not monopolized by Democrats.

MOSERS madness revealed

Posted by Marc Hodak on May 19, 2010 under Executive compensation, Politics | Read the First Comment

I’ve been following the bonus drama in Missouri as the MOSERS Board of Trustees channeled the envy and ignorance of the mindless mob in denying their retirement plan managers their bonuses just because the fund went down in 2008.  Never mind that the bonus plan approved by the Trustees was rewarding managers for several years of outperformance, including during the disastrous 2008.  Once the newspapers mentioned the word BONUS, the reptilian part of their brains reacted with:  bonus = bad, and the board stripped the bonuses from their managers, reneging on their deal.

The board subsequently commissioned a compensation study.  The study told the board that even with the bonuses, the investment staff would only be getting 92 percent of median pay.  That’s below-median pay for above-average performance if they had gotten their bonuses.  Via PLANSPONSOR:

The retirement system’s board of trustees commissioned the study to help set new pay levels for next fiscal year, and a compensation committee has reviewed the options. Committee chairman Bob Patterson said members will vote by e-mail this week, and the recommendation will go to the full MOSERS board in June, according to the Post-Dispatch.

So, if they follow traditional form, Missouri will end up paying their fund managers a higher total compensation than they otherwise would have by leaving the bonus plan intact, with none of that compensation in a variable form that would advantage the fund and retirees by providing the proper incentives.

I spoke to Gary Findlay, MOSERS Executive Director, when the bonus spat first broke out.  He then believed that one could make the state agency work as well as a private fund.  I think Gary is an honorable fool.  On the other hand, it’s not like Goldman or any other private sector outperformer has been spared bonus envy.

I don’t remember the section on “karma” in finance class

Posted by Marc Hodak on May 13, 2010 under Politics | 2 Comments to Read

At Wharton, I was taught that there was exactly one reason to invest in an asset:  you would get more out of it than you put into it.  That’s the definition of value creation.  So, why would anyone invest in ShoreBank, a bank that has proven to be a massive money loser?

People familiar with the situation said Goldman initially declined to invest in ShoreBank. Within the past week, people familiar with the effort to save ShoreBank say Goldman agreed to commit about $20 million to the bank. That would make it one of the largest investors, according to people familiar with the talks. Goldman Sachs declined to comment on its involvement in the rescue effort.

Well, it would be difficult for Goldman to publicly acknowledge that it’s basically donating $20 million as a political sop to President Obama.  But that’s what they’re doing.  They aren’t the only one:

If Goldman invests, it will join a group that tentatively includes Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., among others, people familiar with the discussions say. BofA, Citigroup and J.P. Morgan all declined to comment.

Because it would be really tough to say, “President Obama has let us know that he would really, really appreciate it if we helped out ShoreBank.  He’s just concerned about them, you know.  And he has our nuts in his grip.”

Another Illinois politician was slightly more direct.

Bill Brandt, chairman of the Illinois Finance Authority, said. “I know that Mr. Blankfein and his marvelous organization have been much in the news of late, and I can sympathize with their desire to change the narrative.

If Goldman could change the narrative for a mere $20 million, they’d do it in a second.  But one can only change the narrative if one looks like they are doing this thing all on their own, and not because they are being shaken down by the feds and state.

A spokeswoman for Eugene Ludwig, a former U.S. comptroller of the currency who is working with ShoreBank to raise capital, said the White House and Chicago city officials haven’t been involved in encouraging the fund-raising effort among big banks, describing it as “totally a private-sector initiative.”

But of course.  So, again, why is this particular bank of such interest to the rest of the private sector?

“There’s been a lot of very determined voices about doing it because it’s the right thing to do,” a person familiar with the effort to save the bank said. “It’s an important institution, an icon, and we don’t want to see this one fail.”

President Obama drew attention to the bank’s micro-lending efforts while traveling in Nairobi as a senator. ShoreBank co-founder and now president Mary Houghton offered guidance on small-business lending to Mr. Obama’s mother, who worked on similar issues in Asia. Officers and employees of ShoreBank gave Mr. Obama’s 2008 presidential campaign a total of $12,150, according to data from Center for Responsive Politics.

In January, the Illinois Finance Authority considered assisting ShoreBank. Mr. Brandt, the authority’s chairman, said he and George Surgeon, ShoreBank’s CEO, are childhood friends, and Mr. Brandt was sympathetic both to ShoreBank’s “historic” status and to its request for a state bond issue to finance a bailout.

So, private banks are making this investment because:

– It’s the right thing to do

– The bank’s leadership and the President go way back

– The state finance authority chairman and bank’s CEO are childhood friends

Nothing about NPV or ROI, except some mention that the bank has long since been ignoring those factors, which all adds up to my favorite explanation:

“Sometimes a bank like ShoreBank has to rely on karma, and the planets seem to have aligned to provide some karma with respect to this particular deal,” Mr. Brandt said.

Yeah, planets aimed at the bankers’ testicles.  Welcome to the new world of political lending.