Posted by Marc Hodak on January 4, 2010 under Executive compensation, Politics, Reporting on pay | 
A few top executives at AIG left on the last day of 2009, including Anastasia Kelly, general counsel and chief HR officer of AIG. By leaving then instead of after New Years, these officers, among the “Top 25” of the firm, got to keep their rights with respect to severance and prior bonuses. While these officers were doubtlessly driven by their short-term incentives, they certainly weighed those against the potential long-term benefits of sticking with AIG, and found those prospects wanting. Kelly in particular was outspoken in critiquing the general effect of pay regulations on AIG and its ability to remain competitive for talent. Why would she want to stick with a foundering ship with little hope of getting righted?
Politics has driven the compensation policy of this administration (as it would any administration, perhaps), especially with regards to companies that have received government funds. Fair enough. We own them; we tell them what the score is with their pay. We get to grumble about the $2.8 million in severance that Kelly was collecting for abandoning ship, even though that is what any of us would have done if we had the chance. We get to say, “Who needs her?” as if each of us had the position or wisdom to judge that, better than her CEO boss, who has also complained bitterly about his ability to retain talent under the current pay regime.
But just because we can deal with the talent issue glibly and dismissively doesn’t mean that it isn’t real. Talent is not being dealt with in a serious manner in the press. Like the utter lack of questioning about what would happen to AIG if Hank Greenberg were pushed out for political reasons, no one is getting by the big numbers that these executives make, and could expect to make anywhere outside of the government sector, and asking, “Is this really good for AIG, a giant company in which I have a direct investment, and was saved because its presumably out-sized effect on our economy?”
Posted by Marc Hodak on December 31, 2009 under Politics, Unintended consequences |
That’s what a statistically improbable number of death certificates are likely to read due to our tax law. No one will be able to prove which of the death certificates were fudged, or which doctors might have been fogging up the mirror for their patients until the magic hour struck. But there is no question about how powerful the incentives will be for perhaps dozens of would-be beneficiaries of congressional ineptitude.
Congress has allowed the estate tax to be completely repealed. Over 90 percent of Congress did not want this result. Virtually none of the Democrats wanted the wealthy to have any shot at keeping all their money in the family. The mere thought makes your fainting liberal…well, faint. Even a majority of Republicans were willing to keep an estate tax around, as long as it was something less than confiscatory. And it’s not like Congress didn’t have plenty of warning to do something about it. Like 10 years. This is the kind of failure that in the private sector would have gotten someone fired, for sure. The congressmen involved will most likely be reelected.
But Congress will not simply recognize its incompetence and let the law be the law. It’s not: “Hey, we screwed up on the estate tax. We guess we’ll have to figure out how to fix the mess we created later.” No. They are doubling down on their fecklessness by threatening to make their “fix” retroactive, making the mess even messier.
That’s right. Congress is telling law-abiding taxpayers with a straight face, “Sure, the law says that your estates will be exempt from tax in 2010. And we know that you selfish slobs will plan accordingly in order to deprive us of your hard-earned cash to the extent allowed by the law, you unpatriotic wretches. But don’t spend too much on that party, fair shitizens. When we’ve fixed the law to our satisfaction on our unhurried timetable, we will reach back into the past to take your money away. Don’t like it? Tell it to the justices.”
That’s the way I’m hearing it. How about you?
Posted by Marc Hodak on November 21, 2009 under Collectivist instinct, Politics |
I was at a CFO conference on Thursday where the keynote speaker was CFO of the Department of Energy, Steve Isakowitz. You’d think a CFO, even one in government, would talk about things like accountability or controls for spending, especially with $36 billion in stimulus funds dropped into his department’s lap. Instead, this CFO ran a cheerleading session about all the investments the government was making on “green” initiatives and energy independence, which he acknowledged had a history of failure, but not one word about accountability.
At the end of his talk, I got up and asked him: “What controls will you have to monitor the returns on these investments? And how will you keep from crowding out private investment in similar energy projects?”
His answer: “The private sector is not making these investments. In fact, one of our screens for making any particular investment is that the private sector is not financing such projects.”
When I sat down, a couple of the CFOs sitting at my table shrugged and said that it appeared that he didn’t want to answer the question about accountability for returns, or that he chose to answer it with with a highly questionable assertion about lack of private sector involvement.
I felt that his answer was clear. He basically said that the government has created a huge venture capital funds–rivaling Kleiner Perkins, Sequoia, NEA, etc.–and that this fund will only make investments that no private investor would touch.
What upset me wasn’t that he failed to answer my question, because I think he did after a fashion, but that his answer was intended to satisfy a finance audience. And what really upset me is that it appeared, aside from a few of us cranks, that it worked.
Posted by Marc Hodak on November 8, 2009 under Politics, Scandal |
It should, according to the logrolling that got the vote of the lone Republican, freshman congressman Rep. Anh “Joseph” Cao:
Mr. Cao wants the Department of Homeland Security to forgive $1.27 billion in disaster loans in the wake of Hurricane Katrina; officials said they would try… Mr. Cao said in a statement that he won a commitment from Mr. Obama to address issues involving Louisiana hospitals and the disaster-loan forgiveness.
There may be good reason to forgive disaster loans to New Orleans residents or businesses. But doing so in exchange for committing the nation in a decisive step toward nationalized health care seems like a weak and profoundly cynical bargain, not to mention naive.
Posted by Marc Hodak on under Governance, Politics |
Well, Treasury blocked the sale of Fannie Mae tax credits to Goldman Sachs and Warren Buffet:
Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. “In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval,” an administration official said in a statement.
As noted earlier, this sale would have helped Fannie and Freddie improve their financial positions while promoting the public policy intent of these tax breaks, i.e., spurring low-income housing. The Administration’s objection no doubt centered on the idea that Goldman might have also benefited, a politically difficult fact that Saint Warren’s involvement could not overcome.
So Treasury, which appoints the board of Fannie and Freddie is breaching its duty of loyalty as the conservator of those wounded institutions, making it more likely that they will end up going to Treasury for another bailout, while undermining the public policy intent of Congress in creating those tax credits.
On the other hand, if Treasury can get away with arguing in favor of taxpayers on this tax credit, why don’t they overturn every tax credit in the name of helping taxpayers with something resembling a fair and flat tax? Why should taxpaying renters be penalized by the existence of a mortgage interest tax credit? Why should taxpaying singles and childless couples be penalized by a child care tax credit? ….
Posted by Marc Hodak on October 30, 2009 under Irrationality, Politics |
Floyd Norris makes a good case that bankers get paid so much mainly because banks make so much money. So, he reasonably contends, if you want to reduce banker’s pay you have to reduce bank profits.
Personally, I don’t have much animus about other people’s pay or profits, but I think Norris raises a good question about whether the profits of our larger banks are large for good or bad reasons. He suggests that the increasing concentration of capital in fewer, larger banks we have seen over the last couple of decades is not necessarily a good trend for the economy, that our economy would benefit from less concentration in the banking industry. (And bankers would make less!)
Without judging the normative aspects of that claim, it’s worth asking whether all the political brainpower going into reforming our financial services industry will have the net effect of making it more or less competitive. Will a slew of new regulations, for an industry that is already among the most regulated, reduce or increase barriers to entry? Will new oversight into the formation of banks encourage or discourage new entrants?
I can answer from personal experience that the trend is not good. I have a friend who tried to create a new bank. After getting all the paperwork for state and federal authorities, after raising over $100 million in capital, and after all the other headaches and sacrifices of a start-up that took up 18 months of his life, a single bureaucrat in the FDIC said he would reject his application. This man would give no reasons for his rejection, which in any case would have been difficult because this very same FDIC bureaucrat promised my friend about a year earlier that if he got all his forms in order that he would certainly be approved.
My friend got his congressman, who is on the finance committee that oversees the FDIC, to ask for an explanation of the rejection. This congressman forwarded the response he got, which was full of the kind of mealy-mouthed bureaucratese that explained nothing in three pages, including a comment that “there were other reasons besides those spelled out here.”
So, that $100 million has not been allowed to capitalize the nearly $1 billion that could have been lent out to the small businesses that desperately need it. My friend, instead of contributing his entrepreneurial energies to our economy, is looking for other work now. And the big banks, despite their own frustrations with the bureaucrats, have one less competitor nipping at their heels. And their executives are, in fact, doing better for it.
And my friend, who ironically immigrated from France and became a citizen here because he couldn’t stand their stifling bureaucracy asks, “Is this America?”
Posted by Marc Hodak on October 21, 2009 under Executive compensation, Invisible trade-offs, Politics |
Obama’s pay czar has just dropped more shoes, this time on 175 pairs of feet:
Kenneth Feinberg, the Treasury Department’s special master for compensation, will lower total compensation for 175 employees by an average of 50%, these people said. As expected, the biggest cut will be to salaries, which will drop 90% on average.
I’m sure that Mr. Feinberg, like any good fiduciary, carefully examined the value of each of these 175 executives, individually determined their cost relative to their value, evaluated competing alternatives for their talents, including more entrepreneurial venues (e.g., hedge funds) where they can make gobs of money away from public scrutiny, then evaluated the risk associated with losing each of these people, and the cost to the shareholders of doing so.
Or, more likely, Mr. Feinberg was told by the politicians who ran a different calculation that he had to cut those executives’ pay in half, regardless of the financial consequences, and he figured out how to deliver that result.
The political calculation went something like this: “If we slash the pay of these executives enough to grab headlines, and lose 35% of them, e.g., to competitors, early retirement, etc., then taxpayers-as-shareholders may lose about 25% on their investment relative to keeping that talent. But, of course, the taxpayers-as-shareholders will never know what they’ve lost because if they thought like prudent investors we government officials could never get away with the crap we pull on them all the time. On the other hand, headlines that say we really stuck it to the bankers can get us a 4-6 percent voting edge in competitive districts where we might otherwise be vulnerable to political challengers.
In short, the politicians have figured out yet another way to buy our votes with our dollars. And our largely innumerate media pretends like these decisions are made purely based on the public good.
Posted by Marc Hodak on September 24, 2009 under Politics |
That’s the convenient consensus of political leaders, anyway. Convenient because then they don’t have to deal with the possibility that government manipulation of the cost of capital might have had a meaningful impact on the capital markets. They can pretend that government guarantee of mortgage loans didn’t materially goose the mortgage market. They can blithely conclude that 70,000 pages of new financial services regulation since 2000 was just not enough. Nope. It was the compensation of managers and traders. Yeah, that’s it.
What, a scientist might ask, was different about banking compensation in recent years that would have caused this particular crisis in 2008 instead of, say, any time in the last couple of decades that bankers were being paid obscene bonuses under supposedly perverse incentives? The best answer to that question would be…stepped up government manipulation of the capital and mortgage markets.
The government changed the game with artificially low rates, and artificially high mortgage profits, and artificial capital market complexity born of mind-numbing red tape. The bettors were always at the table. The game was changed on them.
So, if you’re a government official, all this of course means that we have to change the way people bet so we can keep the silly game we created. We can keep absurdly low interest rates that are divorced from the reality of our underlying cost of capital. We can keep Fannie and Freddie, and now the Fed, propping up housing markets because high food costs, high energy costs, or high costs of anything else are bad, but high housing costs are good. Then we can expand regulation of the financial sector because an extra 10,000 pages is sure to achieve the Nirvana that the prior 70,000 pages could not.
But certain people–rich people–will be making less money. Now, wouldn’t that make it all better?
Posted by Marc Hodak on August 24, 2009 under Irrationality, Politics, Reporting on pay |
Kenneth Feinberg is contemplating the serious issue of whether or not to disclose the names and compensation of the highly paid executives whose pay he is reviewing. On the one hand, there are personal privacy and security issues:
“One of my clients makes $25 million a year and drives a Honda,” said Eckhaus, of Katten Muchin Rosenman LLP. “He tries to lead a fairly modest life and he would be horrified if what he makes appeared in the paper. Not only would his neighbors know, but his kids would know, and it would affect his ability to raise his kids. These are people, not a circus sideshow.”
Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank in Washington, said releasing names and salaries of top executives could be intrusive and would not serve a public good.
“When you turn it into specific names, it’s kind of voyeurism,” Elliott said. “It’s not the principles anymore, and I think it does violate their privacy.”
He also said too much disclosure could prompt top executives to resign, harming companies as they try to recover and repay the government.
Very good points all. On the other side, you have Democratic Representative Alan Grayson:
Grayson told Reuters he is unsympathetic to the argument that the pay czar should not name names.
“If this is the same top talent that caused their firms to be destroyed and put the entire U.S. economy at risk, I wish they would leave the firms and leave the country,” he said.
Read more of this article »
Posted by Marc Hodak on August 13, 2009 under Executive compensation, Politics, Reporting on pay |
The Screwed Seven must submit their pay plans to the horribly nicknamed Pay Czar by Friday. The reports about this have fairly captured his situation:
Many believe Feinberg will be squeezed between public fury over outsized bonuses on one side and what is best for companies trying to compete and retain talent in a marketplace that demands million-dollar salaries on the other.
If Feinberg rules that big compensation packages are mostly fair, lawmakers may assail him as the tool of corporate interests. If he tries to strike down salaries, boards and shareholders may blame him for chasing away the rainmakers.
The implication, here, is that our lawmakers consider corporate interests expendable. In the context of taxpayers’ interests in these particular corporations, this would make Congress a lousy fiduciary, but we already knew that.
Once again, this Congress has placed itself to the left of the administration:
“I don’t think the American people begrudge that people make big salaries, as long as they’re not jeopardizing the goodwill of the public in doing so,” White House spokesman Robert Gibbs said Wednesday.
Contrast that with this concern from Nancy Pelosi and Barney Frank:
[TARP recipients could] “enrich their executives while deferring repayment of the federal financial assistance that helped them avoid financial catastrophe.”
As if preventing their “enrichment” will help anyone avoid financial catastrophe.
The fact that Feinberg is doing this job for free is not reassuring. On the other hand, I know they could not have paid me enough to do it. I get rather claustrophobic in the crevices of shifting boulders.
