The media putting words into Feinberg’s mouth

Posted by Marc Hodak on July 23, 2010 under Reporting on pay, Unintended consequences | Be the First to Comment

The headlines run amok:

–  New York Times:  “Federal Report Faults Banks on Huge Bonuses” (the link to this story said the headline was “Feinberg Says Bonuses Paid by Troubled Banks Were Unmerited”

– Washington Post:  “Bank executives received $1.6B; Treasury: 17 banks overpaid execs while receiving billions in taxpayer-funded bailout money.”

– Boston Post:  “17 Firms Issued Excessive Pay”

– Fox Business News: “Pay Czar Feinberg Blasts Banks on Bonuses”

And it goes on like that in an MSM echo chamber.

From those headlines, you’d think Ken Feinberg was foaming at the mouth about how bad these banks were behaving against some standard of morality or reason.  Alas, the whole story can be summarized thusly:

The banks made $1.7 billion in payments before the passage of pay restrictions that would not have been allowed under the pay restrictions.

That’s all he said.  Feinberg did not use the terms “fault” “huge” “overpaid” “excessive” “unmerited” nor did he deliver this report in a “blasting” manner.  All he was charged with doing was tallying up the total amount that had been paid that would have been impermissible under subsequent rules, and that’s what he did.  All of the accusatory, judgmental, sanctimonious verbiage was added by the media.

In the last part of his report, however, Feinberg did go too far, essentially arguing for higher bankers pay in normal times.

Feinberg proposed that firms adopt policies that provide compensation committees with “special restructuring rights.”  What do “special restructuring rights” mean?

If the company’s board of directors has identified that the firm is in a crisis situation, the compensation committee would have the authority to restructure, reduce or cancel pending payments to executives—and this authority would supersede any rights and entitlements executives have in normal circumstances.

It’s not plain from this language that Feinberg is actually arguing for an abrogation of contracts, although it’s difficult to get around “rights and entitlements” as some form of binding agreement.  Regardless of what Feinberg means, many people in the respecting-contracts-is-optional segment of our society will certainly interpret it this way.  At the very least, though, Feinberg is arguing that whatever agreements executives have in “normal times” be ignored in a “crisis situation.”  Now that industry execs are forewarned about this possibility, how do you think this scenario will unfold?

Bank under Federal scrutiny:  “We’ll offer you $1 million bucks to work here.”

Private equity fund:  “We’ll offer you $1 million bucks to work here, and we won’t include a ‘crisis situation’ excuse to back out of that deal.”

Clearly, the bank under Federal scrutiny will now have to offer more to entice this person.  If people generally require a greater reward to take on greater risk, how do you think one of those financially savvy, legendarily greedy Wall Street execs will react?

That’s right.  Enforcing greater uncertainty in their pay with respect to “crisis” situations almost guarantees that they will be asking for more in “normal” situations.  You can bank on it.