Obama to execs who take TARP money: Learn how to survive on $500K a year
posted at 1:55 pm on February 4, 2009 by Allahpundit
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Read the fine print and you’ll see it’s not quite that simple. The cap only applies to companies that need “exceptional” assistance from TARP and contains an exception for stock options, provided they vest after taxpayers are fully repaid. (Non-exceptional TARP recipients can pay execs whatever they like so long as they disclose the amount.) Still, it’s a populist masterstroke, perfectly timed to bump Daschlepalooza and the cratering polls on the stimulus off the front page. Watch Geithner at the beginning, then skip ahead to 6:15 or so for the meat of Obama’s statement. The question is, will the money saved by limiting compensation exceed the value lost when talented managers decide they’d rather work somewhere else for seven figures? I’m guessing yes, since (a) gainful employment’s hard enough to come by right now that managers might not be as picky as we expect; (b) steering a TARP company back onto its feet will be a sufficiently impressive credential as to guarantee big paydays in the future for any manager who can do it; and (c) if — if — it’s true that government bailouts are the only thing right now standing between the financial system and collapse, then gestures like this aimed at shoring up public support for those bailouts are worth far more than the immediate savings in compensation. If it’s not true, well, then, sky’s the limit!
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Ah, in defending the CRA you conveniently forget to address the bigger part of the problem, which was the social engineers in congress mandating that Fannie Mae and Freddie Mac lower their standards for the types of loans they could buy. This wasn’t part of the CRA, but it was even more damaging. They did this at the behest of lobbying efforts by community organizing groups so that the poor (yes, the damned poor again) could obtain “affordable housing”. This effectively removed the risk of subprime lending for the lending institutions and created a market for bad loans.
Now, DTMH, here is a question. What acts as the biggest brake on greed? I’m sure you probably think thousands of more pages of regulations will curb greed. But, in reality, the biggest brake on greed is risk. RISK. Well, Fannie and Freddie took that brake away. So, the reason these lending institutions didn’t apply the same “stringent standards” (laughable) is because there was no downside to making bad loans when Fannie and Freddie would buy them from you.
Or, do you really believe that after decades and decades of assessing risk and analyzing credit scores, income and requiring down payments that, all of a sudden, one day the banks decided to chuck those standards out the window due to a sudden surge of (wait for it…wait for it)…greed?
See, our system works on risk/reward. Take the risk part out and all you are left with is reward. Greed wins the day.
So, the people who are to blame for this are the social engineers in Congress who interfered in the mortgage market in order to provide “affordable housing”. You don’t have to take my word for it either, you can look up the C-SPAN clips on youtube and see Barney Frank, Maxine Waters and other Democrats in utter indignation at the very thought that Fannie Mae needed to be reined in for fear of what it would do to access to “affordable housing”. And by affordable housing, I kind of think they’re talking about housing for the “poor”. Not really the fault of the poor as much as the fault of the Do-Gooders advocating on their behalf and the half-wits in congress who thought it made sense.
So, defend the CRA if you must. It was bad, strong-arm policy that contributed to the mortgage mess. The fear of CRA complaints being filed on one end and the removal of risk by Fannie and Freddie on the other end set up the perfect incentive for banks to issue as many subprime loans as they could.
And Fannie and Freddie were turning right around and selling them on wall street to financial firms that over-leveraged mightily to get a piece of the hot real-estate action. That is what we might call a Domino Effect.
JohnInCA on February 5, 2009 at 1:30 AM
A lot of people have made comments here to the effect of “he who pays the piper calls the tune”. That is exactly right. I think if you accept government money you have to understand that they call the shots. That is why I (and most conservatives) were dead set against TARP, the automaker bailouts, and all of the other bailouts. We don’t want government having that much influence in the affairs of private firms.
Basically I think it is bad policy to limit executive pay. What if one of these companies that received bailout funds wanted to go out and hire a Jack Welch or Michael Eisner type of executive to turn their company around? What could they say: “Hey, we would like to hire you to turn around our struggling company. How does $500,000 sound?” It would sound like a joke.
It’s kind of like when the automakers were asking for bailout money and Chuck Schumer came out and said “These companies have got to understand that their business model based on the gasoline engine is unacceptable”. Unacceptable to whom? The millions of people every year who provide a demand for all of those gasoline fueled cars. They seem to think it’s acceptable. No, it means it’s unacceptable to Chuck Schumer. Now, luckily, he didn’t get his way on that. YET. But the more government intrudes into the private sector the more they call the shots on what is produced. The less choice we have as consumers because we have ceded our decision-making ability to our “betters” in Washington.
What a CEO makes is determined by the board of directors. The board of directors is elected by the shareholders. If you are a shareholder and you don’t like the BOD giving huge bonuses to the CEO then vote the bastards out. What does government have to do with it?
That is why conservatives must fight every bailout. Let the companies go bankrupt. It’s called “creative destruction” and it frees up labor and capital to be used more efficiently elsewhere in the economy. Every time they get propped up with a bailout, what we are saying is that we’ll foot the bill for the companies incompetence, inefficiencies and bad decision-making. Stop the insanity.
JohnInCA on February 5, 2009 at 1:53 AM
Its just going to get absorbed and they’ll be as broke as they were vefore the bailout and we’ll be the ones poorer. This is the time to deny loans to those who would do the same to a bad risk!! People are forgetting the first bailout. The stock ticker and RUsh calling the DOW and Pelosi taking a huge sigh of relief seem like yesterday becuase it WAS just yesterday. We’re better off without stimulus. Let it fix itself with whats already in place.
johnnyU on February 5, 2009 at 7:40 AM
Let’s remember that the SEC in 2004 changed net capital requirements for broker dealers. They previously had to limit their debt-to-net capital ratio to 12-to-1. In 2004, the SEC instituted a voluntary program for broker dealers with capital of at least $5 billion which allowed broker dealers to go up to 40-to-1 in some cases.
Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley all joined this program. Look where most of them are now.
jim m on February 5, 2009 at 9:23 AM
Oh the humanity! How will these guys live on 500k? Think of their children! Oh the humanity!
sabbott on February 5, 2009 at 10:18 AM
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