Feds Cutting Exec Pay

by rrusczyk, Oct 22, 2009, 1:51 AM

The alleged plan of the federal government to cut executive pay at seven bailed out firms reminds me of the old Jerry Tarkanian line: "The NCAA was so mad at Kentucky, it gave Cleveland State two more years of probation."

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It doesn't seem like cutting their pay would be effective; especially bonuses, because if there are no bonuses and they are getting fired/pay-cut willy-nilly, what incentive do they have to do their best?

by Mewto55555, Oct 22, 2009, 1:58 AM

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It's a populist gesture, overshadowed in practical importance by the plan to use some of the TARP money to lend beyond the banks. I hope that they're actually working on reregulation legislation somewhere in the background.

by jmerry, Oct 22, 2009, 2:56 AM

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Nate Silver had a reallly good article about the politics of regulation reform:

http://www.fivethirtyeight.com/2009/10/issue-that-could-fracture-both-right.html

by worthawholebean, Oct 22, 2009, 9:50 AM

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Let's be clear, not only is it a populist gesture, but it's being done because the people at JP Morgan and Goldman (not among the firms suffering the pay cuts) are making so much money. Hence the Tarkanian quote.

Who knows what will happen with regulation, if anything? Most people aren't exactly clamoring for it, perhaps because they don't see how it affects their everyday lives. But it affects the lives of the people who fund political campaigns...

Besides, it's not even remotely clear what to do -- is Congress really going to come out and say "we should stop making it so easy for people to borrow money when it's unlikely they'll pay it back"? That's a nontrivial part of the problem (though not all, of course), but Congress so far seems to be opening that spigot, not closing it...

by rrusczyk, Oct 22, 2009, 1:38 PM

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Cutting the pay of executives who have received government bailout money is nothing more than a diversion. The savings are just drops in the bucket. The outrage is and remains the bailout itself. They should have let these loser companies fail. What would have been the big deal? Other companies would have eventuallly taken their place.

by freeshooter, Oct 22, 2009, 2:25 PM

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The "big deal" lies in that "eventually" - that's the tricky part. As I understand it, and I'm no expert, we would have seen a run on the stock market, a plummet in the value of the dollar and the lending market freeze up even more than it did: essentially financial Armageddon as people rushed into gold, U.S. bonds and other safe securities. This would have sent shock waves through the economy, destroying existing business and sending unemployment really skyrocketing. Sure, eventually, we would have recovered, but that eventually could have meant 10 years of double-digit unemployment. Now, I think we need to break these companies up: make sure none is "too big to fail." But the short-term decision was the correct one.

by worthawholebean, Oct 22, 2009, 8:31 PM

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I think the short-term decision to defend most of the banks was probably the right call. I'm less confident it was the right call with respect to the car companies.

I'm not too confident that it's possible to make the companies not be "too big to fail". I'd argue that the recent events are moving us in the other direction, regardless.

As for what to do about, I'm not so sure beyond a few broad general principles, and even those I'm pretty unsure where to start on. Deal with the credit rating agency mess. No more quasi-private companies. No more heavy subsidies of loans to poor credit companies and people.

For all the talk about AIG and Citicorp and the car companies, why aren't more people infuriated about Fannie and Freddie? We're going to spend more on that mess than on all the others combined...

by rrusczyk, Oct 22, 2009, 9:05 PM

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@worthawholebean: I am certainly no expert, either (heck, I am not even an American

), but I do know this: the bailout money is being hoarded by the banks because there is---excuse my lousy French---still a whole sh-tload of toxic assets (courtesy of the Wall Street wiseguys) which remains on their balance sheets. I therefore doubt your economy will ever see any of it.

Here's an apalling truth: the number of cities and municipalities across the US that are going bankrupt is increasing every day. We both know that for public services to be maintained, property taxes will have to be increased. This sadly translates into more foreclosures as those property owners who were barely able to make their mortgage payments would surely lose their property.

@rrusczyk: I'm not too confident that it's possible to make the companies not be "too big to fail".

Was is it not Nader who said "they're too big not to fail"?

As for Fred and Fan, how these two private companies with their shares listed on the NYSE, for heaven's sake, . . . how they ever managed to hoodwink both the US government and public is something to behold.

Best,

~your friendly neighbour to the north

by freeshooter, Oct 23, 2009, 3:30 AM

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Re: too big not to fail quip from Nader

I might use the same phrase to describe governments, like those state and municipal governments you mention...

by rrusczyk, Oct 23, 2009, 12:41 PM

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I would like to add one more point if I may. Where was the public fury at Big Pharma corporations like Pfizer? Pfizer was slapped with a 2.3 billion dollar fine last month by the U.S. government for---get this---fraudulent marketing, faking research data, kickbacks to doctors to push Pfizer drugs, and some other nasty stuff. The fraudulent marketing charge was specifically for the the antipsychotic drug Geodon. Amazing. What's even more amazing is that there were no criminal charges filed against Pfizer executives, let alone any of these guys doing serious jailtime. And . . . Pfizer shares are up roughly 20% since the fine was levied.

And therein lies the problem: Today in the U.S. (and in Canada, to be sure), white-collar crime pays.

P.S. I just received the first of three mail parcels of the Art of Problem Solving books---19 books in total. (Yeah, I am the Canadian who bought them.) I am slowly building my 5-year-old daughter's (math) library . . . plus her old man needs to brush up on the math, too.

by freeshooter, Oct 23, 2009, 8:32 PM