I will believe this:
WASHINGTON — Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in federal bailouts, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.
when I see it. According to the article some of the companies receiving bailouts will see their top management’s pay being limited to $200,000 per year.
One word: contracts. A lot of the big boys have employment contracts that preclude this.
Not that I’d mind. IMO it’s overly generous. Their pay should be limited to that of a GS-14.
What about banks that took federal monies because the Feds wanted them too so that people couldn’t spot the rotten banks?
Yes, that’s a problem, isn’t it? However, when you take the king’s penny, you are the king’s man.
Unrelated/related comment: Did you guys see the PBS/Frontline documentary last night on the battle between the OTC Futures regulators vs Clinton/Greenspan/Summers/Rubin/Geithner/Leavitt??
Fascinating.
No. What did you think of it?
Oh, how I loooove this. Great phrase, because it highlights the authoritarian nature of these bailouts. Our government basically acted like thugs, “Take the money or we break your legs.” Now, once they’ve taken the money then the real screwing starts.
Of course, how long until the table turns and soon the Wall Street guys are calling the shots?
Oh no, dont throw me in that briar patch!
Steve
Weren’t some of the largest contracts to non-exectuives? You know, the magic men that have no supervisory role, but know how to channel animal spirits from the great beyond?
I opposed the retroactive rewriting of the compensation deals on rule of law principles, but going forward I’m not sure it matters, except that it appears that fixing compensation is the only way Congress knows how to regulate tha financial sector. Jeepers! Get a new box of tools.
“No. What did you think of it?”
Dave, if that query is in reference to the Frontline program I’d say it was sufficiently interesting to warrant watching it on line. (Go to PBS/Frontline and look for “The Warning.”)
And it was good enough that I will watch the related piece called “Meltdown,” which I must assume chronicles the events leading up to the 2008 problem.
The warning is essentially the story of a power struggle between an attorney named Brooksley Born who headed the OTC Commodities Regulatory agency in the 90’s, and the powerful group of Presidentail inside advisors I cited above, plus Greenspan. Born desired to place derivatives trading under her regulatory oversight. The other side fought her vigorously. The punch line of course is that after this fight Long Term Capital Management tanked in 1998.
Although Greenspan refused to be interviewed, what gave the piece its credibility was the first hand interviews, and more importantly, the taped Congressional testimony.
The political side notes are probably 4: 1) it lays to waste the notion that the “Wall Street Greed” financial calamity was a product of a lax Bush administration (although I’m sure that “Meltdown” is going to chronicle the continuing problem during his years), 2) the inference that the opposition to Born was driven by political considerations: to keep a strong economy going for the Clinton legacy and the 2000 election, 3) that several of the people who were in the thick of it, and dead wrong in their position, (Larry Summers, Geithner) are now front and center in the Obama Administration, 4) that the roots of the entire problem (then and in 2008) lie in bad public policy: easy credit to non-creditworthy people (CRA……and then everyone in sight), and the ability of loan originators to take those bad loans and get them off their balance sheet through Wall Street’s securitization machine. (Admittedly, only a portion of the derivatives market.) The last point of course being the drum I’ve been pounding for about a year now.
I’m interested if anyone can tell me where the authority for such an action comes from.
Sort of my point. I expect court challenges. Congress’s powers are practically unlimited but the “pay czar” is an unelected consultant who hasn’t even been approved by the Congress. The one area that I’m skeptical over Congress’s powers would be in its power to delegate its own authority, especially to unelected and unapproved outsiders.
Congress has the power under the commerce clause to regulate compensation (like minimum wage laws), subject to other provisions in the Constitution. Most notably, there are limitations under the due process clause and the takings clause that limit retroactive application of new rules.
How the pay czar got delegated this authority appears to be an open question. The optics being presented are clear: Obama wants us to believe that the pay czar made the decision, which, if true, would violate the Appointments clause, which requires principle officers to be appointed subject to Senate oversight. If challenged, I wouldn’t be surprised if the pay czar becomes merely an informal advisor who just makes recommendations to his superiors. I believe Robert Byrd has already said this set-up stinks.
PD Shaw,
I’ve just read that this “program” (for lack of a better term) would not just apply to banks that received federal money, but to literally thousands of banks as a “risk-reduction” measure.
So Congress has the power to regulate compensation – does that mean they can delegate that power to the executive branch to set compensation as they see fit?
@Drew
“The punch line of course is that after this fight Long Term Capital Management tanked in 1998.”
BTW, did anyone see this on Kevin’s blog:
Third Time’s the Charm?:
As Kevin says, words fail.
Andy, from what I read in the paper today, the program just applies to a small handful of TARP recipients, and is just going to give the Federal Reserve the power to review compensation contracts. As complained at the time, TARP gave the treasury and federal reserves a blank check to fix the economy. I wouldn’t be surprised if TARP gave the Fed extreme oversight on the companies receiving TARP money.
I’ve also heard that Schumer and others have been wanting to regulate executive compensation for all U.S. companies since hearings last Spring. Maybe, that’s what you’ve heard too. But my impression is that Congress would like to pass omnibus legislation of it’s own. Congress passed regulations of executive compensation in 2002 under Sarbanes-Oxley. There have been studies on the effect on executive compensation/company performance, but it might be nice to refresh them.
On the broader point, there is something called the nondelegation doctrine, which says that the Constitution places the legislative power in the Congress and it can’t simply delegate it to someone else. It can delegate responsibility to an agency by giving the agency some “intelligible principle” to operate under. The courts don’t enforce this principle much, probably because it doesn’t see a lot of good in protecting Congress from delegating away its authority, but also probably because the question of whether a principle is intelligible enough is a matter of degree.
BTW/ there is a big case currently before the SCOTUS involving the constitutionality of an agency created by Sarbanes-Oxley that touches on some of these questions. Prof. Bainbridge and other business law bloggers filed an amicus brief with the SCOTUS. They argue that the accounting oversight board that was created to remove itself from political pressure was unconstitutional because it was completely removed itself from political accountability.
PD Shaw,
According to this, the Fed is looking at regulating compensation at all the firms it regulates.
Yeah, I think the article I read conflated the two things that are happening, and I think there actually three. (1) Pay czar is cutting compensation for executives in seven TARP companies. I assume the authority comes from TARP and is intended to safeguard the investment. (2) The FED is issuing guidance, which doesn’t sound like something that is specifically enforceable. The guidance is still up for public comment, but it looks like an essay on good compensation practices that perhaps shareholders might insist on and which bank examiners might rely upon in evaluating whether the bank is financially sound. I’m not sure if this means anything other than that banks will better document the reasons for their compensation arrangements. (3) Congress may try to regulate executive compensation for all U.S. companies.
This might be the fed’s angle:
Banks should “have its board of directors receive and review, on an annual or more frequent basis, an assessment by management of the
effectiveness of the design and operation of the organization’s incentive compensation system in providing risk-taking incentives that are consistent with the organization’s safety and soundness.”
The accusation made by Elizabeth Warren yesterday was that compensation is out of control because the Board of Directors and the compensation committees are in bed with the executives. She said they sit on each other’s boards and slather each other with goodies. By making the Boards do more work and document their decisions, the Fed is creating more evidence for the government to pursue fraud charges and for shareholders to bring their own suits.
Here is Tyler Cowen’s NY Times article that looks at the precedent set by the bailout of LTCM,
http://www.nytimes.com/2008/12/28/business/economy/28view.html
Some choice bits,
TL;DR–Discretionary power doesn’t work well, an early bailout set up a moral hazard problem, and combined with the bursting housing bubble and already large federal government deficits, this discretionary power is one of the things that has gotten us in the current mess.
But hey! Technocracy works great. So we’ll elect a man who loves using discretionary power to keep right on doing what helped get us in this mess in the first place. I don’t see how that can go wrong.
Here is the Cato Institute’s take on the bailout as well,
http://www.cato.org/pubs/briefs/bp-052es.html
meh….