Compensation Cuts?

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.

18 comments… add one
  • 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.

  • Drew Link

    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??


  • No. What did you think of it?

  • Yes, that’s a problem, isn’t it? However, when you take the king’s penny, you are the king’s man.

    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?

  • steve Link

    Oh no, dont throw me in that briar patch!


  • PD Shaw Link

    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.

  • Drew Link

    “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.

  • Andy Link

    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.

  • PD Shaw Link

    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.

  • Andy Link

    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?

  • sam Link


    “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?:

    Hedge fund manager and arbitrageur, John Meriwether, is setting up his third fund, The Financial Times reported. The man behind Long-Term Capital Management is making the move just three months after he chose to close his second fund manager, JWM Partners.

    As Kevin says, words fail.

  • PD Shaw Link

    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.

  • Andy Link

    PD Shaw,

    According to this, the Fed is looking at regulating compensation at all the firms it regulates.

  • PD Shaw Link

    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.

  • PD Shaw Link

    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,

    Some choice bits,

    THE financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund’s creditors, our current problems might not be quite so bad.


    Because Long-Term Capital owed large sums to banks and other financial institutions, the Federal Reserve Bank of New York organized a consortium of companies to buy it out and cover the debts. Alan Greenspan, then the Fed chairman, eased monetary policy to restart capital markets, which were starting to freeze up. Long-Term Capital’s shareholders were wiped out, but none of the creditors took losses.

    At the time, it may have seemed that regulators did the right thing. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.

    […]In 1998, there was no collapsed housing bubble, the government’s budget was in surplus rather than deficit, bank leverage was much lower, and derivatives markets were smaller and less far-reaching. A financial crisis related to Long-Term Capital, however painful, probably would have been easier to handle than the perfect storm of recent months.


    The ad hoc aspect of the bailout created a precedent for what has come to be called “regulation by deal” — now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew. Decisions are made as to whether a merger is possible, whether a consortium can be organized, what kind of loan guarantees can be offered and what kind of concessions will be extracted in return. So far, every deal — or lack thereof, in the case of Lehman Brothers — has been different.

    While there are some advantages to leaving discretion in regulators’ hands, this hasn’t worked out very well. It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.

    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,

    The intervention also is having more serious long-term consequences: it encourages more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implies a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking; and it undermines the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.–emphasis added


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