Good Plan!!

Looking at the NY Times this morning and I see an article entitled “Administration Seeks Increase in Oversight of Executive Pay”.

WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

…

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.

Is this really what we want? The government deciding how compensation is determined and how much a person can make. Doesn’t that sound a little, I don’t know, Marxist? From each according to his ability to each according to his need – well who determines ability and need? What happens when congress decides that you’re overpaid and they are going to slap a 100% tax on everything you make over $30,000.

I guess we could adopt the Twentieth Century Motors plan and let everyone vote on it, but that probably wouldn’t work well.

And why, oh why, isn’t anything said about limiting the pay of pro-athletes and movie stars? Both of those industries have been sucking at the public tit for years and their salaries are far in excess of value provided.

I know that people are angry right now and in part I agree with them. I think a lot of executives are overpaid for what they do, but that’s part of having a free labor market. You get to make the best deal you can. And honestly just because you’re angry doesn’t mean you’re right. Kids get mad when they aren’t allowed to play with loaded handguns and matches – so what. These actions have consequences and maybe that should be considered instead of blindly rushing forward in a craze of righteous indignation.

I almost sound Randian here which is funny because I think Atlas Shrugged is both simplistic and stupid, (and yes I know many people consider me simplistic and stupid so the irony is not lost)but she did hit one thing right. If you remove a person incentive to work they stop working. If nothing else the former Soviet Union showed that.

OK, now that I have finished ratting some of the other aspects of this plan I agree with (at least in theory I haven’t seen details yet):

It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.

A good part of the reason we are in this mess is because of a lack of transparency on the part of traders. The system won’t work unless everyone has access to the same facts.

While I am here let’s jump back to the AIG bonuses for a bit. One of the reasons that we are in this spot is that the government decided AIG was too big to fail following the disruption caused by the Lehman Brothers failure. At the time I supported that decision, and I still do to an extent, an overnight failure would have been devastating to the economy, but now the question arises is the bailout doing more harm than good? I think so.

Joe Nocera makes the same point, and raises a damn good question.

(A rich irony here is that any nonfinancial company in A.I.G.’s straits would be in bankruptcy, and contracts would have to be renegotiated. The fact that the government is afraid to force A.I.G. into bankruptcy, despite its crippled state, is the main reason Mr. Liddy felt he couldn’t try to redo the contracts.)

But there is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

He is right. The immediate crisis passed awhile ago. The government needs to let AIG go into bankruptcy and reorganize. It may be that AIG like Ford or GM may require a special set of bankruptcy laws. So be it, just read the damn things before voting on them congress.

This entry was posted on Sunday, March 22nd, 2009 at 9:18 am by Chad and is filed under Big Thoughts, How Not To Succeed In Business, Your Tax Dollars In Action. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.