Economics

From Banks to Battered Wives

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By now you've heard that President Obama has limited the salaries of executives at bailout-receiving companies to a half-mil a year. Or, as the Reuters news agency puts it:

High-flying Wall Street executives have had their wings clipped by government officials who earn less than many junior bond traders after President Barack Obama on Wednesday capped at $500,000 the salaries of executives whose companies take U.S. bailout money.

Oh, snap! Anyway, one point that's already been largely forgotten in the fooferaw is that the federal government not so long ago FORCED UNWILLING BANKS TO TAKE BAILOUT MONEY. Remember how that went?

Although Wells Fargo chairman Richard Kovacevich resisted, Paulson gave the bankers no choice. It's partial nationalization

Italics mine, to italicize. As Newsweek put it at the time,

Richard Kovacevich had a point. Why should his company, Wells Fargo, sign its freedom (and his compensation) away to the U.S. Treasury when, unlike many other banks, it hadn't overloaded itself with risky mortgage-backed securities? The Wells Fargo chairman eventually agreed Monday to Treasury Secretary Hank Paulson's capital injection plan–it was, frankly, an offer he couldn't refuse–but Kovacevich's objections still resonate. Amid the continuing market turmoil, there is a sense that all of us are being asked to assume collective guilt for the large, but still identifiable, group of rogues and villains who got us into this mess. And then we're supposed to just forget about it.

Unless you are one of the rogues and villains, that is. Sure enough–"Bailed-Out Bank Nixes Lavish Vegas Junket After Outcry From Capitol Hill":

"Let's get this straight: These guys are going to Vegas to roll the dice on the taxpayer dime?" said U.S. Rep. Shelley Moore Capito, a Republican who sits on the House Financial Services Committee. "They're tone deaf. It's outrageous."

Having been a Wells Fargo customer for too much of my adult life, I can say without fear of contradiction that the bank deserves to be dipped in a vat of boiling grease. And I'll stack up my class resentment against anyone's, particularly when it comes to billionaire hosebags scarfing at the public trough. However, the only "outrageous" thing going on here is that the government forced itself upon a comparatively successful private company, bitched about the host's ingratitude, and is now doing what the federal government does best: Setting compensation rates at commercial banks. What's that you say? Bank stocks tumbling on "nationalization" fears? Why I never!

To sum up: In a fit of righteous anti-greed, people who make several hundred thousand dollars a year as federal employees (then millions more out of office doing whatever it is Tom Daschle was doing) are consciously driving the best talent out of endangered firms that are sitting on scores of billions of taxpayer dollars that they were made to accept by force. Shoot, what could go wrong with that?

As President Obama said,

There will be time for them to make profits, and there will be time for them to get bonuses–now is not that time.

It will likely never be that time, as long as the government is in the business of running private commerce. Banks will be forced to write 4 percent mortgages. Automakers will be forced to build magical green cars that spew out 3 million jobs from their exhaust pipes. Airlines will be forced to Buy American, governors will be forced to spend their budget-filling bounty on unionized teachers, and newspapers will be forced to run Rahm Emanuel columns. Local commercial decisions will be made in Washington, based on politics, instead of by business-owners, based on consumers. As a direct result, the once-autonomous firms, despite all that fancy money, will get less and less competitive, spend more and more of their time trying to please Washington instead of their customers, and will continue coming back for more as long as the well doesn't run dry.

Even if some of the details are off, the general results are as preditable as a Beltway school closing early on a snow day. Nationalizations have happened time and time again over recorded history, and their rate of success is not ambiguous.

NEXT: Ryan Frederick Convicted of Voluntary Manslaughter (UPDATE and Bump)

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  1. Well Matt, it seems you’ve found your ranting voice again. Where was it? On the night stand with that unfinished copy of Dreams from My Father?

    Well I for one am sold. I’ll follow you anywhere. Who do we kill first?

  2. That story about the “forcing” of the money was probably bullshit.

    Look at Wells stock since then, they are in trouble and they did need the money from USGOV.

  3. Preach it, Matt!

    That story about the “forcing” of the money was probably bullshit.

    I doubt it. I talk to money center bankers periodically. The feds are putting a lot of pressure on people to take bailout money right now. In classic gov’t fashion, they’ve got to get the money out the door, whether its needed/wanted or not, or the program “fails”.

  4. Look at Wells stock since then,

    It couldn’t possibly have dropped because investors thought that having the feds running your business would be bad for business, could it?

  5. I’m confused about the Wells Fargo issue as well. I wouldn’t be too surprised if the treasury applied pressure, but I’d like to know what kind before I start saying the fed “forced” them to joint TARP. This isn’t with reference to the Wachovia thing, is it? Because I was under the impression that Wells was salivating over the commercial bank when the fed sweetened it with TARP money.

  6. Ian, Wells was pressured into taking the TARP money a month after Wachovia came down. Citi was going to take Wach after laying off some to the fdic, wells said they would do it without charging the fdic. the tarp came later that month. fuck the bailout. economic historians in the 2040’s are going to have their cybernetic hands full.

  7. In a few years we’ll know what went down the last 6 months, its gonna be one hellava story in Reason magazine.

    I just think these leeches needed a cover for their insolvency, and the “Hank wouldn’t let us leave the room until we took the money” story was devised. …bullshit detector alerting me…

    Wells deserves what it gets if it really wanted Wachovia, what a fiasco. I am short WFC.

  8. Now that’s the kind of red-meat libertarian screed that I come to reason for! I haven’t seen that since Obama launched his campaign.

  9. “Italics mine, to italicize.”

    I’m gonna have to borrow that one from time to time.

  10. The major effect of this, as with Sabanes-Oxley, will be to drive more and more companies private and kill off publicly held companies. If public companies cannot compete for talent with compensation caps, that talent with stay private. People will start their own companies with private investors.

    We will end up with giant, privately owned companies who own big chunks of the government. Think ADM on steroids.

    For all the left screams about the corporate-fascist state, they do everything in their power to bring it about.

  11. where is the obamaphile joe to tell us how this is all wrong. krugman and obama have a brilliant plan to make puppies and skittles dance on rainbows of love!

  12. “In a fit of righteous anti-greed, people who make several hundred thousand dollars a year as federal employees (then millions more out of office doing whatever it is Tom Daschle was doing) are consciously driving the best talent out of endangered firms that are sitting on scores of billions of taxpayer dollars that they were made to accept by force. Shoot, what could go wrong with that?”

    Nothing. The looters will take their pound of flesh, and the producers will, if they are truly producers, will move into new industries and make us all richer for the experience.

  13. Right Wing Realist | February 5, 2009, 12:03am | #
    Now that’s the kind of red-meat libertarian screed that I come to reason for! I haven’t seen that since Obama launched his campaign.

    Here! Here! Inspired, worthy of minstrel adulation:


    Now we’re old and grey Fernando
    And since many years I haven’t seen a rifle in your hand
    Can you hear the drums Fernando?
    Do you still recall the fateful night we crossed the Rio Grande?
    I can see it in your eyes
    How proud you were to fight for freedom in this land

    There was something in the air that night
    The stars were bright, Fernando
    They were shining there for you and me
    For liberty, Fernando
    Though we never thought that we could lose
    There’s no regret
    If I had to do the same again
    I would, my friend, Fernando

  14. Matt Welch do you have any friends with private sector jobs? There is a terrible problem with corporate governance that has led to a situation where pretty much every public company is run by a conspiracy of overpaid dunces. Executive compensation is especially out of hand and is more like looting in broad daylight than the model of directors with a fiduciary responsibility to their shareholders paying to recruit and incentivize execs with the shareholder interest in mind.

    It’s a losing argument to say that something shouldn’t be done about excessive executive compensation. Those clowns are overpaid. As a libertarian, what helps me cope with the challenges of life is well researched pieces explaining how everything bad is the government’s fault. Can you hit me with some of that?

    It’s an obvious and huge problem that we have one SEC, a monopoly FINRA, and a monopoly FASB. What would be better is if we had more than one of all of those, so that companies could choose to list on different exchanges with different sets of rules. And investors who like going broke while getting lied to by inbred morons would be able to buy shares on an exchange managed in an SEC-FINRA-FASB like manner, while people who prefer transparency or lies delivered by scholars could invest on a different exchange.

  15. Go listen To Aerosmith’s “Livin On The Edge” . . . that about sums up where we are.

  16. I just wrote essentially the same rant in the comments of Mark Cuban’s blog. Not as eloquently. But damn. Wells should have taken a page out of Cheney’s book and told Paulson to fuck himself.

    And for the record, I’m a happy Wells customer (personal and business) for all of my adult life. I hope the government doesn’t destroy them. But I wouldn’t be surprised at this point.

  17. Wells Fargo did the government a FAVOR by taking over Wachovia.

    They likely needed the money to reapitalize from absorbing Wachovia’s toxic debt.

    That’s part of what’s wrong witht he notion that there’s something WRONG with banks using TARP funds to buy up other banks.

    Okay, they shouldn’t get the TARP money in the first place, BUT if we’re going to be handing out cash, it makes a lot more sense to give it to banks that have been properly managed and allow them to buy up the assets of the failing ones, than it does to give it to the failing banks with their managerial structure intact.

  18. I find it ironic that president 666 should decry bonuses paid to Wall Street executives when his wife had a no show job that was abolished once he was elected president.

    Its really funny coming from a man who eats $100/pound steaks that he doesn’t pay for. I mean when is the last time you spent that much for a steak?

    Ironic that a man who is proposing the greatest waste of taxpayer money in history talks about capping someone else’s pay while he praises the Barney Franks of the world who created this disaster.

    By the way can you really trust a man who bits the hand that feeds him. Hussein received far more from Wall Street than McCain so we can expect the payoff to Wall Street to continue.

    Obama is on a roll. Less than a month and all ready he makes Jimmy Carter look sage and Clinton look classy.

    Go president 666. Cahne, hope, unicorns.

  19. It’s amazing how Obama manages to act like a raving socialist while simultaneously packing his cabinet with Republicans.

    Maybe that shouldn’t be as ironic as it initially seems.

  20. “For all the left screams about the corporate-fascist state, they do everything in their power to bring it about.”

    That’s because 99.99% of them have no clue what fascism was, other than the BOGEYMAN.

  21. The head line here is perfect for a sad threadjack…

    Lux Interior is dead.

    http://blog.wfmu.org/freeform/2009/02/lux-interior-rip.html

  22. They likely needed the money to reapitalize from absorbing Wachovia’s toxic debt.

    Doubtful. Wells could have raised more when they issued stock in November, and they aren’t cutting back on their dividend. They took a lot of the pain from the Wachovia merger upfront, like a $20 billion credit mark on the $100 billion option ARM portfolio. On the regulatory side, I do think that the deferred tax asset provisions in the bailout bill helped Wells decide to acquire Wachovia, and they closed the merger in ’08 because of beneficial accounting treatment on distressed loans.

  23. First, they came for the bankers.
    And I said nothing because I wasn’t a banker….

  24. By what authority can Obama set pay rates for the executives? Was is part of the terms of accpeting TARP money? Was it part of the legislation? Did Paulson and the bean-counters at Treasury slip it into whatever passed for contracts with the individual firms?

    “That was not part of of our arrangemnt!”

    “I am altering our arrangement. Pray that I do not alter it any further.”

  25. Seems to me they deserve pay cuts because if they were worth millions, the companies they run would not be taking free handouts now would they?

    RT
    http://www.online-anonymity.at.tc

  26. By what authority can Obama set pay rates for the executives?

    He’s the Obamassiah, sent to us by a loving God to make our decisions for us. This sort of unilateral executive action is OK now, because The Smart People are in charge.

    The banks voluntarily took the money he benevolently offered to them (taken from us by force and imposed on the banks with threats, but both sides of the equation are ‘voluntary’ since The People are now in charge), so they now must follow his divine will.

  27. Anyone who didn’t see this coming from this President last year had their head in the sand.

    I was lambasted for calling Obama a socialist and now you can see what I meant. (Yes Bush started it and he should be rightly criticized for it.) Expect more of the same.

    Never forget that part of the bail-out legislation was $XX millions of dollars to “prepare America for nationalized healthcare”. They took this wording out…but the money is still allocated….

  28. Rantalicous Matt.

  29. I wonder if any of those wall street executives that helped get this guy elected are having second thoughts? 500k? Those are slave wages – I work with 24 year old VP’s who make that. This year!

  30. It’s like a rapist complaining you’re a bad fuck.

  31. Matt’s timely post reads just like Neal Boortz’ radio show from 6 days agolast Friday.

    I want companies receiving bailout funds to fail.Let their wage-capped managers find work somewhere other than zombified insolvent banks and failed business models reanimated with taxpayer moolah.

    In nearly all of the near identical commentary that has preceded Welch’s on this matter most are missing what this really is.Not so much that the government is changing the rules after the fact but a smoke screen for what is about to come.They are going to try another bailout far exceeding what was allocated for TARP to “guarantee” all the bad assets on the books.The figure 4 trillion is being bandied about.CEO wage caps are intended to make this fly with the proles.

  32. I’m surprised he didn’t just decide to tax the execs at 95%.

    If these execs are so great, wouldn’t they all quit knowing they can make millions more running other companies? This could be a new age of large company entrepenuership if I really believed these guys were worth a damn and could come up with any solid original ideas and get financing for them.

  33. SIV,

    I presume you are referring to the “bad bank” idea that has made the rounds. This will be Fed balance sheet – pure and simple. comes from nowhere – poof. It’s massively inflationary – if and only if, they don’t repatriate the assets into the private banking system at the earliest opportunity.

  34. “If these execs are so great, wouldn’t they all quit knowing they can make millions more running other companies? ”

    Some probably will in time – I’d bet many or most think this thing will blow over.

  35. Nationalizations have happened time and time again over recorded history, and their rate of success is not ambiguous.

    There’s certainly nothing ambiguous about the gigantic success the Swedes had nationalizing their banks in the 30s.

    Too bad we’re not doing it like that.

  36. domo,

    I was thinking of all the proposed solutions, “bad bank”,”insurance wrap”,nationalization and recapitalization w/o liquidation.I don’t think any of those can be engineered strictly through the Fed or on the remaining TARP funds.They do have the guns though so I suppose they can do anything they want.

  37. Some probably will in time – I’d bet many or most think this thing will blow over.

    Someone told me yesterday that a dozen or so investment bankers left Merrill for Deutsche Bank immediately after this cap was announced. [citation needed]

  38. Latest Business Week reports that top executives at Bank of America and top brokers are Merrill Lynch are already leaving for better opportunities. One wonders about the quality of those who will accept capped wages.
    My banker, with some 35 years experience, is ready to retire and he says the young pups behind him are clueless because they’ve never had to manage through such awful economic conditions. One reason, he says, for such high salaries is that the executive class is small right now because in the early 1970s when careers were starting comparatively few smart students wanted to get business degrees.
    Everyone wanted to be a hippy or a public interest lawyer working for Nader, or a community organizer or some such job where filthy money wouldn’t touch their hands.

  39. “Someone told me yesterday that a dozen or so investment bankers left Merrill for Deutsche Bank immediately after this cap was announced. [citation needed]”

    Probably coincidental, as bankers aren’t impacted by the restriction (and Merrill got paid this year – probably better than DB) – only a very few corporate officers at the top. Plus, I’m hearing that this provision does not apply retroactively, meaning that only banks that take money from now on are impacted. So, no one will actually get their pay limited – because no one will take any new money. Brilliant.

    SIV – your right that it would take some new program. My point is that they will certainly not be able to issue 4 trillion in treasury debt to pay for such a program – meaning that the Fed will have to capitalize any “bad bank” solution of that kind – probably in a manner similar to the Maiden Lane LLC arrangement. Ie. The fed will purchase ownership shares, paid for with newly minted electronic money and put the bad bank shares/debt on it’s balance sheet. If this happens, this will absolutely be at least close to the way they do it. Like the Maiden Ln scenario, it works fine as long as there are no losses (remember, the taxpayer might show a profit, wink wink…) losses that do occur come out of the Fed’s remittances to the Treasury (and hence the public purse) or are monetized.

  40. Man, we can never do anything right!
    Damn those libertarian principals, always screwing things up for everyone else!

  41. ahem *principles

    [repeats to self – “the head of a school is a principal because he is your pal, etc.”]

  42. Hello United Socialist States of America.

  43. You know, I agree that executive compensation has gotten all out of whack with the value of most executives. It’s become a club with automatic perks, regardless of your ability. I know personally of a number of executives who have been fired, fired, and fired and keep making more money in each new job. Egad.

    That said, government intervention isn’t the answer. Probably the solution, if there is one, is for shareholders and boards to get smarter about limiting executive compensation. But that will only happen if it happens generally across industry.

    I don’t mind the high compensation as much as I mind the jokers who get it. Look at someone like Barry Diller, who hasn’t made a smart move in the last 15 years. Meh.

  44. The notion that we are forcing the best and brightest out of top management at the money center banks is.. hopefully accurate! Afterall, it was this best and brightest, who were only found because of large base salaries and 20 fold more bonuses, which managed to crap all over the banking system. What on earth would we as a nation do without them running the show? If the Treasury turned around and said, ok give us the dough back, would C and BOA still be standing? MS and GS? We can debate whether or not its good or bad they be let to fail (and how) but it seems near certain at least 2 of those would be toast if not all 4 by now. If these CEOs and their top mgt pull things out there is no doubt in my mind that they will be given lavish bonuses by their boards, once they have paid back the dough. I have no issue with making them wait and if they don’t find this acceptable, the pool of inept managers is large.

    IIRC, B of A was the only bank which said ‘no’ we dont need the dough (only to recently recant). And if a smaller institution did not want or need the money, then they should not have taken it. The CEOs/boards are on the hook not to Ben Berspankme or Paulson but to their shareholders. Don’t take the phone calls and do as Nancy Reagan says.. Just say No!

  45. IIRC, B of A was the only bank which said ‘no’ we dont need the dough (only to recently recant).

    Wells says they didn’t, and I believe that Goldman has so far stayed out of the bailout.

  46. Does anyone have a real answer? The election is over. He’s just another politician. Get over it.

    “jsh | February 5, 2009, 7:38am | #
    By what authority can Obama set pay rates for the executives?

    He’s the Obamassiah, sent to us by a loving God to make our decisions for us. This sort of unilateral executive action is OK now, because The Smart People are in charge.

    The banks voluntarily took the money he benevolently offered to them (taken from us by force and imposed on the banks with threats, but both sides of the equation are ‘voluntary’ since The People are now in charge), so they now must follow his divine will.”

  47. I’m sorry, but I have no sympathy for these execs who are having their golden parachutes deflated. You accept money from the levaithan, you become the leviathan’s bitch. The devil wants his due.

  48. Let me put it another way… wouldn’t you WANT government employees to have a salary cap, or do you want government employees making millions of dollars at your expense?

  49. Goldman took Tarp money.

    Pro Lib
    executive compensation has gotten all out of whack … That said, government intervention isn’t the answer. Probably the solution…

    Shareholders do not have much power, management usually installs cozy, comfy support on the board. The ridiculousness of CEO pay is a testament to that fact. It’s a classic iron triangle.

    Egosumabbas,

    I would agree except that having the execs becoming government employees (and the idea that this could come to be viewed as normal) is far more dangerous than the taxpayers footing the bonus bill. But, as I stated above, these restrictions do not apply at all yet, since it’s not retoractive, will be interesting to see what they do next.

  50. …gigantic success the Swedes had nationalizing their banks in the 30s.

    What was their technique that was so successful?

  51. @ Mr. Roboto:

    “Egosumabbas,

    I would agree except that having the execs becoming government employees (and the idea that this could come to be viewed as normal) is far more dangerous than the taxpayers footing the bonus bill. But, as I stated above, these restrictions do not apply at all yet, since it’s not retoractive, will be interesting to see what they do next.”

    Keep in mind that I opposed the bailout from day one. I would go even further to suggest the denationalization of the Federal Reserve, but I guess that makes me a kook even on *this* forum.

    That being said, I only see this new development as a good thing because: salary caps might discourage future rent-seeking from banks. Also, it puts moral hazard back into place, as TARP took the moral hazard away. At least this shows that Barack Obama understands the concept of moral hazard even if he isn’t smart enough to follow it to its logical conclusion (that moral hazard is what makes markets self-regulating).

  52. domoarrigato,

    It is a flaw in the system that management is more powerful in the courts than the shareholders. That makes no sense to me at all.

  53. “Profit sharing” requires profits. Paying bonuses when you’re losing money is worse than stupid.

    Corporate governance is a disaster, but the government is not where a good solution will come from.

  54. Ego – we are essentially agreed on this. although I have supported monetary policy intervention, while opposing fiscal stimulus, and non-bank bailouts.

    Pro Lib, yes, but the devil is in proposing some type of change to the system that would correct the problem. Delaware incorporation statues? how do you get insitutional investors to vote their shares independantly instead of with management?

    P Brooks,
    To management, I agree. What about the trader who made 80mm for the bank this year, even as management screwed the pooch?

  55. domo-

    I agree absolutely with performance-based pay.

    I have a question regarding your trader example; is this a permanent gain, or is there a downside risk?

    Mortgage brokers, to use a glaring example, apparently are paid up front for an asset which may not actually produce. The “trader” should retain some ownership of the downside risk; how you structure that is, of course….

    [And- tangentially related: I would like to see any stock-based compensation be in the form of actual shares, valued at the current market price, and accounted for accordingly.]

  56. Swedish Bank
    Swiss Bank

    Where would you put your money if those were your only choices?

    Nuff said.

  57. IIRC, BB&T (with the recently retired Randist CEO) was “forced” to take TARP money too.

    They werent in danger of going under.

  58. I’ll throw this out there, too. I do not think you can overstate the damage done by the conversion of investment banks from partnerships to corporations.

  59. P Brooks,

    I have a question regarding your trader example; is this a permanent gain, or is there a downside risk?

    Well, it depends. At the least, it’s marked to market. Depending on what the trader trades, it could be liquid, illiquid, or in between. generally the less liquid, the more risk the trader retains on his books – this usually pays out over time. The problem arises when you book a big profit one year, and your positions collapse the next. You’ve already cashed your check. That doesn’t mean you didn’t do a good job in year one, even though you might have lost more in year 2. If you give the trader some type of restricted stock or vesting period this helps to a certain degree – only emplyment law says you can take that away unless you are fired for cause. Losing money is not cause. So if you fire the trader because he blew up, his restricted usually vests.

    There have been lots of desks which lost more in ’08 than they made in ’05-’07 combined. You can take back more compensation than you actually paid out, clearly.

    Mortgage bankers were paid to run paperwork and get signatures for a fee. The banks that bought the loans should’ve known better. I don’t think giving mortgage brokers interest in the final loan product is practical – there are too many steps, and they have little control over the loans once they enter a pool. Theoretically, this is why they document – so that the people who buy them know what they are getting. Cave Emptor.

  60. I’d like to add that if this forces more companies to go private instead of public, all the better. Public corporations are tools of the state.

  61. Matt got his bitch on!

    Two snaps up!

  62. Ego – that very well may be a positive result.

  63. Damn, this globe’s heavy!

  64. You tell ’em, Matt!

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