Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in the government’s financial rescue, 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.
Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the annual salaries of their 25 best-paid executives by an average of about 90 percent from last year. Their total compensation — including bonuses and retirement contributions — will drop, on average, by about 50 percent.
If we wanted to solve this problem correctly, we should have never empowered these failed institutions. Where would their huge salaries be this year if we let these institutions fail last year?
"WASHINGTON – The Federal Reserve for the first time would police banks’ pay policies to ensure they don’t encourage employees to take reckless gambles like those that contributed to the financial crisis, according to a proposal unveiled Thursday.
Unlike a Treasury plan to slash pay at certain companies that were bailed out with large sums of taxpayer money, the Fed proposal would cover thousands of banks, including many that never received a bailout."
Note that contrary to most initial reports the Fed is proposing to control pay even at institutions that didn’t receive bailout funds.
If we wanted to solve this problem correctly, we should have never empowered these failed institutions. Where would their huge salaries be this year if we let these institutions fail last year?
There were only a handful or a few institutions which were actually failing. Banks were forced to take bailouts.
Anyway, there goes the good bank executives–to London!
Right now these limits are going to apply to Citi, BankAm, AIG, GM+GMAC, Chrysler+Chrysler Finance.
From the WallStreetJournal today:
"While the Fed didn’t propose pay caps, it said it will review compensation policies at “28 large, complex banking organizations,” which it didn’t identify. It will be a “horizontal review” that in effect compares them to one another. The Fed also proposed that pay of traders and other employees be linked to the risks taken to achieve returns. So if two people generate $1 million in revenue each, one who took more chances could be paid less.
Fed Chairman Ben Bernanke testifies on Capitol Hill Oct. 1 at House Financial Services Committee hearing on financial regulators.
Analysts noted that one surefire sign of risk – bets that use a lot of borrowed money – could stay out of style if the Fed uses risk-adjusted returns to assess how employees should get paid"
Now Greenspan is saying the federal government should use anti-trust law or other regulations to break up banks that are determined to be “too big to fail.”
Notice though that there are two things going on here: it starts with the government rescuing people who took risks and ought to have been punished simply by a loss of their own money. Then, this is the second step: where the government says: “no more risk taking”. Of course, they (usually) say that in the form of a law. So, it is applicable to all, thus penalizing all for the sins of a few – whom they saved from the consequences of their sins.
Worse still, after this goes on for a few decades, people get used to the idea that the government will check up on things for them. Government regulation drives out private vigilance. It lulls some people into Madoff-like situations; it lulls others into thinking that the government is probably monitoring the risks being taken by firms like AIG. Then, when the government actually acts to prevent failure, such assumptions are proven true. As an example, I used a money-market account like a savings account even though I knew it was not FDIC insured. Now – post-crisis – I am far more confident that the government actually has given these guys an implicit insurance. So, instead of having a crisis scare me off such an account, it has made me more confident in it. In essence, the government is actually encouraging risks, except that they are insisting that those risks must come in new and different concrete forms.
The bank break-up suggestions are based on a simple fact: the U.S. government (via the FDIC) has stood behind banks for decades. As long as it does so, it will try (somewhat justifiably) to limit banks in various ways that it thinks reduces risk. The villain here is the FDIC.
Notice though that there are two things going on here: it starts with the government rescuing people who took risks and ought to have been punished simply by a loss of their own money. Then, this is the second step: where the government says: “no more risk taking”. Of course, they (usually) say that in the form of a law. So, it is applicable to all, thus penalizing all for the sins of a few – whom they saved from the consequences of their sins.
The Fed has been talking about controlling the wages of all institutions including those who did not receive “bailouts”
Many banks were pressured into taking the bailouts which they did not want
Much of the cause of the crisis causing some institutions to even “need” the bailouts was government intervention in private affairs to begin with through Fannie, Freddie, Acorn and “Community Reinvestment” acts.
So I have trouble with your statement.
Your saying the govt rescued people who took risks is the equivelent of saying I rescued someone who I threw off the boat to begin with.
The banks weren’t saved from the “consequences of their sins”.
The sins were the sins of a non capitalist govt meddling in the private sector. “Rescuing” these financial institutions was no kind of altruistic saving of people from the consequences of their misdeeds.
The govt broke the financial industry as an excuse to take it over.
So they pressured as many institutions as possible to take it to show ignorant Americans that capitalism doesn’t work.
It is just an inroad to start pushing regulations further on all institutions.
Already the affected banks are saying that if their salaries are capped all financial salaries should be capped since the places without caps will have an “unfair advantage” by way of being able to attract the best. And of course since this is what the govt wanted all along they are listening with avid interest.
Anyone who’s read Atlas Shrugged knows exactly what this is and where this is heading.
Quo Vadis, I think you might have misunderstood me. I don’t think the government should be controlling salaries, not even of the companies it bailed out.
I agree that culpability is complex in an industry where the government has meddled so much. However, I do not think the guys at (say) Long Term Capital Management or Lehman (or, even Citi) can claim that they played by the rules and did nothing less rational than the guys at Wells or J.P.Morgan.
I agree that culpability is complex in an industry where the government has meddled so much. However, I do not think the guys at (say) Long Term Capital Management or Lehman (or, even Citi) can claim that they played by the rules and did nothing less rational than the guys at Wells or J.P.Morgan.
Exactly.
But that is the evil genius of govt intrusion.. meddle, when the meddling causes problems say that the problem was you didn’t meddle enough and so on and so on.
The major strength of a corrupt govt is the ability to make sure everybody is a “wrongdoer”. If no one is innocent then all the govt has to do is pick when they want to strike.
To be sure there were many in the financial industry that were either unscrupulous or incompetent, that goes with all people and all lines of work.
But I think the real and relevent question is where does this start?
Obviously a fundemental problem is a group of influential people deciding that “affordable housing” meant forcing loans for people to have houses they couldn’t afford.
And for the financial instutions being forced to make these loans knowing that so many of the loans were bound to default it is only natural (if indeed very imprudent) that they would seek out risky back door ways of making money in hopes of making up for the govt forced losses.
So we have stupidity in the govt and stupidity in the private sector to be certain.
For me the issue is… how can anyone think that more govt regulations can solve the problems govt regulation created to begin with?
For me the govt has turned into a caricture of the creepy abusive boyfriend/spouse from bad Lifetime movies…
>>cue bad music<<<
“I can’t live without you.. and I won’t LET YOU live WITHOUT ME!”
But I think the real and relevent question is where does this start?
Obviously a fundemental problem is a group of influential people deciding that “affordable housing” meant forcing loans for people to have houses they couldn’t afford.
Before this, one has to have ordinary voters thinking government should help people with housing. Before that, one has to have people teaching those ordinary voters about the nature of government.
For me the issue is… how can anyone think that more govt regulations can solve the problems govt regulation created to begin with?
If voters believe government should be helping people with homes, and that government should be monitoring their investments, a crisis like this makes them think that the government needs to step up its help and its monitoring.
Despite the protests against government health-care, a huge number of voters (almost a majority) thinks that some type of fairly massive government involvement in healthcare is a good idea. In terms of power, this is where the problem starts, not in some secretive Washington D.C. bar.
I think it is fascism or approaching fascism when the government takes over some banks and financial institutions and then wants to heavily regulate everyone in that sector. If someone bails you out then that person can set certain terms for the bailout, but that wasn’t done ahead of time, so my argument would be that the banks and financial institutions went into the bargain thinking they were just going to get a bailout and what they got was a take-over. For those banks that did fail and were bailed out, I think they had it coming to them to a certain degree because they ran to the government for a hand-out; but the rest certainly don’t deserve to be treated as guilty agents of the financial crises. I don’t think there is any doubt that the government did this in order to gain control of those sectors, blaming them for the failed policies of the government who forced them to do things against reason in the first place. Those banks and institutions should not have been bailed out, they should have raised a stink against the federal policies, instead they turned towards a bailout and got snookered. However, regulating wages in this manner will only drive the better people out of that industry, and all that will be left are the bureaucrats, which is what I think the government wants anyhow. They don’t want there to be a free market in banking and finance, they want absolute control – i.e. fascism.
