Another Sneaky Provision in Stimulus

The NYT is reporting that buried deep in the cavernous bill that is the economic relief bill is a provision restricting CEO compensation for the companies who take tarp money. For those who wanted restrictions on CEO compensation and thought that Sec. Geithner was too conciliatory this was a big victory.

Perhaps because he may be facing a reelection challenge, Sen. Dodd (d) Connecticut inserted the provision.

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
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The biggest difference between Mr. Dodd’s provision and the Treasury rules is that the new stimulus provision would apply to any company that either has received money or will receive money in the future under the Treasury’s financial rescue program. By contrast, the plan announced by Mr. Geithner would apply only to companies that receive federal money in the future.

The revised rules do not impose a formal cap on executive compensation, unlike the Treasury proposal. Under that plan, banks were barred from paying more than $500,000 in salary until they repaid the TARP funds to the government. (Banks were permitted to offer bonuses in restricted stock.) Senator Dodd’s rules, however, go a step further, prohibiting banks from awarding restricted stock to 25 top executives equal to more than one-third of their annual cash compensation until the banks have repaid all the money owed.

As usual there are defenders of the compensation who are aghast at this provision.

But some experts on executive compensation warned that the restrictions could unleash unintended consequences, like encouraging banks to increase salaries to make up for diminished incentive pay. Even then, they warned, banks were likely to lose top talent.

“These rules will not work,” James F. Reda, an independent compensation consultant, said on Friday. “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”

Let's examine these claims. First the paying back of tarp money. If a company can pay back tarp money and remain solvent that sounds fine.= to me. The entire point is to have the money repaid. If you dont need it give it back. Are we supposed to assume that companies who actually need the money will give it back? What sense does that make? the company goes under without the money then the ceo is out of a job and is single handily responsible for sinking the company because he didnt want to limit his own pay. That person should never be in charge of another company and should be out of a job.

Second the idea that they will get another job. Fine. These banks need money because they are insolvent and not able to exist without it. That means these executives are failures. they are bad at their jobs and should look for new ones. I am very doubtful you cant find someone to take the job for the big salary offered. Its not like the smartest and best people are working at the failed banks. So who cares if they get another job unless Mr. Reda means we dont want them to sink another company.

The third claim is one made at several points in the article, that banks will just pay their executives more because there is no hard cap. I think dodd is just daring the heads of these companies to increase the actual salary to the equivalent of the current compensation. The optics for that are terrible and any ceo who tried is likely to be flayed alive by shareholders. In addition there are likely to be tax issues with doing that. The current system exists for a reason and Dodd's provision looks like it does a decent job of cutting down on the compensation.

Several of the restriction opponents discuss the lack of "pay for performance" this provision would create. This of course overlooks the fact that these people receive the money whether they suck or not. Strictly speaking there is pay for performance but it just cant exceed a third of the salary.

The opponents seem to suggest that what this restriction does is create a farm team where people could go and after proving themselves get called up to the majors where they can make the big bucks. Again, all of this must be considered in the light that this applies only to companies who take tarp money. If they repay the money, no more restrictions. So turn the company around and it all goes away.

So a this point im wiling to give dodd some props.

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About that TARP oversight...

This is what happens when you rush to do something, anything, in a crisis.

Elizabeth Warren, the Harvard Law professor who chairs the Congressional Oversight Panel, which is monitoring the Treasury's spending of the bailout money, appeared this afternoon before a House commmitee to testify about the report -- better characterized as a set of questions -- the panel released this morning.

And from what Warren said, it doesn't appear that oversight of the billions of dollars at stake is being treated by either Treasury or Congress as a top priority.

Warren told the committee that the panel's four members had met for the first time just two weeks ago, and were still "struggling" to find office space. She added that all the members of the panel are serving part-time.

"Well, that raises the question of whether this can really be taken seriously," said Rep. Melvin Watt (D-NC), echoing fears about the strength of the oversight mechanisms are in place.

Raises questions? I think it actually provides answers. The board serves part time, has no authority and no office. This is not a legitimate way to oversee the expenditure of 700 billion dollars.

This is a simple illustration of the larger point that in a rush to do something about the economic crisis the Dems folded again and failed to get legitimate and substantial oversight of the money. Its happening again with the Auto Bail Out where not only is the money coming from a fund designed to create cars but it comes with no strings attached. Its free money. They dont have to keep US jobs or fire management or shift to better cars. Its not a good plan.

I understand the argument that this is a prop loan so that Obama can come into office and deal with this but really dont we need some oversight and conditions on this cash? The industry is only worth 3 billion. It just seems like another giant boondoggle in the making.

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Bailout Financial but let the Auto's fail?

Look i know that the Auto industry is not the poster child for intelligent business model and that the ceo's who came to the hill to beg were stupid to do so in private jets but the scrutiny given to the Auto industry is actually pretty extraordinary when compared to the financial sector. Especially considering that the auto sector probably provides more jobs when its all counted up.

Part of this is that everyone has been pissed at the auto club for a while because they have undermined CAFE standards and produced bloated SUV's. The other is that the south had those union free auto plants that they want more of. The final part is that the financial people are more than happy to give oversight free bags of money to their friends who they know deserve it lest the entire world crumble.

I actually dont oppose putting some steele strings on this bail out money for autos but i would like to see the same response given to those companies like citi who come begging for money and seem to get it instantly.

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On Representation and Leadership in Congress

Yesterday's failure to pass the bail out legislation should be considered a text book case study in the competing philosophies of Republican government. We saw in stark contrast the difference in the constituency service model and independent leadership model of government. The law makers who had to go home and face the voters voted overwhelmingly against the bill while safe law makers voted for it. Why? To answer that we need to look at what congress people think their job is.

There is a constant tug of war in congress members minds between acting on their own judgment about an issue and in responding to the demands of the constituency. Take the example of the bailout, the safe members who voted or the bill were not exempt from their constituents demands for a no vote. If reports are to be believed they were being hit at a no to yes ration of 30-1. In this case they ignored their constituents for what they believed was the good of the country. They utilized their own judgment about what was best based on their own knowledge of the situation and the consequences of action. What they did was exercise leadership when they must know that they will take a major hit from this. Many people believe that this is why we elect representatives to go and make the hard calls.

On the opposite side we have the nay voters from unsafe districts. These people totally relied on the demands of the voters back home. They simply performed the role of the mouthpiece. This is a fully recognized idea of how a representative should act. We petition leaders so that we may influence the decision. Would we do this if we were not supposed to have input? The question is whether these people have gone to far. Why elect them personally if all we need is a stand-in? We could vote over the internet on every bill and the representative would simply push the button yea or nay.

The question arises whether they were actually following their constituents out of an ideological belief that that is the right thing or out of a political cowardice that they would be voted out of office. If they really believed that this was the right thing to do and voted no to keep their jobs that is a problem in my mind. If you believe your job is to lead and make decisions for the people except when that might hurt you politically i cant respect that.

If you believe that we elect our congress people to lead and make decisions then sometimes they have a duty to do that. If that decision leads them to get voted out, fine. If they have a principle and they believe they were elected to follow those principles they should sacrifice their career for what is best for the country. others have sacrificed more than simply a job. i have a hard time believing that a representative who votes for an issue with the ability to defend why his vote was best for the country will get thrown out of office. Even if they do they should have no regrets.

What is lacking in the discussion of the bail out is that what should be done is what is best for the country, regardless of politics. If that bill that was put up was not the best bill for the country then it had no business being voted on. No one thought the bill that went before the congress was the best possible bill. The people understood this. The best bill needs to go up in a crisis and if republican members want to take a principled stand against it i think that is their right. I think if there was a bill that everyone actually thought would work and was not a cobbled together political band aid the american people would get behind it. it might not be perfect but good should be a worthy adjective. Then you would have no trouble with those people afraid of using their judgment.

I could be wrong though. There is always the idea that we elect members to make trivial regular decisions we cant be bothered with but that the important stuff should be left to the people. That might work. The problem i see with that is that people dont usually understand the important stuff any better than the trivial stuff. We should not just trust them or cede total decision making to legislators. Calls keep them honest and make sure that only on the most truly principled issues will they cross the voters lest they risk their jobs.

It is an unresolved question what is the job of a legislator, listen and follow the people or use your own judgment? Legislators like to have it both ways by building support for an issue but sometimes you have to make the call about what is best for the country without the benefit of popular support.

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