The Obama administration is going to need to bite the bullet and come clean with the American people. It has to tell them the truth about the bailout programs. Specifically…
…officials at the Treasury and the Fed said they worry harsh pay limits will undermine critical bailout programs by discouraging financial firms from participating. Although many of these companies could survive without government help, they might lack money to ramp up lending, which officials consider critical to turning the economy around.
Some banks could not survive without government help, but we haven’t defined who they are yet. Hopefully, the stress-tests that the Treasury Department is performing on financial institutions will help clarify the situation, but we can’t be setting executive pay restrictions based on mere participation in the government recovery programs. We are asking banks to take low-interest loans so that they can increase their capitalization and increase lending. It’s perfectly acceptable to make demands about how that money is utilized (for lending) but we can’t treat every firm that accepts the offer as if they’re now government property and set all kinds of restrictions on how they run their businesses. If we do, then the plan won’t work.
At the same time, the Obama administration cannot hope to get away with skirting the laws that Congress laws down, no matter how misguided they may be. Even if their efforts are ultimately determined to be constitutional, the political costs are too high. The problem is a matter of perception. The public thinks the money is going to banks to keep them from going bankrupt and therefore has certain expectations about how firms that accept the money will behave. But only a small percentage of the banks are actually facing insolvency, and we don’t have any clean way right now of legally distinguishing between the two.
What we need to do is decouple these issues. Executive pay should be regulated by law, irrespective of which firms are participating in government recovery efforts. As soon as possible, firms that are insolvent should be identified and treated differently under the law from banks that are not. We should not be buying equity stakes in solvent institutions that we believe will have no difficulty in repaying our loans. We should be taking equity stakes only in truly insolvent institutions.
This is a political matter. And the Obama administration needs to treat it as a political timebomb. Sort things out quickly, because the status quo is too ambiguous and too subject to easy distortion. The plan to increase lending is solid, but the means is unsustainable.
Isn’t this exactly what the bank “stress tests” are supposed to achieve?
Shouldn’t Obama therefore make the results of the stress tests as transparent and public as possible as I was agreeing with CalcRisk back in February?
Would that not solve the problem you describe?
yes and no.
It will help distinguish between the firms we are saving and the firms that are doing us a favor. But then that distinction would have to made a matter of law.
If you read the linked article, you can see the manifold problems that are building up with efforts to inject capital into firms without them becoming subject to congressional restrictions.
Not arguing on the point that laws, regulations, and most importantly enforcement of those regulations are important. I agree with you wholeheartedly on that.
I just don’t think it’ll happen.
AIG is suing the Federal government on a tax case (interesting how “shareholder value” doesn’t matter at all)
JP Morgan Chase is sabotaging the Chrysler settlement in hopes of getting its secured loan out.
Geithner/Obama have a complicated task, but the culture of the banking institutions is poisoned and cannot be fixed easily. At some point they have to break the political power of the bankers.
Can you tell he how, if Obama delivers health care and breaks the bankers(meaning the Ken Lewis’, Jamie Dimon and Lloyd Blankfein’s of the world, how he won’t come out looking like roses to the public at large? That would surely be change all of us could believe in.
It’s complicated because a situation of profound institutional capture is analogous to like generalized cancer: how do you break the cancer without breaking the entire organism.
Agreeing with Guthman, if the government announced its intention to reduce citibank and boa to reasonable size and to jail the bankers, the public would applaud but the bankers could cause a massive financial panic.
The problem with a situation where the bankers are too powerful is that the bankers are too powerful.
Big didactic challenge here and a no-win situation. No way the administration will look good after navigating this, not to the left, not to the right. The key then is to remember the priority: deliver on a decent healthcare bill and on help for the “bitter” communities. No matter how shrill, the public anger is totally secondary to the public needs.
Executive pay should be regulated by law, irrespective of which firms are participating in government recovery efforts.
That’s a very broad statement. And I don’t agree with it because it is so broad.
I can go along with a company losing any deduction for employment related expenses above a certain level as a deterrent to huge executive pay. But to simply limit it by law? No.
Unless the company were receiving public funds. Any lender/big equity contributor can make rules and the govt. is no different. It’s the golden rule. He who has the gold rules. If the govt. is putting the money in then the govt. can call the shots.
But in a company in which the govt is not an investor? No.