What is going on here? Has the entire WH been deep captured by WS? This is getting ridiculous...
Obama to Neuter Bank Pay Restrictionshttp://www.nakedcapitalism.com/2009/02/obama-to-neuter-bank-pay-restrictions.htmlIn case you think my headline is too harsh, consider the one at Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7OkF6O1OaY0&refer=home">"Obama to Work on Executive Pay Limits After Industry Complaints." So in case you were laboring under the delusion that widespread managerial failure among the nations' top banks, to the point of being dependent on taxpayer provided drip-feeds among the nation's top banks, would lead most thinking people to show those officers the door. Remember, these companies have been looted, in a process described by George Akerlof and Paul Romer in a 1993 Brookings paper:
Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.
Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values...
Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses....
So let us start with the obvious:
1.
People in these firms (the large banks on life support) were overpaid by a considerable degree in the last few years. The earnings were bogus (they were hugely overlevered relative to the risks they were taking; in addition to holding more equity , they should also have made greater loss provisions). So recent pay is no guide for what their services are worth
2. The companies ought to be in turnaround mode. Normally, the board brings in a new CEO. the CEO sets a new direction and replaces people at the top either lacking in the right skills or unwilling to support the new program.
3. The managers and line staff were hired when these companies were drunk on growth and fat fees. They are by temperament and training the wrong type now. Look how badly the once well-regarded John Thain stumbled at Merrill
I see no particularly reason to be anxious to hang on to these individuals.
The threat to quit is empty. Hedge funds and PE firms, favored havens for disgruntled "talent" are shedding staff and in some cases closing their doors.And even if there are some legitimately valuable individuals, there is no excuse for an organization being held hostage to them. As DeGaulle remarked, "The graveyards are full of indispensable men."
Now readers may think I am harping on a minor issue; indeed, I've labeled the pay issue "symbolic" because they usually involve too few people (recall that Merrill last year has over 700 staff members earning more than $1 million). But
it serves to illustrate how the industry has completely bamboozled Team Obama. If you put the same argument made by the bankers, that they might lose their precious talent, in the mouths of auto industry executives, they'd be laughed out of the room. Yet the financial industry meltdown has done vastly more damage to the economy than the decline of the Big Three, which suggests their ability of their managers and staff to operate competently and responsibly is even more in doubt.
But Team Obama seems cowed by Wall Street psychopaths, so aptly described by http://epicureandealmaker.blogspot.com/2009/02/to-catch-thief.html">The Epicurean Dealmaker. And if the Obama crowd lacks the nerve to take on the banks on issues that are largely window-dressing, it's obvious they won't even attempt to tangle with them on matters of substance.
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