Wednesday, February 4, 2009

A cap for The Street

I hardly know where to begin.

I suppose I should start in Washington, where this morning Pres. Barack Obama and Treasury Sec. Tim Geithner emerged from fervent prayer to announce that pay would be capped at $500,000 for executives of banks and other financial institutions taking big-time bailout money from U.S. taxpayers.
"We all need to take responsibility. And this includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves customary lavish bonuses. As I said last week, this is the height of irresponsibility. It's shameful. And that's exactly the kind of disregard of the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else."
In addition, these propped-up companies would face restrictions on "golden parachute" severance packages, entertainment, transportation and other luxury expenditures.

Next stop: New York, where the chorus of blubbering on Wall Street is deafening. Here's Meredith Whitney, an analyst with Oppenheimer:
"No one goes into Wall Street to save the world. Compensation is the motivating factor. If you can’t compensate your employees, they’re going to go somewhere else. You’re going to get a different variety of folks who are going to come in."
Also typical is Megan Barnett of
"For starters, it will create a disincentive for executives at troubled banks to use the federal program that was established for the very purpose of preventing the U.S. banking system from collapsing. Secondly, it will drive some smart executives out of the banks that need them desperately right now. And replacing them won't be easy, dangling a $500,000 carrot in front of potential candidates who likely surpassed that grade level more than a decade ago."
Having seen no reliable correlation between high executive pay and corporate viability, I'm not particularly convinced by that kind of provincial whining.

I'll end today's tour at the commentariat. Conservatives (so called) are apoplectic, calling the administration's move "a blueprint for the end of America" and "the flushing of free enterprise." You'll have that.

So did Obama-Geithner make the right play? Or is this the ultimate expression of anti-capitalist big government?


I don't care much for Big Brother, nor am I a fan of government inserting itself into our free-enterprise system. All those taxpayer-funded corporate bailouts, however, changed the game before the rules were written. Today, belatedly, the administration made a few new rules: responsibility, accountability and sacrifice.

Executive pay is what it is -- and what it is, besides stratospheric, is detached from reality, performance and results. Maintaining that connection should be the job of corporate boards and shareholders, but both have abdicated their roles, gauging success only by stock tickers and monthly statements.

Whenever corporate cost-cutting is called for, I've noticed, it almost always takes the form of hacking away at rank-and-file workers. That gives the appearance of boosting "shareholder value," so stock prices tick up. But because consumption still infects the executive suite, corporate health continues to decline. In many cases, as we've seen, failure is inevitable.

And under the old rules, the capitalist ideal, those companies would’ve failed -- but then the 110th Congress and our 43rd President defied the will of The People and taxpayers were conscripted to ride to Wall Street's rescue. Capitalism on the way up, socialism on the way down.

Now that We, the People, are shareholders, today the new chairman of our board simply did what corporate boards didn't do for their shareholders.

In our economic system, that's not the role of government. When Pres. George W. Bush and Congress boarded the Good Ship Bailout, however, it set capitalism adrift. So while capping execs' comp might make me cringe -- and believe me, it does -- this independent citizen also demands responsibility, accountability and sacrifice from companies "rescued" with my (and my children's) tax dollars.

In the end, of course, bailouts won't fix anything, and whether these companies survive or fail, our money is gone forever. The new rules aren't enforceable, either, but in light of the status quo, the Obama administration had no intellectually honest alternative.

In for a penny, in for a pound.