Worry about bank capital, not bonuses
–James Saft is a Reuters columnist. The opinions expressed are his own.–
The effort to rein in banking bonuses, outrageous as they may be, is akin to banning glue sniffing because you are worried about the effects of intoxication.
There are, as the kids in the alley behind the high school can tell you, other ways of getting high.
Train your regulatory fire instead on requiring more and better bank capital and you will arguably do a great deal to control excessive compensation as well as doing much more to protect taxpayers and the economy.
Financial leaders from the Group of 20 rich nations agreed the skeletal outlines of a plan to reform banking last weekend in London. Included was the idea of claw backs on bonuses if earnings evaporate, forcing more pay to be deferred for longer, and more disclosure of top pay.
This may have some effect; bankers will have to wait a while for their money and some risky bets may not be made. But the out-sized rewards are the result of people within finance having an informational advantage over their shareholders and regulators and the ability to play with huge amounts of other people’s capital. Combine this with an implied government guarantee for the too-big-to-fail and you end up with a crisis every ten years or so. Just making bankers wait longer for their money does nothing to affect the competition for deals and assets to leverage.
Besides the folks who brought you the CDO squared will be well able to find workarounds to ensure that money leaks out in one way or another.
How the bailout feeds bloated banker pay
– James Saft is a Reuters columnist. The opinions expressed are his own –
Rising pay in the finance sector in the wake of the global financial crisis is no surprise and is driven partly by the government’s bailout itself and the underwriting of banks that are too big to fail.
News that some financial firms benefitting from government largesse actually increased the share of revenue they pay their employees sparked a lot of outrage but more heat than light.
The good news is this new bulge in pay may not be sustainable.
The bad news is it will probably only be stopped by further regulation, regulation which may never come.
To understand what is going on you need to understand the economic concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would be able to if there was perfect competition.
A monopoly will charge a very high price for goods or services because, well, they can. Needless to say economic rents are not a good thing, unless of course you are in receipt of them.
Well, if you think about it – maybe they do deserve more money than before. After all, the bankers and the media had a stellar performance hyping up the “meltdown”, and subsequently were rewarded with fantastic bailout programs (the exact details of which is a subject for a whole other discussion). Thus, not only did the bankers avoid the “noose”, they did so *without spending a dime of their own money*. With a great success like that can you really blame them for paying themselves more?
Executive bonuses: heads you lose, tails I gain
– Tamar Frankel, a professor at Boston University School of Law, is author of “Trust and Honesty, America’s Business Culture at a Crossroad.” The views expressed are her own. –
The debate over corporate executive bonus payments should be put in perspective. Some say that the executives did not earn these bonuses and don’t deserve the millions in parting payments that they received. But if parting payments were specified in the executives’ contracts they must be paid. A binding contract is binding.
But what if the payments were made at the discretion of a board of directors, as bonuses usually are? Can such bonus payments be retrieved from the executives? Probably not. Unless the executives failed to give the board accurate information, or illegally caused the payments, they are entitled to retain them.
But directors who approved bonus payments notwithstanding the corporations’ losses may not be as free of liability. Unlike salaries, bonuses are usually paid at the discretion of the employers. They are awarded not as a matter of right but as a recognition that the recipients have done a good job. In the past, most were tied to the “performance” of the corporations, usually defined in terms of higher profits or higher share prices.
The lore was that “executive talent” must be rewarded with money or stars would migrate elsewhere. And without such talent the corporation — and America — would be lost. But this wisdom has now extended to non-performance situations where talented executives received bonuses no matter what happened to their corporations. The current crisis might not have been their fault, the reasoning went. They did their job. They performed well. They worked as hard as they did years before. Why should they be punished because the economy is in recession?
There is one answer to these arguments. When bonuses were linked to “performance” (short term rise in corporate profits and market share prices) executives collected incredible amounts. That may have been how the corporations took so much risk — to earn so much that the bonuses could be huge. But whatever the reason for the profits and share-prices rises, the bonuses were linked to these measures and the executives did not complain. So they cannot complain now, and the directors cannot suddenly change the rationale for the payments. What was good for many good years is good for bad years.
Historically, executives and their supporters pressed hard for payments reflecting the owners’ fortunes, even though executives are not the owners and never were, unless they owned the corporations’ shares. Their payments were based on the theory that their incentives should be identified with those of the shareholders. If this theory is valid, let them share the shareholders fortunes today just as they had in the boom time.
From all sectors of society, up goes the shout: “We didn’t read the small print.”
One can surely go further, and argue that, as part of due diligence, the shareholders in their turn should have asked whether the remuneration committees of the companies in which they were planning to invest were making such hare-brained payments to executives, and if they were, voted with their feet. If the company lied to them, then OK, let them sue. But if the company made their compensation policy plain, and the shareholders accepted it because the company was also paying high dividends, well…..
Goodbye bonuses, hello hedge funds
– James Saft is a Reuters columnist. The opinions expressed are his own –
The argument about bank bonus payments is as sterile as it is backward looking; compensation at government insured institutions is going nowhere but down.
The real action will be at those places like hedge funds, private equity houses and boutiques, which will try and trade less insurance for more autonomy and which will capture more market share, take on more risk and offer more reward. The question is how will they be regulated, how will they fund themselves and how will the rest of us be protected from the systemic risk they could easily represent.
The British government jawboned its banks over the weekend after reports of huge payouts at Royal Bank of Scotland sparked public outrage, calling on senior bankers to reject their bonuses.
President Barack Obama took a more head-on approach, setting a $500,000 cap on top executive pay at companies receiving taxpayer funds, though many have pointed out how easy it will be to circumvent and that it only covers the very top of the management tree.
So, will bankers be paid despite individual and collective failure? Yes. But really, it’s last call for drinks on the Titanic. Sign for whatever you like, there will be no reckoning.
For any institution that is inside the TARP or government tent, there is a very good chance that we are looking at something like a wind down; from high leverage to low leverage, from complicated products to simple products, from high compensation to moderate compensation and from many employees to a lot fewer.
Regulation can be avoided. Create a bank and a company that will absorb toxic assets. Make your bank to sell defaulted debts to that company and your bank will look neat and clean, while the same high risk lending continues. Profit creates bonuses, bonuses are an incentive to risk. And regulation is in the middle, so there is a strong incentive to cheat. Nationalized banks belong to government. It has no need to cheat taxpayers about profits.
A bonus should be for work well done – in the last two years there would have been very few!
Nothing wrong with having to prove performance before enjoying the bonus.