Leave pay to companies, shareholders
– James Pethokoukis is a Reuters columnist. The views expressed are his own –
For the populists who really, really want to make Wall Street pay by slashing their pay, Treasury Secretary Timothy Geithner certainly isn’t giving them what they want.
Yes, the top executives of the remaining TARP firms seem destined to be salary serfs to the “pay czar”, Kenneth Feinberg.
Of course, it’s hard for even the most die-hard free marketeer to feel sorry for financial firms that mismanaged their businesses terribly, took government bailout money and now find themselves under Uncle Sam’s thumb.
But as for everyone else? Well, here’s how Geithner put it: “We are not setting forth precise prescriptions for how companies should set compensation which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”
Even worse for those who wanted the Treasury secretary to bring down the hammer, he went on to highlight how the financial sector is already making changes on pay and how he looks forward to a “continuing conversation”. Yes, self regulation in action! Hardly what the torch-and-pitchfork crowd craved to hear.
That’s just too bad. To his credit, Geithner seemingly understands his goal isn’t to punish, but to play a constructive role in nudging financial industry compensation in a direction that better connects risk and reward.
No U.S. bounce from China’s safety net
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Offer a U.S. Treasury secretary visiting Beijing one wish, and he will certainly opt for a revalued Chinese currency. Offer a second, and the probable choice would be a strengthened social safety net.
Timothy Geithner followed bipartisan tradition when he recently called on the Chinese to strengthen their social benefits. Indeed, it has become an article of faith that a solid welfare state will allow the Chinese to curb their abnormally high savings rate — which is at the heart of the global economic imbalance.
Luckily for Geithner, this consolation prize appears within reach. China’s spending on welfare rose 27 percent last year.
Particular excitement has surrounded China’s plan to provide near-universal healthcare by 2011. Free from the need to stockpile for a medical emergency, the Chinese people will be more able to splurge on consumer goods, it is thought.
Jim O’Neill, Goldman Sachs’ chief global economist and the doyen of China enthusiasts, argues that this is perhaps the most important public policy in the world at the moment.
Yet while welfare reform is almost certainly good for the Chinese, it may do precious little for the United States. Hopes for China on this front are based on half truths.
Mr. Swann, this is one of the most incisive analyses I’ve read with nearly a quarter of a century living in Asia, 4 in mainland China and 4 in Macau (while it still belonged to Portugal).
When I lived in Tianjin 1985-86 and Beijing 1986-88, the commorn street intelligence held that a typical worker saved around 40% of his or her income, partly because there wasn’t all that much to buy and partly of the then-extant cradle-to-grave system that provided for practically everything. While I’m certainly no expert on anything at all to do with economics, that seemed to be borne out by Chinese I knew, including the family of a lady from Beijing I married. Her Mother save 35-40% of her salary, while her Father usually hit the 50% range (but, then, his salary was considerably higher than hers). Other friends, colleagues, and students (I taught in universities) told me comparable stories. I even got into the act myself after marrying, knowing that we would be going to the U.S. for further studies for my wife, and in about 19 months, earning the equivalent of $400/month, I saved about $2750. But even I had few expenses, though I didn’t get *quite* everything a Chinese citizen did.
So, I’m a bit puzzled by the percentage saved as cited in your article. True, what I read was in the popular press, and my direct experiences with Chinese were (1.) only anecdotal, and (2.) univerfied — I never asked anyone to show me their bank book or to see the stash under the bed or whatever.
I returned to mainland China for nearly a year 1999-2000, and even that late my boss and his wife, both of whom worked, after about seven years of marriage (and having a daughter along the way) saved enough money to buy multiple household high-end goods (television, refrigerator, sound system, etc.), a late-model used car, and a late-model used motorcycle — AND an apartment measuring about 750 dquare feet. And their families both were dirt-poor, so it wasn’t the daddies forking over a chunk.
Anyway, I thoroughly enjoyed the article and learned some things from it — thanks!
California, harbinger of hard U.S. choices
– James Saft is a Reuters columnist. The opinions expressed are his own –
California’s fiscal train wreck should be watched warily by investors in U.S. Treasuries; as the start of a trend among states seeking bailouts, as a source of pressure on Federal funds and as a harbinger of hard choices at national level.
California voters last week rejected a finance bolstering proposal, setting the stage for billions of dollars worth of cuts in services, layoffs and a shortened school year.
It also leaves the state with a budget shortfall of more than $21 billion, an exacerbated seasonal revenue shortfall and a fragile reputation in the bond market.
These are just about the last things a state needs when unemployment is high and recession is deep, but California is trapped between its own high cost base, bond investors unwilling to give it the benefit of the doubt and a Federal government that is loath to play Santa Claus. Of the three, the last is most likely to give way, and if the U.S. does widen the bailout it is already giving to states it will have potentially profound consequences.
Treasury Secretary Tim Geithner knocked back, equivocally, a request from California Treasurer Bill Lockyer to use TARP funds to backstop the issuance of bonds by California. Lockyer fears that investors and banks will impose punitive costs on new borrowings, costs that will only worsen its overall position.
Though Geithner was right to say California wouldn’t fit under the TARP, saying in essence that this was not the purpose of the vehicle, he was far from final on the whole issue.
How much more debt can we continue to accumulate? In the 1930s the U.S. had a very low income to debt ratio when contemplating the New Deal programs. We are not in that position today. Moreover that spending did not lift the nation out of the Great Depression.
The IMF has quietly said to the U.S. it must break the hold and influence of the banking Oligarchy. If not the recovery will not be sustained. There will not be enough growth to pay back all this debt we are accumulating.
Who is it that will tell the U.S. government to take the bitter pill of default when the time comes?
Failure is the only success in stress test
– James Saft is a Reuters columnist. The opinions expressed are his own –
The stress test of banks now underway in the U.S. is one exam in which failure will be the only true measure of success, at least in terms of speeding a recovery.
The U.S. will release some information about the methodology of the stress test of 19 major banks on Friday according to reports, with results slated for release in some form on May 4.
What is far from clear is if this will be some sort of self-deluding exam in which all of Treasury Secretary Tim Geithner’s children are judged to be above average or whether the U.S. will take this opportunity to take real and difficult remedial action with banks that are too insolvent to play their role in the economy.
Keep Dreaming..
Maybe if we all click our heels together in our magical ruby slippers we can resurrect the american middle class from the destruction of the last ten years.
Summers’ compensation intensifies reform doubt
The weekend revelation National Economic Council chief Lawrence Summers received almost $5.2 million in salary and other compensation last year from hedge fund DE Shaw and Co, and hundreds of thousands more in speaking fees from other banks, has dealt another blow to the administration’s fast-waning credibility on financial reform.
Summers and protege Treasury Secretary Timothy Geithner have already attracted criticism for a strategy many commentators believe is unduly favorable to Wall Street.
For all the talk of beefed up supervision and stringent capital requirements in future, financial assistance to the banking system has come with few conditions. Anxious not to offend powerful Wall Street interests, Treasury staff have consistently pushed back against attempts to impose compensation restrictions or other penalties on recipients of public funds.
It all stands in marked contrast to the tough line being taken with General Motors and Chrysler. Bank chiefs were invited to discuss the industry’s future at the White House; GM CEO Richard Wagoner was summarily dismissed.
Wall Street’s special treatment is justified by citing the industry’s pivotal credit-creating role. But there is a widespread suspicion financial interests have captured the government agencies, legislators and senior officials meant to regulate them. It is the type of rent-seeking behavior common in emerging markets and associated in the past with militant industrial unions and President Dwight Eisenhower’s military-industrial complex.
In a thoughtful article in the latest edition of The Atlantic magazine, former IMF chief economist Simon Johnson argues U.S. policy has been controlled for the past two decades by a “financial oligarchy” which exercises influence through campaign contributions and the regular exchange of top personnel between Wall Street firms and the White House, Treasury and other institutions meant to regulate them. It promotes an identity of views between the regulators and the regulated.
The disclosure of Summers’ earnings simply fuels that impression, and the administration’s decision to publish the disclosure forms on a Friday afternoon shows awareness of the embarrassing appearance of business as usual for an administration that came to power promising “change we can believe in.”
Maizie, you are correct. What the Fed does is a responsibility the U.S. Constitution requires the congress to fulfill. That power was given away in 1913. The Congress is good about giving away their powers; War Powers Act, FISA, Patriot Act, Homeland Security Act….
The fact of the matter is Executive Branch administrations are all beholding to some large corporate interests. This particular administration appears to be in the pocket of Wall Street and High Finance. Summers, Geitner and Emmanuel should all be replaced. They are to closely tied to Wall Street.
A private entity of powerful bankers and bureaucrats controls the money with no government oversight. The definition of a Fascist State is a form of government generally, though not always, headed by a dictator who serves the interests of large industries. I think the U.S. banking system qualifies as a large industry.
One rule for banks, another for autos
– James Saft is a Reuters columnist. The opinions expressed are his own –
There is one law, it appears, for failing U.S. automakers but sadly quite another for similarly failing banks.
The Obama administration has decided to play hardball with auto firms; rejecting recovery plans from General Motors and Chrysler LLC (GM.N) and warning they could be thrown into bankruptcy. Chrysler, which is controlled by Cerberus Capital Management CBS.UL, has 30 days to complete an alliance with Italy’s Fiat SpA (FIA.MI) or face losing its government funding. GM chief executive Rick Wagoner is out at government request, as will be most of his board of directors in coming months.
This is painful and risky but probably for the best; the auto industry has far too much capacity and both firms have blundered repeatedly, avoiding making hard decisions to improve their competitiveness and products. In short, this is what is supposed to happen in capitalism when you fail.
It is also a huge contrast to what is being done for U.S. banks, where management has generally remained entrenched and where Treasury Secretary Geithner and his predecessor have thrown cheap money and other subsidies at doubtful banks in ever more complicated forms. Most recently, going as far as cutting hedge funds and other investors into the deal under the public private partnership in order to create the illusion of a return to market forces.
If the U.S. administration thinks the auto tough love will make them look like they are taking a hard line with highly compensated executives, they could not be more wrong. If anything it will increase the perception of the divide between how Main Street and Wall Street are treated when they come begging at the public trough.
To be fair, the case against the automakers is pretty airtight. Even given a recovery, which is by no means a sure thing, they may not be viable. The best counterargument, that bankruptcy causes rolling failures among suppliers and that consumers will shun automakers which are in bankruptcy. Those possibilities are hard to measure, and even if true, probably not enough to justify keeping the two on life support for what could be an indefinite period.
Talk about euphemisms: “toxic” assets.
There is nothing toxic about “nothing”, because these “assets” are empty, void, worthless.
But “toxic” sounds nicer.
The Banks themselves are dealing with “nothing” with each other, selling good old “snake oil”.
A show trial for AIG?
– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —
Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have been raking AIG over the coals in hearings and speeches for paying employees bonuses totaling $165 million. But today’s Los Angeles Times reports that the Treasury Department specifically agreed to the bonuses in a 586-page agreement signed on November 25. The deal allows AIG to pay out bonuses for the 2009 year that equal bonuses paid for 2007.
It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff. What is puzzling is why the administration pretends not to know.
According to documents from AIG, the bonuses are compensation owed to employees under Connecticut law. Under the Connecticut Wage Act, the company said, if the bonuses are not paid, AIG becomes liable for legal costs of employees who try to collect, as well as penalties that could equal twice the bonuses owed. AIG might also leave itself liable to shareholder suits.
Despite the show trial in Congress and the sense of public outrage, it would be unwise for the government to go back on the contracts and sue to recover the money, especially when they agreed to it in November. This could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.
Members of Congress are also discussing emergency legislation to tax away part or all of the bonus. This would set a precedent—corrupting if not unlawful—of using the IRS and the tax code as weapons of the state to go after individuals whom the administration and Congress want to punish. Such sanctions might amount to ex post facto punishment, legislation that makes unlawful behavior that was lawful when it occurred. The Constitution prohibits such legislation. Even President Nixon, who had an enemies list, never dreamed of this.
The wave of public sentiment against the AIG bonuses presents the government with a choice. It can try to run companies that receive bailout funding in a way calculated to win public approval, micromanaging every detail. This is impossible, because the government cannot even manage its own federal agencies efficiently, with episodes of wasted resources surfacing regularly.
First AIG is to big to fail. The economic fallout we were told would be a disaster. Now we are told AIG has to be shut down for the same reason. The Secretary of the Treasury asked Congress to give him that very authority. Congress is likely to comply. It is clear no one in government knows what they’re doing. Or at least they are giving that impression. What is more disturbing is the steady usurpation of Congress’ Power to the Fed and the Executive branch. The parallels to Ancient Rome and her Senate are haunting.
Where is Cicero now?
Hold your wallet — here is TARP 2
– Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor. The views expressed are her own. –
This week Treasury Secretary Tim Geithner unveiled a financial stabilization plan that could cost $2 trillion, in addition to the $790 billion that Congress plans to spend on economic stabilization. All this without any consultation with Congress.
That’s financial stability?
The Dow Jones Industrial average fell almost 400 points Tuesday on the news, and the Asian equity markets followed. This steep decline is symptomatic of the unease that permeates financial markets.
It’s not just the amount of money that is troubling. The markets were also distressed by a lack of detail, especially on how to deal with so-called toxic assets – loans with diminished and uncertain value. The previous Treasury secretary, Henry Paulson, proposed to buy toxic assets, then discovered the difficulties of pricing and so switched to purchases of banks’ preferred stock to infuse capital into the banks.
Geithner promised “to consult closely with Congress” as he moved forward, but Congress has not held hearings on implementing the program, even though it would leverage $1 trillion of Federal Reserve funds and close to that in private-sector funds. The public fears that the $2 trillion dollar bank bailout fund would be just throwing good money after bad.
Last October Congress allocated $700 billion to the Troubled Asset Relief Program. But TARP, with roughly half the funding disbursed, has not yet delivered on its promises. Then, on February 10, it was déjà vu all over again. Geithner declared, “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses.” He didn’t say how long it would take – because no one knows.
I get tired of politictions telling me they know what I
need as I have never talked to them, what makes them so
sure they now my needs.
As for the banks, let those high rollers go bankrupt and
give the bailout money back to the taxpayer from whose
pocket they picked to began with.
I am on a fixed income and tired bailing out some one
who has gotten away with it.
If gov’t. wants to do something try triming the fat off
the hogs back instead of his ankles.
The US needs to stop supporting a corporate aristocracy. The gross and outrageous compensations for some of these Top Managers is nothing more than the US paying to support these individuals in a lifestyle they have become accustom to. By no means are these individuals worth this much to the corporation. No one could be worth these kinds of compensations. Some are over 400 times the average compensation of their employees. No corporate board could begin to justify that one person is worth that kind of compensation. Yet, that kind of compensation exists today in publicly traded corporations. What else would you call it but the support for a corporate aristocracy?
Publicly traded companies fall under federal laws. The Government does not have to “own” a piece of them to set rules upon them in order to protect the public.
The compensation of top management should be tied to the compensation of the average employee. Let’s face it they all had a part of the success or failure of the business. Some countries have put limits on publicly traded company’s top management at 10 times the average employee compensation. Compensation would include salary, stock options, and bonuses. To compute this they take middle management, front line managers and their employees including all secretarial and office administrative staff and average their total compensation. No one in upper management can make more compensation than 10 times this amount. This value is recalculated each year to set limits on the next year. Within this limit salary, stock options and bonuses are paid. If upper management wants a raise, they need to raise the compensation of their employees.
This type of pay limitations provides incentive for profits and efficiency while ensuring the benefits of a job well done are given to those that do a good job. These benefits will flow up a year later. And I am all for upper management being given incentives to think in terms of the long haul by withholding some pay in the form of stock purchases.
I for one am against maintaining a corporate aristocracy. We need fiscal responsibility forced back upon the corporate industry.