The accidental genius of Obama

US President Barack Obama is poised to reveal details of new rules limiting executive pay to $500,000 a year for firms getting a US taxpayer bail-out.

So says this BBC article.

My initial thought was that price regulation such as this rarely ends well. That price caps create shortages and other distortions. However this is not an unqualified price cap. It is a price cap for executives of companies that receive government bailouts. If you are an executive earning say $2 million per annum then such a reform means that you suddenly have a very powerful personal incentive to avoid government handouts like the plague. Not such a bad thing in my book. Actually it’s probably a powerfully good thing. Australia should immediately implement such a policy except it should not be limited to a bailout but to any form of government handout or subsidy. It would mean an effective end to a lot of what get’s called “industry policy”. And of course it fits snuggly with the populist rhetoric of the day so the symbolism is ripe for havesting.

Of course I don’t think Obama is viewing this thing quite the same way that I am. I think his genius in this regard is probably somewhat accidental.

28 thoughts on “The accidental genius of Obama

  1. Hell, I hate the idea of bailouts… but as much as I hate them, I have no problem whatsover with the idea that those who receive them should pay restrictions. I really don’t see the dilemma here, to be honest.

  2. Putting on my policy hat and working with this idea here is how I’d formulate a new tax law to end a good chunk of industry policy.

    Any company receiving government grants or government payments for the provision of untendered goods or services totalling in excess of $10,000 in a given financial year must restrict the salary package of all employees and executives to no more than $500,000 inclusive of superannuation. Companies that breach this restriction shall be liable for a corporate tax surcharge equal to twice the amount of the grants or payments received.

  3. Great idea. So you have a good part of the banking system on life support and you place restrictions on people who to some extent are the new management, or the Tarp was forced on them like JPM and WFB and then expect to retain top management to run the business and get them out of trouble.

    this is why to a large extent I was partially wrong in supporting TARP as you always end up with shitty decisions like this one.

  4. Have you given it some thought that it could actually make the situation even more problematic.

    1. Banks needing TARP may be reluctant to push for one.

    2. Fire the old management and then who are you going to attract to run a risky operation where your own reputation could be on the line if it fails through no fault of your own and the reward is a terrific sum of 500,000 a year and no upside?

    You’re just promoting mediocrity and crappy management.

  5. “You’re just promoting mediocrity and crappy management.”

    Or bright young things on their way to the top with a bullet. The real danger of this for senior management everywhere is that these companies will not collapse when these restrictions come into place, showing up current exec salaries to be another giant scam…

  6. The other problem is that where management own a large slice of the equity in the business, which will be the case with all the support to small business for example, there is little difference between receiving the money as salary and retaining the earnings.

  7. Such a cap would bring rates of pay back towards what have been proportional in the past – While I believe talent should be rewarded I think that it could also be argued that an organisation in need of a bailout has perhaps not had the ‘talent’ it needed.

    Dollars don’t buy genius, they buy reputation which ‘might’ be built on substance – or marketing.

  8. Fellas

    In 90% of the cases the management that got the firm into trouble gets the bullet.

    Who exactly are the bright young things that will be able to pull the firm out of trouble? Most probably they’ll be at a good bank an unlikely to move for a lower rate of pay and a shit box that could ruin their reputations. Ask yourselves would you move and run a shitty bank that is possibly going to tip over for lesser pay?

    Pandit over at Citi is a ” bright” young thing and he’s fucked it even more by not moving fast enough.

    Furthermore in most cases the government is going in as a non voting shareholder with preferred stock and warrants. Since when do preferreds and warrant holders qualify them to call the shots. This is just a form of economic fascism by another name.

    I can’t believe libertarians are falling for this shit. It has the makings of disaster written all over it and you guys are hailing the o’ man for putting this forward.

    It’s simply better to run the bad banks down than clown around with this stuff. The market decides comp, not the freaking White House for politically expedient reasons.

    [ADMIN: Please note that “fuck” gets caught in the moderation filter]

  9. Dollars don’t buy genius, they buy reputation which ‘might’ be built on substance – or marketing.

    Yea how about that? So the boards better get off their useless backsides and make a good selection or the bank goes under. Fancy that, hey?

    It’s about time some of the boards started to earn their keep.

  10. JC – I’m not proposing that the legislation be retrospective. Each financial year would be treated independently. And obviously if the government makes a law that forces a company to accept money that the law then forces the company to give back in tax the government is being more stupid than usual. The point of my law is to provide a personal incentive that discourages senior management from putting their hand out to government. Perhaps it needs some polish but I don’t think it needs too much.

  11. Sorry that was me


    Would you mind changing that terje. It’s what I call myself when pointing a stick to angrify bird.

    Shareholder value?

    He’s not allowing and stock options, terje. that’s what the laws says.

    If it’s a NYC bank someone on a middle class existence would be struggling on that salary.

    $500,000 gross.

    tax is 50% in NYC

    $250,000 doesn’t go far in NYC.

  12. I’m not proposing that the legislation be retrospective.

    O’man and the congress are.

    Each financial year would be treated independently.

    They’re not, They’re saying it would be for the life of the assistance.

    And obviously if the government makes a law that forces a company to accept money that the law then forces the company to give back in tax the government is being more stupid than usual.

    They didn’t. They forced GS and JPM to take the money with the pointed gun at their head.

    The point of my law is to provide a personal incentive that discourages senior management from putting their hand out to government. Perhaps it needs some polish but I don’t think it needs too much.

    Do you understand? No one wants TARP unless they’re keeling over and about to die in the present form as it has meant a host of things like having to tell the Feds everything everyday an d there’s a swarm of cheaply dressed bureaucrats with bad breath hanging over the bank counter every minute of the day.

    I think you’re confusing what you want to see and then suggesting O’man is a genius. The only problem is that your solutions and o’man’s are quite different and guess what, he’s proposal is going to trump yours.

  13. Then pay yourself $2,000,000 and don’t put your hand out for taxpayers money.

    And the bank goes over which is not the system they’re gunning for. And as I said in 90% of the cases the old management gets the bullet. Now they’ll stay. great work.

  14. Intervention begets intervention begets intervention…

    This will have unintended consequences including those that jc has mentioned. The TARP will have unintended consequences. A fiat/fractional-reserve banking system has unintended consequences. All government manipulation into the economy causes other problems. This new rule further highlights the impossible absurdity of centralised control of the economy.

  15. Sorry if I was misunderstood. I wasn’t literally saying that Obama is a genius or has a great policy idea. I know he is headed down a different road to me with this initative. I’m just saying that his policy idea has inspired me to offer a piece of law reform that is pure genius (IMHO). 😮

  16. No terje;

    Let’s get this straight. I was went for the tarp for two reasons.

    1.Back in sept the credit markets and even the payment system looked like it was failing. Literally failing in that banks weren’t reluctant to pay one another in case they didn’t get the other side. that meant that credit wasn’t flowing through the system (and payments too) which could have easily resulted in say supermarkets not being able to pay their suppliers. It really meant that and as one official observed that it was 9 am in the morning and he saw the the Fed wire basically seizing up by 3 that afternoon.

    2. seeing the banking system was and still is a socialist construct and the government basically fucked it up by allowing interest rates to finance a huge credit expansion it was up to them to try and set it up back again. They owned the problem in the first place.

    So let’s not go over old ground again and stick with the current government fuck up. Shall we?

    [ADMIN: Please note that “fuck” gets caught in the moderation filter.]

  17. The difference between socialism and capitalism? Under socialism, banks are first nationalised and then go bankrupt. In the capitalist system it appears to work the other way around.

  18. You can’t tell me there is nobody willing to take a shot at being CEO of a major corporation for %500,000 a year. If they turn it around, they get to move on out into the big world, jump 15-20 years seniority and write their own paycheck.

    Seriously, if nobody is interested I’ll put my hand up. Don’t know all that much about the industry, but I’m willing learn, and in the meantime to crowd-source my decisions on the blogs.

  19. Yea, people like Vikram Pandit at Citi become interested in the job. He had no experience at running a bank let alone a huge one with big problems, wasted time on setting goals etc. with a bank model that was broken when he should have been selling assets a year ago rather than now and you end up with a bank that had an NAT of 30 bucks now trading at 3.45 that is probably going to be nationalized.

    But hey they saved on CEO comp, right?

    You pay peanuts and you end up with monkeys, nic.

    The person that should be running C or BAC are currently on big pay at some of the healthy regional (yes there are such things) and the idea that they will leave their jobs to take over a heap of shit is not exactly enthralling.

    But let’s all keep dreaming about just how smart the O’man is is limiting pay.

    Even Meredith Whitney, the banking guru analyst that predicted the bank problems and continues to suggest they are in serious trouble thinks this is a stupid idea.

  20. There are two basic choices here. You either let the banks fail that need to fail or the government tries a workout arrangement.

    If it is choice one the issue of comp is pretty mute. If it is 2 you then pay market rates to attract really good people that get the bank out of bother.

  21. Remember it is a strategic competitive advantage to the stronger banks that the weaker ones have their exec comp limited… I don’t think Barak Obama will stand up to the execs at the stronger banks. I’ve just posted on this, in case you are interested.

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