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The Right Strings

While I'm still fence-sitting on the proposed bailout plan, I have come up with a partial opinion, on one of the proposed aspects being kicked around for it. The Democrats want to tie a cap on CEO pay for any company that signs up for the plan.

Now, I happen to think that there should be some conditions for the bailout, and I have no problems if they pinch a bit, but that strikes me as just plain stupid. Imagine the following Bob Newhart-esque phone conversation:

"Hello, Mr. Miracle Worker CEO. This is Gerry, down at MegaDumb Bank. How are you doing today? ...That's great... hey, you might have heard about us lately... yes, that was us... yeah, that was us, too... yeah, we did that... that, too... so, it seems you have heard about our problems... yup, that was us too... so, Mr. Worker -- can I call you Miracle? OK, Mr. Worker, here's why I called. We just got rid of our old CEO, the guy who ran us into the ground, and we're wondering if you'd be interested in the job... yes, sir, we heard you love a good challenge... yes, sir, pretty much absolute authority... three-year contract? no problem... yes, you can bring some of your own people, too... salary? Funny you should bring that up... you see, Mr. Worker, under the terms of the federal bailout, you'd have to take a 90% pay cut... um, no, sir, that's not a joke... really, sir, I'm not kidding... sir, I'm nowhere near your leg... please, sir, try to stop laughing before you pass out... sir? ...sir? Mr. Worker? I'm going to hang up now and call 911 for you..."

As I said, I don't have a problem with strings. But this is typical Democratic crap -- a blunt club of a punitive measure. It's putting the government in the position of micromanaging these businesses, and if there's anyone more inept than the current crop of bozos we have in our financial sector, it's the federal government. So just say no to CEO pay caps and other similar measures.

But let's not let them off the hook entirely. Instead, let's literally make them pay for the privilege of dumping their bad loans on the taxpayer. I had an idea for a formula:

If an institution wants to sell its bad loans to the government, we take the total they want to unload and calculate how much of a percentage of their total such loans they hold. Suppose the MegaDumb Bank I mentioned above has two billion dollars in loans they want to dump, out of a total of ten billion dollars. That's 20%. (Yes, I'm making up numbers to keep the math simple.)

Whatever the percentage works out to be, divide that by 4. In MegaDumb's case, that works out to 5%. So MegaDumb, for the privilege of unloading those bad loans, has to pay the government 5% of its gross revenues as a "bailout tax" for as long as the government holds those bad loans.

Now, the bailed-out companies will have the right to buy back those loans at any time, immediately ending their obligation to pay the bailout tax. Likewise, should the government manage to find someone else to buy off MegaDumb's bad loans, that would end the obligation. If that happens, the government will look at what it paid for the loans versus what it sold them for. If the government lost money, then MegaDumb will be on the hook for the "bailout tax" until that difference has been made up. (No screwing around with interest, COLAs, or anything -- a straight-up comparison of what the government paid versus what the new buyer paid.) If the government sells the loans for less than they paid, then MegaDumb is off the hook for future bailout tax payments, but the government pockets the difference as its reward to the taxpayers.

Yeah, it sounds a bit complicated, but it does what I think needs to be done -- it gives the bailed-out businesses some hefty reasons to debate whether or not they really need the bailout, as it'll put them on the hook for the foreseeable future. But that hook will not be a simple punishment, but an incentive to get their asses in gear and their houses in order.

As I said, I dunno if I'm in favor of the bialout generally. But I do hope that if it does go through, someone will apply a smidgen of common sense (a rare commodity in DC, we've all noted) and use the clout it will give the government not to indulge their petty cravings for punishment, but for actually trying to fix the problem. And I'm just naive enough to think that my "bailout tax" plan could do just that.


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Comments (19)

Does anyone here understand... (Below threshold)

Does anyone here understand this? I don't.

I don't think it's that dum... (Below threshold)
Mark L Author Profile Page:

I don't think it's that dumb. We're using $2300 per person in the US for this bailout. That's bad enough. I don't want some golden parachute for an already millionaire Wall Street CEO. He ran his company into the ground while making millions - now I'm supposed to let him use my money to pad his devalued portfolio? Nope. They need to feel some pain, too.

Now, they deserve good pay. They have important work to do - getting me my money back. Put them on at the GS-15 government pay scale. That's a six-figure income. If they care so much about their firm and reputation, they can put up with that for a couple of years.

The salary needs to be tied... (Below threshold)
cstmbui;ld:

The salary needs to be tied to multiple conditions, like
1) Profit
2) Increase in stock value
3) Increased market share
4) Improved balance sheet
etc, etc (You get the picture....btw, the type of company would also effect the requirements)

No golden parachutes. If they get fired for poor performance they need to pay money back!

Honestly, most companies need some of these restrictions (not set by the government). I own my own company, so I can't give myself bonuses while running the company into the ground. I might get a "huge" bonus/salary one year, but there wouldn't be a company the next year.

<a href="http://www.openlef... (Below threshold)
hyperbolist:

Some wishful thinking:

"I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me."

(Dunno how to do block quotes, obvs.)

Well, this is a real easy c... (Below threshold)

Well, this is a real easy call for me. Only the the first $100,000 in bank accounts is federally insured and I sure as heck don't want to lose most of my money to some bank failure, especially when the bank's stock value recently went down 60% in price. And I see way too many examples of persons suffering in my community with financial troubles or other economic problems.

By the way, why is McCain still advocating for privatizing Social Security after the big financial house failures or huge stock value falls? His economics are just as out of touch with reality as "Gilligan" Bush. Thank goodness the nation isn't dealing with a lost retirement savings crisis right now as well, and Congress rejected that privatizing nonsense prone to stock market falls or financial house collapses like this.

Paul, your depth of skeptis... (Below threshold)
WildWillie:

Paul, your depth of skeptisism and negativity are boundless. The stock market long term ALWAYS goes up. Only the short traders care about the week to week. Lefties are always so self loathing. Their motto is: "We can't, we can't." ww

Honestly, most com... (Below threshold)
Honestly, most companies need some of these restrictions (not set by the government ). I own my own company, so I can't give myself bonuses while running the company into the ground. I might get a "huge" bonus/salary one year, but there wouldn't be a company the next year.

cstmbui;ld, I believe this is Jay's point; that allowing the government to dictate private industry bonus's is another slippery slope. Running your company into the ground does not effect the fiscal solvency of the nations economy. Would you invite government rules on how you choose to reward or punish your company?

By the way, why is McCain still advocating for privatizing Social Security after the big financial house failures or huge stock value falls?

Would you like to explain to us Paul where the Social Security funds are located at the moment? Hint: there are none! It's all on paper credits tranfered to the general fund producing a "huge value".(sarc) Social Security is the biggest joke being pulled on our society. Using this, (SS), as an example of fiscal responsibilty is a weak argument at best.

"Gilligan" Bush?

I sure hope some one comes up with a sure-fire medication for the withdrawels you BDS folks are going to have in a few months.

Having met quite a few corp... (Below threshold)
abc:

Having met quite a few corporate bosses, most notably the president of Pfizer and his successor during its glory years, and the president of Johnson & Johnson more recently, I have some stunning news for you: they're just guys like the rest of us, except someone decided to fill their pockets with money. No one, not a star athlete, not a CEO, is worth 5 million a year or more. They aren't magic, and seldom do their decisions do more than spur silly morale programs or refinance debt to boost the bottom line. That one man in a high position can change a failing corporate culture is absurd, and is a fiction that these companies create for themselves. Maybe if he is given carte blanc to clean house and spend more money on a stable of all-stars, their "excellence" may trickle down, but it has a long way to go to get to the real problem: the little guys.

If you want your company to do better, pay the little guys what they deserve, not what you can get away with paying them. Those millions you pay one executive would add up to nice raises across the board for the rest of the corp. Low pay makes unhappy, distracted employees, which equates to employees who really don't have much motivation to excel at their jobs, and when you have a whole company "mailing it in", you have the current state of affairs today in corporate America. The little guys have only enough motivation to avoid getting fired, or maybe they'll step up to the level of mediocrity in hopes of promotion.

To attribute a company's success to the boss is a mistake. How about paying that engineer whose ideas have made millions for the company, or the R&D guy who comes up with the next big thing? Nope, they keep getting paid their salary, with maybe a little pat on the back.

As a chemist, I've created things from scratch that have made tens of millions of dollars, only to see the idiot marketing and sales forces get treated like kings for managing to sell something that sells itself. Did I get a raise? Sure, at the high-end of the standard scale, where it will take me years to reach what some marketing barbie-doll makes straight out of college. Time to link pay with actual benefit to the company or society. Better pay for teachers, cops, firemen, will improve the quality of individuals attracted to those positions. Corporate executives do not need 10 mill to do a job that they'd still do for a paltry 1 million. An MBA doesn't make you a genius, and when I see something come from one of these guys that turns the company around in bad times, I'll be impressed.

Oh, and if you want governm... (Below threshold)
abc:

Oh, and if you want government to do something, have congress create a new cause of action allowing shareholders to recover underperforming executives' salaries...

WildWillie, just imagine yo... (Below threshold)

WildWillie, just imagine your retirement savings were invested in Fannie Mae or Freddie Mac stock back when they were $65 a share only a short time ago, but now worth only a little over $1 a share today. And just imagine you bought Ford stock when it was $28 a share, but can be purchased for around $5 today.

Last week I got a Federal Bankruptcy Court notice in the mail for my SonicBlue stock. This digital chipmaker stock went from $6 a share down to just 6cents in value. It makes a nice set to go with my Pacific Northwest Development stock shares purchased for $9 a share and worth just $3.25 today.

It will take a lot more than wishful thinking to expect some of these issues to rebound. Ever. I've seen more than enough of this losing a few thousand here, losing a few thousand there with this market to suit me for now.

Werd, abc.... (Below threshold)
hyperbolist:

Werd, abc.

I think you've hit on somet... (Below threshold)
Jack:

I think you've hit on something here J. I'm not in favor of an out and out bailout, but something needs to be done and I don't want unintended consequences to kill any opportunity of protecting the innocent. And before anyone jumps in, by innocent I mean you and me.

Rovin said "cstmbui;... (Below threshold)
cstmbuild:


Rovin said "cstmbui;ld, I believe this is Jay's point; that allowing the government to dictate private industry bonus's is another slippery slope. Running your company into the ground does not effect the fiscal solvency of the nations economy. Would you invite government rules on how you choose to reward or punish your company?"

Exactly why I said "(not set by the government ). " These are things that need to become "standard corporate fare". Like stock options, production bonuses, sales bonuses, etc. have become.
Instead of: We'll give you $10 Million to run our company and if you fail we'll fire you and give you the $10 million anyway(Slight exaggeration).
It is called corporate responsibility, but instead of environmental it is fiscal.

Hey look, we just paid for ... (Below threshold)

Hey look, we just paid for the bailout, but didn't get it. $700 billion is $2,300 for every man, woman and child. The markets dropped 7% today because the bailout plan didn't go through. If you have $32,800 in the market, you just took it in the shorts 7% which is $2,300. And, we still don't have a bailout plan in place.

This is a copy of the email... (Below threshold)

This is a copy of the email message I just sent to my Congressman, Ciro Rodriguez of Texas.

--------

Congressman Rodriguez,

First, thank you for representing me. Though I'm disappointed you voted against the 'bailout', I still appreciate your efforts in Congress.

I don't usually do this, but I'm sending this because it's important to know what's really happening today. The 'bailout' package just failed to pass Congress, which is bad news for America and for our paychecks in particular. The problem is that most Americans don't understand that the 'bailout' shouldn't be called a 'bailout' - it's really a shrewd investment that Congress should make. I'm against rich bank executives getting a bailout as much as anyone, but that's not what the 'bailout' would do and the stakes here are just too high. If you don't vote for this 'bailout', things could just become worse!

The article by John Mauldin entitled "Who's Afraid of the Big Bad Bailout?" (http://www.frontlinethoughts.com/article.asp?id=mwo092608) does a really good job of describing why. Before I read this, no one had adequately described exactly what the 'bailout' is and why it should help protect us from a depression (yes, depression with a 'd', as in the Great Depression). There's a lot of techno-financial terms in the article, so I summarized it this way ...

1. Banks can only lend to consumers and investors at about 12 times their capital base (value of their assets).

2. Mortgage securities on the bank's books are now worth much less, so banks have to mark down the value of their capital base, which means they can't lend as much as they are currently.

3. In order for banks to meet lending regulations, they have to raise capital (get cash) by selling bonds so that their lending to capital ratios will balance. The other option is for banks to call in loans, and I sure don't want my bank calling in my mortgage, do you?

4. No one in the market wants to buy bank bonds right now because the market is in a panic.

5. Bank bonds are now selling for something ridiculous like 53 cents on the dollar (read 'ON SALE!').

6. The 'bailout' would simply buy truckloads of these bonds, giving banks cash and stabilizing the market.

7. BANKS ARE STILL HELD ACCOUNTABLE. Banks would still need to pay back the bonds (the ones the government wants to buy at 53 cents on the dollar). The government could also turnaround and later sell these bonds for a profit!

8. Even if half the banks go on to fail, the government would still get a sizable return on the bonds. Remember that if a company (bank) fails, lenders (bond holders - the government) gets the remaining assets first, and stockholders (bank owners) last. This broad portfolio of bank bonds is a pretty safe investment for the government to take.

9. If the government doesn't buy these bonds, the credit market will likely freeze and the company I work for may not be able to get the funds it needs to cut my next paycheck. No one wants that, right?

10. Tell Congress to think like shrewd investors for once!

Thank you for representing me.

Best regards

Horrors! Senator McCain and... (Below threshold)
Mike Pollock:

Horrors! Senator McCain and House Republicans have discovered greed on Wall Street. Welcome to Economics 101 guys. The free enterprise system works because it's based on greed! And, it's the best economic model yet devised. Greed assures competition which benefit's Wall Street and Main Street. But even Adam Smith knew there had to be regulations to have it work properly, after all, greedy CEO's will find a way to subvert the system so it benefits only themselves. That's why we have governments, to enact laws and regulations to prevent abuse. This is where President Bush and the Republican party failed their country. Their swashbuckling, regulation slashing policies are largely to blame for the mess the country now finds itself in. I can't help but be more than a little cynical when hearing Senator McCain and House Republicans professing outrage over greed on Wall Street and the subsequent bailout proposal, after all, they are the ones who dropped the ball.

I"m not for a bail out for ... (Below threshold)
Deborah:

I"m not for a bail out for only one reason. Absoutly no one has said exactly what the House is voting on. Everyone has hinted, saying that we will buy the junk bonds, but I want to see the nitty gritty that republicans dont want and democrats do. Every news station has told us the overview, but I want specifics. If I am to save my failing economy, I want to know exactly what my money will be going for, not an overview or summary.
Ive heard there are alot of stipulations in this bill, but what are they? Ive heard that republicans wont agree to alot of the stipulation, but, what are they? If they want my money, then I want to know.

NO ONE in governmnet and in... (Below threshold)
MARIE:

NO ONE in governmnet and in financial institutions, which are the experts, could see this catastrophy coming our way? I can't believe that.
I believe, as many people do, that Lehman Brothers, Goldman Sachs and AIG should be accountable and made to pay to the last penny of what they own in personal and business assets. And yes, if that is for them to go bankrupt, so be it, like many of us would go out of business if we made a bad business deal. Someone else would take over these companies and pay the bad debts. After these companies are stripped of all their assets then unfortunately and unfairly the taxpayers would have to carry what is left of the load in a bailout.

BUT WE SHOULD NEVER BE MADE TO PAY UNTIL THESE COMPANIES PAY FIRST.

For crying outloud don't let these money hungry companies get away with murder. We are the victims.

No one likes the bailout, b... (Below threshold)
Economist:

No one likes the bailout, but if it is not done, our economy could spiral downward even further with catastrophic results (think great depression). This appeared to be pretty fair-handed written legislation, with protections for average folk like you and me. The reason Congress' favorability rating is so low is because they only care about getting re-elected, not what's best for this country. If you think the bail-out was a bad idea, wait until you see the results of what doing nothing will be. Hopefully none of you will need a loan anytime soon for anything.




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