Monday, September 29, 2008

A Look at the Bailout

As Tony predicted here:
...Leonhardt addresses briefly, near the end of the article, the notion of limiting the pay of Wall Street executives who waddle up to the public trough. Good Luck: I bet the tax lawyers and accountants are salivating at the prospect (hell, having previously been one such tax accountant, I know they are)...
Sure enough, in conducting a first review of the proposed bailout, Clusterstock (all emphasis, both color and bold, is Clusterstock's) notes:
Executive compensation at bailed-out companies. Toothless: The plan ostensibly prohibits golden parachute payments to CEOs and other "C-level" execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling (sic) the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent...because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn't mean the companies can't pay their CEOs $500 million a year. IN ADDITION: There's another absurd section that makes all compensation above $500,000 for the three highest paid employees at the company not tax-deductible for the company. This is LUDICROUS. It means the company can pay the executives anything it wants and that the penalty for this will be exacted on the company and its shareholders. (Unless we're mistaken, Americans are furious that CEOs make $50 million a year for running companies into the ground, not that the $50 million is tax deductible).
The same article addresses, in part, the question asked here with the following (again, all emphasis remains theirs):
Equity/warrants: The Treasury MUST be granted warrants or debt instruments (senior debt) from public companies in exchange for more than $100 million of bailout money. No specific language on how significant this warrant or debt position must be, except that it must "provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant, or a reasonable interest rate premium, in the case of a debt instrument." AND...must provide additional protection against taxpayer losses. This is an important and just provision. The tension will be between the government wanting to take enough equity to offset the risk without scaring the bank away.
I am still not convinced that having an equity stake in an insolvent or nearly insolvent company is any form of assurance to taxpayers. I do, however, understand that it may be better than nothing. This whole plan is very clearly a start of things to come, and we'll be seeing more legislation coming through revising and expanding the government's role and authority to interact with corporations.

I hope someone here, maybe Percicles or Tony, can speak to the history of government's interaction with the corporation as individual relative to government's interaction with states as relative to the individual (specifically civil rights). There is clearly a role for regulation that has been fought for and well established, but this is no longer regulation, this is active participation. What can we expect from the future in judicial and legislative terms? Is the commerce clause sufficient Constitutional ammo for all of this, or will we see new arguments to protect these newfound and newly stated powers of government?

Also, mark-to-myth is placed under review and may be suspended. This can have enormous impact and we can all expect to hear more about it in the coming months:
VERY STRANGE AND POSSIBLY ALARMING: The SEC has the ability to suspend mark-to-market accounting for financial institutions when it thinks doing so is in the public interest. The SEC will also be launching a "study" of mark-to-market accounting. Mark-to-market has been fingered as one of the villains in this collapse. It isn't, but it sounds as though the SEC may have been persuaded that it is. Without mark-to-market, there's a lot more risk of a Japan-type scenario, where banks live in denial for years about how far up the creek they are.

1 comment:

  1. By the way, if the announcement on Sunday by Harry Reid and others of the limiting of executive compensation to $500,000 seemed a little subdued, and was not trumpeted as a huge deal, there's a reason. For the past 20 years or so, no deduction has been allowed for (public company) executive compensation in excess of $1 Million. As you can tell, that's been a hugely effective brake on compensation, right? So the limit of $500,000 is just a sop to the public, who can't be expected to know that the new provision is just a minor refinement of an existing (and ineffective) law. See Internal Revenue Code Section 162(m) for the law.

    By the way, when the original law was passed, public companies were in a tight spot: they wanted to lobby against it, but for PR reasons many of them felt that they could not. (McDonald's was a particularly ironic example: how to argue against a limit on deducting executive comp. of $1 Million when your customers are, well, pretty much at the very opposite end of the socio-economic ladder?) So they formed a consortium of similarly-positioned companies to lobby under an assumed name. Obviously, the effort failed.


Please post your comment(s) here. To reply to a specific comment, be sure to paste the appropriate @ displayed into the box below as the first line.