On Feb 4, 2009, at 4:37 PM, SA wrote:
> Matthias Wasser wrote:
>
>> A cute little devil, from the WaPo story:
>>
>> "Under the new rules, companies can waive the $500,000 cap by
>> informing
>> shareholders that they planned to continue paying executives higher
>> salaries. Companies would be required to allow a shareholder
>> resolution on
>> the subject, but the results would not bind the company."
>>
>>
>
> Ha! They're good at this.
[From the WSJ's Real Time Economics]
New Pay Rules Will Provide Some Cover in Worst-Case Scenario
The new executive-pay rules issued by the Treasury may make it easier for the Obama administration to deal with political backlash in a worst-case scenario, but they aren’t likely to have an immediate effect on compensation at financial firms.
The new guidelines cap the pay of all top executives at $500,000 a year for any company that receives “exceptional assistance” from taxpayers. The cap needs to be considered by any company that takes money from the government from this point on, but it isn’t binding unless the situation is extraordinary. Treasury used AIG and the Bank of America and Citigroup transactions under the Targeted Investment Program as examples.
Right now, the government isn’t planning on any more such deals. Proposals being discussed for a “bad bank” and other measures to prop up the financial system wouldn’t fall under the “exceptional” banner. Banks participating in those programs aren’t facing rules that are much more onerous than the compensation guidelines proposed under the first round of TARP.
These new rules are meant for an unforeseen government intervention. Over the course of 2008, the government learned to expect the unexpected, and very often deals had to be crafted in a matter of hours to save major financial institutions. Details weren’t the top priority. However, in the last few months public distaste for bailouts has grown exponentially. If another one is in the cards, the Obama administration is showing that it will be prepared.
Bank nationalizations aren’t being considered right now, Treasury Secretary Tim Geithner said recently. But it’s not difficult to imagine a situation where nationalization becomes the only option and a bank has to be saved over the course of a few days or hours. These rules insure that going into such an arrangement, everyone is clear on the ramifications.
This has two potential effects. 1) It makes another bailout easier to sell to the public immediately. The day the government has to step in under unusual circumstance, executives will face consequences. 2) It has the potential to reduce moral hazard, which is the fear that bailouts promote bad behavior by creating a safety net. While the worry about moral hazard may be overblown, there’s no uncertainty here any more. Government intervention means punishment. –Phil Izzo