Obama orders pay cut for execs at rescued firms

[The Brain]

grumbler displays kindergarten view of economics. Film at 11.

[Martinus]

I think what grumbler is saying is this: beyond a certain pay level, each dollar you pay translates to a smaller and smaller improvement in the work quality provided by the employee, until it reaches certain point when the improvement is 0 or close to 0. Essentially, if you put it on a graph, with the x axis representing pay and the y axis representing quality of work you get, you would get a hyperbole.

In that sense, people at the top pay levels stop being "worth" it in terms of a simple quality-per-dollar ratio.

Now, of course you can retort, like dps, that a person is worth whatever the markets will pay for it - that may be true, however there is one little twist which you are forgetting. The markets work the way you describe in classic capitalism phase, when the owner of the capital (the "stock holder") is making the decisions on how much to pay people they are hiring. With the stockholders being extremely dispersed and these decisions being made by largely unaccountable CEOs, however, this simple free market mechanism is distorted.

Effectively, the capitalist system has undergone this silent revolution, with the money-owning "capitalist" caste being displaced and usurped by the expert "MBA" caste. It's not unlike the hereditary land-owning feudal lords being displaced by educated bureaucrats in the late middle ages.

[The Brain]

Except that you are the one who is trying to sneak in a free market requirement.

[Martinus]

Except that you are the one who is trying to sneak in a free market requirement.

Explain.

[The Brain]

Except that you are the one who is trying to sneak in a free market requirement.

Explain.

"Now, of course you can retort, like dps, that a person is worth whatever the markets will pay for it - that may be true, however there is one little twist which you are forgetting. The markets work the way you describe in classic capitalism phase, when the owner of the capital (the "stock holder") is making the decisions on how much to pay people they are hiring. With the stockholders being extremely dispersed and these decisions being made by largely unaccountable CEOs, however, this simple free market mechanism is distorted."

dps didn't mention free market in his post, nor is it obvious why he would have.

[The Minsky Moment]

Two thoughts:

1) the "price mechanism" in banking is fundamentally broken.  A bank is in the money business - but the cost of money to the bank is not set by the market.  It is set by the Fed which has priced that commodity at only slightly above zero, and indirectly by Treasury which has aritificially lowered bank borrowing costs by guaranteeing other financial liaiblities (like commercial bank bonds).  Only the revenue side of the bank business is market-based right now - it is like being able to play in Vegas with loaded dice. 

2)  It is interesting to compare Goldman Sachs in the not so-long ago day when it was a private partnership (essentially a purely capitalistic enterprise where the owners managed the enterprise and bore all the risks) as opposed to its time as a public company.  There are two major differences: post-IPO GS carried (and carries) significantly more leverage and risk and the "partners" get a bigger cut of the income then ever before even though they hold vastly less equity.  Basically the bank has put significant risks onto the shareholders and then appropriated the extra compensation of that risk for the banker-employees.

This is not an attack on GS in particular - just that their recent conversion to public company form makes the comparison easier.

[Eddie Teach]

I think what grumbler is saying is this: beyond a certain pay level, each dollar you pay translates to a smaller and smaller improvement in the work quality provided by the employee, until it reaches certain point when the improvement is 0 or close to 0. Essentially, if you put it on a graph, with the x axis representing pay and the y axis representing quality of work you get, you would get a hyperbole.

In that sense, people at the top pay levels stop being "worth" it in terms of a simple quality-per-dollar ratio.

You don't pay the top guy more to get better work out of him; you pay him more so he works for you and not your competitor.

[Admiral Yi]

2)  It is interesting to compare Goldman Sachs in the not so-long ago day when it was a private partnership (essentially a purely capitalistic enterprise where the owners managed the enterprise and bore all the risks) as opposed to its time as a public company.  There are two major differences: post-IPO GS carried (and carries) significantly more leverage and risk and the "partners" get a bigger cut of the income then ever before even though they hold vastly less equity.  Basically the bank has put significant risks onto the shareholders and then appropriated the extra compensation of that risk for the banker-employees.

Didn't the change in SEC leverage rules predate the IPO?

[Zanza]

http://www.nytimes.com/2009/10/27/business/27aig.html?hp

October 27, 2009

Ex-A.I.G. Chief Is Back, Luring Talent From Rescued Firm

By MARY WILLIAMS WALSH

Maurice R. Greenberg, who built the American International Group into an insurance behemoth with an impenetrable maze of on- and offshore companies, is at it again.

Even as he has been lambasting the government for its handling of A.I.G. after its near collapse, Mr. Greenberg has been quietly building up a family of insurance companies that could compete with A.I.G. To fill the ranks of his venture, C.V. Starr & Company, he has been hiring some people he once employed.

Now, Mr. Greenberg may have received some unintended assistance from the United States Treasury. Just last week, the Treasury severely limited pay at A.I.G. and other companies that were bailed out by taxpayers. That may hasten the exodus of A.I.G.'s talent, sending more refugees into Mr. Greenberg's arms, since C. V. Starr is free to pay whatever it wants.

"Basically, he's just starting 'A.I.G. Two' and raiding people out of 'A.I.G. One,' " said Douglas A. Love, an insurance executive who has also hired A.I.G. talent for his company, Investors Guaranty Fund of Pembroke, Bermuda.

While America generally loves stories of entrepreneurs making a comeback, Mr. Greenberg's success may be at the expense of taxpayers. People who work in the industry say that if he is already luring A.I.G.'s people, he may soon be siphoning off its business and, therefore, its means to repay its debt to the government.

"To me, it's just going to be a matter of time before the valuation of what he's building is greater than the valuation of A.I.G.," said Andrew J. Barile, an insurance consultant in Rancho Santa Fe, Calif.

A.I.G., meanwhile, is struggling to regain its footing. The recipient of the biggest taxpayer bailout in history, it has been ordered by the government to restructure, unwind its complex derivatives and pay back the taxpayers.

At 84, Mr. Greenberg remains larger than life. He spent nearly four decades forging A.I.G. out of private companies, devising its Rubik's Cube structure and building it into the world's largest insurance group, with a $1 trillion balance sheet. He lost most of his fortune when the company nearly collapsed last year.

And now, he appears to be starting over.

He was ousted from A.I.G. in an accounting scandal in 2005, and has insisted that he was not responsible for the problems that almost brought down A.I.G. last year — extremely risky trading in derivatives by its financial products unit. At the moment, C. V. Starr does not have a financial products unit, a spokesman for Mr. Greenberg said.

After he was pushed out, Mr. Greenberg fought bitterly with A.I.G. over how to untangle assets that they both laid claim to. Over the summer, he won, earning the rights to $4.3 billion in A.I.G. stock that he had removed from an unusual offshore retirement plan. The company had argued that he had improperly cashed out the stock and used the money to finance new business ventures that were competing with his former company.

With his battles with A.I.G. now largely resolved, Mr. Greenberg is free to use that money as the seed for his latest ventures. Just this month, C. V. Starr leased 141,000 square feet of space — three stories — on Park Avenue in Manhattan, in one of Lehman Brothers' old headquarters. Previously, he had expressed an interest in buying one of A.I.G.'s prizes, a sprawling global insurance group, but only if he could buy the whole thing. A.I.G. is trying to keep a stake.

Mr. Greenberg declined to comment. But his lawyer, Lee Wolosky, said he was not trying to undercut his former company. "Mr. Greenberg built A.I.G. and wants to see it succeed," Mr. Wolosky said. He added that since the bailout Mr. Greenberg had been trying to offer consistent advice, both in public and private settings, "about the best course to restore A.I.G. for the benefit of all its stakeholders." After all, Mr. Greenberg remains A.I.G.'s largest shareholder aside from the government.

As to whether Mr. Greenberg was poaching his former employees, Mr. Wolosky said, "C. V. Starr does employ a number of former A.I.G. personnel, but far fewer than the global insurance companies that are A.I.G.'s direct competitors." He declined to provide a specific number.

A.I.G. declined to comment.

Treasury officials said their special master for pay, Kenneth R. Feinberg, was aware that if he set pay standards that were too stringent, he could further harm A.I.G. by driving away its executives. "We're acutely aware of this possibility," said Andrew Williams, a department spokesman. "That's why Ken Feinberg spent hours at A.I.G. trying to understand that specific dynamic and strike the right balance."

Unlike A.I.G., C. V. Starr is privately held, so there is no stock to entice investors, and no disclosure of financial information. Little is known about its business plan, although it has been announcing ventures to insure things as diverse as wayward corporate directors and construction accidents on the bridges and roads being built under the Obama administration's fiscal stimulus program.

The firm seems to be focusing on the specialized lines of business insurance that once made A.I.G. stand out. The government had hoped to leave those businesses at A.I.G. intact after selling off most of its other operations, like life insurance and household finance.

C. V. Starr is also taking on the same form as A.I.G. — an intricate group of companies, each with its own line of business.

For now, most of those companies do not sell their own insurance, but operate as general agencies, representing insurers from rival groups on products that C. V. Starr does not yet sell.

That way, if C. V. Starr does not yet profit from the underwriting of a line of insurance, it can still receive commission income by selling it. "That's the beauty of how he structures the company," Mr. Barile said. "Everything is in such silos that every time you make a transaction, the outside world thinks you're competing, but you aren't."

In March, the Starr Indemnity & Liability Company named Charles H. Dangelo its president and chief executive, after bringing him from A.I.G. Global Risk Management.

A few months later, Starr Indemnity hired another executive from A.I.G., Jim Vendetti, making him its senior vice president and chief underwriting officer. The company also hired a former A.I.G. crisis manager, Alex Pittignano, to build up its businesses of insuring against specialized risks like environmental disasters.

Mr. Greenberg has found ways to exploit A.I.G. without directly hiring former employees. Starr has formed a joint venture with Ironshore, led by the former chief executive of an A.I.G. company called Lexington Insurance. Each of Ironshore's five new businesses is headed by still more A.I.G. alumni. The joint venture, called Iron-Starr Excess Agency Ltd., is headed by Geoff Smith, an executive hired away from A.I.G. in December. It provides insurance to businesses after they have exhausted their primary insurance.

[KRonn]

Maybe it was noted before in this thread, but apparently the Obama admin is looking into pay controls at banks and financial companies, regardless whether they received any bail out money.

Not sure now how much. or if, I should care, though I'm still wary of a pay Czar. Then too, the banks and financial institutions, money supply, etc are already regulated by the government. I've been annoyed at financial managers who risk investor money, and when the risk goes well the manager makes big bucks, but if not then the investors lose while the manager doesn't. That includes pension funds and such, for big and small customers, not just the wealthy. Plus other mischief the financial corps have been up to. But I think some in Congress have had their hands in helping the mess come about. For one thing the repeal of Smoot-Hawley which allowed banks to get more into riskier investing?

[size]
http://www.latimes.com/business/la-fi-exec-pay23-2009oct23,0,3190494.story


Bank bonuses are in Fed's cross hairs
The regulator seeks to limit rewards for risky practices at the 6,000 institutions it oversees.

Reporting from Los Angeles and Washington -  Escalating the government's intervention in corporate pay practices, the Federal Reserve moved Thursday to restrict the ability of thousands of banks to pay bonuses in an effort to curb risky practices widely cited for helping to trigger the global financial crisis.

Under its proposal, the Fed would examine the compensation of any bank employees -- including senior executives, securities traders and loan officers -- who individually or collectively could significantly increase the amount of risk taken on by their employer. The central bank could order changes to policies that encourage too much risk.

The Fed's action came as the Obama administration's "pay czar," as expected, took the unprecedented step of dictating changes to the pay packages of the highest-paid employees at the seven companies that received the most federal bailout money.

The dual steps taken Thursday came amid an unrelenting public outcry about the scale of pay on Wall Street in the wake of the financial crisis. Some experts predicted the actions could provide momentum for changes in corporate compensation beyond the companies directly affected.

"The debate over CEO pay fundamentally shifted last year when it became not just shareholders getting ripped off, but also taxpayers getting ripped off," said Dan Pedrotty, director of investments at the AFL-CIO and a critic of high executive pay. "I think the outrage over all of these economic collapses is going to fuel reform."

The Fed's action could have a far-reaching effect on Wall Street, said Patrick McGurn, special counsel at RiskMetrics Group, a New York advisor to large investors about how companies are governed.

"It might stop a lot of the free-agency mentality that has played out in the financial services industry, where someone would look for a quick kill and then jump to another firm and let the house of cards come crashing down behind them," he said.

The Fed's proposal would apply to the nearly 6,000 banks it regulates. The 28 largest of those institutions -- almost certainly including Citigroup, Bank of America, Wells Fargo, JPMorgan Chase and Goldman Sachs Group -- would receive extra scrutiny.

The Fed would not dictate salary or bonuses for bank employees but instead would take compensation policies into account as part of its routine determination of whether the firms were being soundly run. Regulators would look in particular for incentives that encourage undue risk.

As an example of such incentives, a senior Fed official pointed to bonuses that are based on the volume of loans made by an employee or the amount of trading revenue generated without taking into account the riskiness of the loans or trades.

The central bank issued very general guidance Thursday on how pay arrangements should be structured and asked for public comment on the proposals for the next 30 days.

But it said banks shouldn't wait for the final guidance but should "immediately" launch their own reviews and alter pay arrangements that could threaten bank safety.

Also Thursday, Kenneth Feinberg, the Treasury Department's special master for executive compensation under the $700-billion Troubled Asset Relief Program, announced his decision to cut by more than half the average total compensation for top employees at the seven biggest recipients of TARP money -- Bank of America, Citigroup, American International Group, General Motors, Chrysler and the automakers' financing units.

The cuts, which apply to as many as 25 employees at each company and take effect Nov. 1, will reduce their total compensation an average of 50% and their cash pay an average of 90%.

The changes boost the proportion of compensation paid in company stock, but executives generally have to wait years -- or until the employer has repaid its TARP money -- before selling those shares. The restrictions are designed to limit conduct by the executives that would harm the value of their companies' stock.

Feinberg said he tried to balance the public anger over salaries at those firms with the need to keep too much top talent from fleeing.

"The taxpayers are in deep with these seven companies," he said, "and one of my primary obligations is to see to it that the taxpayers' dollars are returned to the U.S. Treasury."

At the White House, President Obama praised Feinberg's work.

"This is America. We don't disparage wealth. We don't begrudge anybody for doing well. We believe in success," Obama said. "But it does offend our values when executives of big financial firms -- firms that are struggling -- pay themselves huge bonuses, even as they continue to rely on taxpayer assistance to stay afloat."

Several of the companies under Feinberg's watch, though they didn't criticize his orders, said their compensation plans already were heavily weighted toward long-term, stock-based compensation.

But Bank of America issued a statement complaining about "an inability to pay people based on their performance and value," suggesting the pay cuts could prompt some executives to leave the company.

"Competitors not subject to the pay restrictions are already exploiting this situation," the bank said.

Feinberg encouraged other companies to follow his lead voluntarily and structure pay to reduce risk-taking.

"I personally believe that it's a lost opportunity for a broader marketplace not to take advantage of what we've learned in this process," he said, but he pointed out that his jurisdiction "begins and ends with these seven companies."

Congress is considering "say on pay" legislation that would give shareholders in all public companies an advisory vote on executive pay packages. Some compensation watchdogs say the measure wouldn't have much effect and are pushing for more direct measures, such as giving shareholders more control over corporate boards.

Such moves could help realign pay scales at U.S. companies.

In 2007, U.S. chief executives were paid on average 275 times the average compensation of the workers at their companies, compared with 24 times in 1965, according to the Economic Policy Institute.

The ratio currently is also much higher in the U.S. than in other countries, other studies have found.

But McGurn said a general lowering of the pay scale for U.S. executives was unlikely.

"It may slow the rate of growth," he said, "but one constant in the universe is that you never see executive pay go down."

[grumbler]

Isn't that how people with less money generally feel?

Those with less money feel that way, as do those with more money, and those with exactly-equal money. 

[grumbler]

The worth (in economic terms) of anything, be it your time, a fine diamond, or a used car that barely runs, is what you can get someone to pay you for it.  If you can get someone to pay you a million a year, or 10 million, then you're worth it to them.

Of course, when people get the ability to set their own pay, their time tends to be worth more.   

Exactly.  CEOs don't bid for their jobs, and the cheapest one gets it; compensation is determined by the compensation committee, which consists of one's peers at other firms, who have a vested interest in seeing one get the highest possible compensation, to justify increasing their own compensation.

This isn't a market system. 

[The Minsky Moment]

2)  It is interesting to compare Goldman Sachs in the not so-long ago day when it was a private partnership (essentially a purely capitalistic enterprise where the owners managed the enterprise and bore all the risks) as opposed to its time as a public company.  There are two major differences: post-IPO GS carried (and carries) significantly more leverage and risk and the "partners" get a bigger cut of the income then ever before even though they hold vastly less equity.  Basically the bank has put significant risks onto the shareholders and then appropriated the extra compensation of that risk for the banker-employees.

Didn't the change in SEC leverage rules predate the IPO?

No the IPO was in 99; the rule change was in 2004.
The SEC rule only relates to broker-dealer operations; it does not regulate capital in the proprietary trading side of the business which is where a lot of GS' leverage (and risk) can be found.

[grumbler]

grumbler displays kindergarten view of economics. Film at 11.

[The Minsky Moment]

For one thing the repeal of Smoot-Hawley which allowed banks to get more into riskier investing?

Glass-Steagall.  Smoot-Hawley was an import tariff.