Today's WSJ reports that the Obama administration, while disclaiming intent to "micro manage," is seeking to pile new compensation rules on financial institutions -- including firms that have escaped TARP's clutches:
The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.
Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.
Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay.
I've always thought that those on the right who slap the "socialist" label on the Obama administration, as some in the RNC apparently want to do formally, were way over the top, but the Obama administration's continuing dismantling of capitalism must give anyone who believes in free markets pause.
Larry Ribstein observes of the compensation proposal, for example, that:
The nastiest part of dismantling the basic structures of capitalism is once you start, where do you stop? ... Once you start regulating, the political dynamic changes and the interest groups can realign for broader, even more inefficient, regulation. So if the banks are going to clobbered, they're going to want the hedge funds to be clobbered too.
But there is a limit. The US will have to get global cooperation to impose its regulation on the entire world. That was the lesson learned from capital flight in the wake of SOX. Not surprisingly, we’re hearing talk of a global systemic risk regulator.
Space travel might bring some relief. But I'm sure the Obama administration will be ready with plans for a galactic regulator.
If this were an isolated incident, we might be able to shake it off. But it isn't. Instead, it is of a piece with the totality of Obama's program.
Consider, for example, Todd Zwywcki's cogent WSJ op-ed today on the lawlessness of the Obama administration's handling of Chrysler:
Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez. But it would never happen here, right?...
The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.
The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.
Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.
The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler's assets to Fiat. While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset's, or in this case the company's, value. That's hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan. The Obama administration's asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.
By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?
The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government's threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.
It's probably still over the top to call Obama a socialist, but it's no longer disputable that he is social democrat intent on remaking the American economy into something like that of, say, Sweden. At the end of which, we'll be less free and less well off.
