Obama to Slash Exec Pay at Bailout Firms

NYT:

Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in the government’s financial rescue, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the annual salaries of their 25 best-paid executives by an average of about 90 percent from last year. Their total compensation — including bonuses and retirement contributions — will drop, on average, by about 50 percent. The companies are Citigroup [C 4.42 -0.01 (-0.23%) ], Bank of America [BAC 16.51 -0.50 (-2.94%) ], American International Group [AIG 38.96 -1.47 (-3.64%) ], General Motors, Chrysler and the financing arms of the two automakers.

There really ought to be more outrage about this proposal. As a letter to the editor in today's WSJ aptly observed:

To those who would defend the government's ability, justification and right to negate Ken Lewis's contract and hijack his pay ("The Fall Guy," Review & Outlook, Oct. 2), I offer a John Adams quote found in David McCullough's book "John Adams." Adams stopped at a tavern for lodging. He happened to overhear several locals discussing British actions regarding taxation. One man says to the rest, ". . . if Parliament can take away Mr. Hancock's wharf and Mr. Row's wharf, they can take away your barn and my house."

Mr. Lewis might already be considered rich, as was Mr. Hancock, and the amount of severance may seem to be outrageous, but to you supporters of this confiscation I ask: If you grant the federal government's pay czar the power to confiscate or alter the pay of 175 Americans today, whose barn or house is next?

The point is exceptionally well taken. The Obama administration has shown a shocking disregard for the rule of law when contract rights interfere with the administration's ability to reorder the American economy as it sees fit.

As Todd Zywicki observed when Obama threw Chrysler lenders under the bus:

The rule of law, not of men -- an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers -- is the animating principle of the American experiment. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.

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?

Until Chrysler. ...

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.

And then Obama bullied GM's bondholders to the extent that even the Obamabots on the Washington Post's editorial board were moved to protest that "the Obama administration is coming dangerously close to engaging in financial engineering that ignores basic principles of fairness and economic realities to further political goals."

So set aside the question of whether compensation at financial firms is "too high," however you propose to measure it. Set aside the question of whether these troubled firms will be able to keep their best people, who presumably now will be targeted by unregulated firms like hedge funds that will be free to pay market rates.

The basic problem is here is that many (most?) of the compensation deals the Obama administration is shredding were set in employment contracts. Granted, some of those employment contracts were signed after the law setting up pay "czar" Kenneth Feinberg's position and empowering him to review pay packages at TARP firms. But a lot of them are pre-existing contracts and it's those contracts that are the main concern.

Feinberg in fact is trumpeting his success at forcing so-called renegotiation "even for contracts over which he did not have explicit authority."

The bottom line thus is that Obama is having his minion coerce TARP executives and employees into ripping up contracts Obama doesn't like so as to assuage the populist public. In doing so, Obama and his appropriately entitled "czar" are exhibiting a basic lack of respect for the rule of law.

Unfortunately, these are not isolated incidents. As I wrote back in May, they are each "of a piece with the totality of Obama's program."

Russell Kirk wrote that:

Separate property from private possession, and Leviathan becomes master of all. Upon the foundation of private property, great civilizations are built.  ...

Sir Henry Maine, in his Village Communities, puts strongly the case for private property, as distinguished from communal property: “Nobody is at liberty to attack several property and to say at the same time that he values civilization. The history of the two cannot be disentangled.” For the institution of several property—that is, private property—has been a powerful instrument for teaching men and women responsibility, for providing motives to integrity, for supporting general culture, for raising mankind above the level of mere drudgery, for affording leisure to think and freedom to act. To be able to retain the fruits of one’s labor; to be able to see one’s work made permanent; to be able to bequeath one’s property to one’s posterity; to be able to rise from the natural condition of grinding poverty to the security of enduring accomplishment; to have something that is really one’s own—these are advantages difficult to deny.

No American President has posed as profound a threat to those advantages as Obama, because none has shown as little regard for the rule of law when it comes to property and contract rights.

Update: David Frum offers an interesting analogy:

Suppose we discovered that during the tense days of September and October 2008, executives at the big banks were ordering lavished catered dinners for themselves at their offices. WE'd all disapprove. Those executives should have been eating sandwiches at their desks! But would it be OK for the government to order the banks to refuse the invoices from the catering company?

The service was contracted by the people who had the legal authority to make the contract. THe contract must be paid, unless the company goes into bankruptcy - at which point all creditors would have to be treated equally, without the government picking and choosing its favorites to be paid first.

What's happening with these executive contracts is the equivalent of bouncing the bills from some disfavored suppliers. It's lawless and it's wrong.

Update: Larry Ribstein comments on the "czar" business:

There's a process concern here that is being overlooked. The WSJ notes that Feinberg was brought in to take the heat off Geithner:

Since bringing Mr. Feinberg to the Treasury Department, the Obama administration has largely stayed out of his business, preferring instead to let him make the controversial calls unlikely to please many people. Mr. Feinberg has met with Mr. Geithner just twice and hasn't spoken with White House officials at all.

Perhaps the worst aspect of this whole thing is the Obama administration's attempt to avoid political accountability by creating a "czar." Process is supposed to matter in a democratic system. This is, in fact, what's at stake in the PCAOB case. I wonder if the Supreme Court will have in mind the current administration's approach to governance when considering the constitutionality of a past effort to create an agency with executive power but not executive accountability.

Larry also observes:

As Alex Tabarrok says, "[t]here is no way this will work as advertised. * * * [M]ost of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves." Commenters responded that the executives were incompetent anyway, so who cares? But if that's so, why are taxpayers flushing billions down incompetently managed firms, and then constructing pay rules so they can't attract better ones?

Update: James Joyner put together an excellent selection of commentary, adding his own editorial observations. Check it out.

Update: I know Obamabots think it's not a real news organization and that being associated with it raises my risk of ending up on Obama's enemies list (BTW, Kimberly Strassel's WSJ column on the "Chicago way" is a must read), but I was quoted by Foxnews on this issue:

"He has a lot of authority with respect to not just the seven but with respect to all TARP firms," said Stephen Bainbridge, law professor at UCLA. "It's an enormous expansion of federal power over corporations." 

Under authority granted by Congress through legislation passed in February, Feinberg has decided to order cuts for the top 25 earners at the firms that received the most aid from the $700 billion Wall Street rescue package. He's looking to cut salaries by 90 percent from last year's levels, and to cut total pay by half. 

The fact that Washington is again meddling with contracts -- following a stalled attempt by Congress in March to halt AIG bonuses -- has revived charges that the federal government is overstepping its bounds. Lawyers say Feinberg could be trampling on legally binding agreements. 

But Bainbridge and others said he nevertheless has an "informal" authority to get his way. "Certainly he has the ability to cajole even where he doesn't have the ability to directly regulate," he said. 

Comments

[Ignoto Fiorentino]

What about FDR, Lincoln, and Jackson?

[Max Kennerly]

"a lot of them are pre-existing contracts and it's those contracts that are the main concern."

Give one example of a contractual obligation that Feinberg has recommended be broken.

[twitter.com/mmccartney14]

It is scary and ironic that he served as a Constitutional Law Professor/Senior Lecturer at U of Chicago for 12 years. I think that fact is most frightening, since he truly knows the rights he is trampling. Very disturbing.

[MHodak]

If I had an agreement with you to fix your driveway, and I roughly suggested that you can fix it yourself, you might try to sue me. But if I also controlled the water supply into your house, and threatened to turn it off unless you renegotiated our driveway agreement, you might easily conclude that some of your rights are expendable in the name of being able to drink and shower.

I think what we are seeing here is that the power to make people miserable trumps most of their contractual rights. The government may not, strictly speaking, abrogate contracts signed before the passage of the stimulus package. But the government can make its government wards "an offer they can't refuse" with regards to existing contracts. Also, the ARRA law includes the words dear to every bureaucratic heart: "whatever the Treasury Secretary deems to be in the public interest." Does your pay offend the public interest? Let's ask Mr. Geithner, who has delegated this to Mr. Feinberg. One this point, Mr. Feinberg has exhibited a scary prescience in saying, "anything is possible under the law."

http://hodakvalue.com/blog/?p=1772

[gus6]

Remember- we are talking about execs that ruined the companies! They made these contracts knowing they were robbing the store while stealing from the public they were supposed to be serving! This has nothing to do with regular laws, except they broke them, consciously. they did not earn those monies!

[D> Rosenthal]

Typical Obama - always "a day late and a dollar short". This is just one of the terms of the bail-out that should hane been settled BEFORE all that money was thrown away. Had this been part of the agreement, you can be sure these execs would have found another solution to their problems, but why worry about making those hard decisions when the govt let's you "have your cake and eat it too". (When the cliche fits, use it)

[James Miller]

The Problem is that Obama is trying to tweak a colossal mistake. The bailout was a massive redistribution of wealth IN THE OPPOSITE DIRECTION, adding to the injustices and corruption of a corporatist system.

What we live in is a betrayal of the free market ideals of Adam Smith and Ayn Rand. How can we have an economy "recover" without job growth, growing wages, or the strengthening of our society?

Read more about it here: "Don't Compare Obama and Sully: We'd be Better Off with a Crash" http://jamesthehype.blogspot.com/2009/10/dont-compare-obama-and-sully.html

[Hal (GT)]

And thus the continued failure of the US economy and government continues. It amazing to watch. Scratch that. It's scary.

It's hard not to look at any of this anymore and not think of Fascism. The good thing I think is that American can right the ship still. Just takes citizens being active and observant.

[RH]

Sanctity of contract is an odd way of looking at this. These companies got into this state by entering into contracts with their lenders that they couldn't honor. So we renegotiated their contracts for them via bankruptcy and bailout, and as part of this process we are renegotiating their internal contracts. Most people thought that it was sensible to demand concessions from the UAW, even though they had perfectly good contracts with GM and Chrysler.

[save_the_rustbelt]

High pay for incompetence and malfeasance - Obama did not make this mess.

Once the financial system seems more stable, the federal government (as shareholder and/or lender) should force these companies into Chapter 11, clawback executive and board compensation, and prosecute those who deserve it. Then let the market redistribute the assets.

These chuckleheads ruined their own companies, screwed their own shareholders and drilled a $6 TR or so hole in the economy. That is not a free market, that is racketeering.

[Floridan]

I guess these executives now know what a lot of credit card customers experience.

[LogicalUS]

Mark it down, these shell companies, after the executives leave, will end up the home of all the displaced Leftists who need a way to keep feasting at the government teat just as Fannie Mae and Freddie Mac did under Barney Frank.

Of course they will lose huge amounts of money just like Fannie Mae all of which will be covered by Obama and his horde of communists funneling even more borrowed funds to their friends until they are can be re-hired into government jobs.

Barry Obama entire team of economic advisors were Leftists who had been whoring out huge salaries at Fannie Mae while they were out campaigning for this very stupid man.

[STH]

@ James Miller, regarding this statement: "we live in is a betrayal of the free market ideals of Adam Smith and Ayn Rand"

First of all, if you're looking to a fiction author (and a nutjob one at that) for your economic advice, you need to rethink where your ideas are coming from. She's not an economist, she's an opinionated novelist.

Second of all, the reason why they're called "ideals" is because they aren't actually feasible. The problem with most economists, including Adam Smith, is that they tend to ignore the fact that the economy isn't some independent entity floating out in space, and it NEVER can be. Like it or not, the economy is part of society, and trying to approach it as if it isn't (the way Smith does) fundamentally doesn't make sense. The economy can never be truly unregulated, because even if the government doesn't regulate it, the processes of our society will regulate it. My question is, why should we be approaching the economy as if it is possible for it to ever be unregulated when it can't be? We need a new framework that actually explains how the economy works in context with the rest of society instead of merely pretending that it's some entity floating out in space.

Adam Smith was an idealist, and he was wrong, get over it. So was Marx as well for that matter, so don't start your cries of "socialism." That's not going to work either, it's too idealistic. We need a fundamentally new approach, and I admit I'm not the one who has the answer. But relying on economic principles that have almost never worked the way they were meant to ever since their conception over 200 years ago doesn't make any sense to me. At this point it's as if we feel the need to stick to them simply because they are old and in some way holy, even though they don't work.

[PatHMV]

On the other hand, it seems to me that, had the bailouts not happened, the companies would have gone bankrupt, and the employments contracts those executives had with the company would be worth very little. Given that reality, is it truly all that unconscionable that their salaries be cut?

Personally, I think bankruptcy would have been preferable than the heavily politicized, make-it-up-as-we-go-along bailouts that were done. But in the world as it is now, I don't see this as all that terrible, other than the fact that the government will now likely use this in the future as a precedent to try to regulate the salaries of executives in all companies, not just those which received massive bail-outs.

Some of these executives are the ones who are responsible for the financial disaster faced by their firms. Many others are not. But almost all of these executives were there at the time the decision to accept the bailouts were made. That has consequences for their company, and it ought to have consequences for them personally, too.

[Cornellian]

I'm finding it hard to work up much outrage. I'm sure Mr. Lewis will find enough change in his sofa cushions to keep food on the table assuming he doesn't blow it all on legal fees. I wouldn't assume his contract precludes the board of directors from cutting his pay. Maybe it does, but I don't assume that. Presumably the contract has a termination for cause provision and for all we know, the directors or the government know more about what Mr. Lewis knew about Merrill Lynch, and when, than the public knows and they're actually going easy on him by not firing him.

Re the Chrysler bond holders, they bought bonds everyone knew were junk in the hopes that they'd make a windfall from a government bailout. They can whine all they want as far as I'm concerned. If they had a legal right to a first preference, they were free to enforce it in court where no doubt the usual suspects will shelve their usual talking points about the need for the courts to defer to the elected branches. If the government can throw its weight around in other areas to get them to back off, that's hardly something they were unaware of when they decided to buy the bonds.

Give a guy $200 and call it welfare and for some (not all) conservatives, no measure it too intrusive or too humiliating to ensure that public funds are well spent - drug testing, random inspections in his home to make sure he's not living with someone etc. Give a corporation $200 million and call it a bailout and those same conservatives are outraged at the idea that the government might attach some strings to how it's spent.

Without the bailout they'd be bankrupt today and their compensation would be zero. If they didn't want restrictions on what they could pay their executives they were free to refuse a bailout. I can't get a nickel of public funds without a dozen strings attached. Why should Wall St. execs be any different?

[J. K.]

These companies and their highly paid employees f'ed up and had to be bailed out by the government. They are now civil servants. They should be compensated as such.
If the government has to come and rebuild my wharf, then they should have a say in how the wharf is run.
It amazes me that every so-called conservative argument is so flawed - from this to death panels to afghanistan. Its no wonder you clowns ran this country so far into the ground.

[Andy]

The federal government is the largest shareholder in most of these companies. What's wrong with it invoking its ownership privileges? Those executives would be unemployed right now without the government.

[Contrarian]

"Typical Obama - always "a day late and a dollar short". This is just one of the terms of the bail-out that should hane been settled BEFORE all that money was thrown away."

That would have caused real constitutional problems, considering that Bush was president when "all that money was thrown away."

[pegolas]

They want to pay their big guns ridiculous amounts of money? Fine. Give us back our tax money and you can do whatever you want.

Until then: You work for ME.

[nice strategy]

Conservatives ignoring externalities and pretending that their selfish "right" to consume an unlimited amount of the world's resources no matter what the cost to others is really a principled stand about the rule of law? I'm not surprised. Ben Bernanke is a socialist for caring about systemic risk, yeah, OK, whatever. The bailout itself weighed systemic risk against moral hazard. In this case, tamping down on risky trading reduces moral hazard and systemic risk at the same time.

[Savage Henry]

Mr. Hancock set his wharf on fire and burned it to the ground. The government came in and rebuilt it for him. Mr. Hancock is now standing on his new wharf with gasoline and matches. The government should be able to stop him from setting fire to it again.

What we have is a situation where it is the SAME people engaging in the SAME behavior that caused the banking meltdown to begin with. It is reasonable that the government should be able to stop them.

Yes the bailouts should never have happened. But they did and so now we have to play this out in the best way possible for the taxpayers.

[Dennis]

We're going to need a pretty slippery slope for the pay cuts of 175 bankers to snowball into the taking of my barn. That's a risk I can live with.

[MarkJ]

Rosenthal - maybe Obama would have worked out these "details" beforehand if he had actually, you know, been president when the TARP funds were handed out to Wall Street. If you cast your memory back it may remind you that Bush was President at that time. He and Hank Paulson were the ones who failed to work out the contractual details beforehand. Obama is just doing his best to reign in a bunch of greedy incompetents who feel entitled to vast wealth even though they screwed up royally. I wish he would replace them all with executive service level Federal Bureaucrats - they could hardly do a worse job managing things then the "wizards" who have been in charge for the past few years.

[MarkJ]

@ D>Rosenthal: Obama might have worked out the compensation renegotiations before hand, had he been President when the bailout funds were given to Wall Street. However, if you will cast your memory back it might remind you that Bush was still President when the bailout money was handed out. He and Paulson are the ones to blame for not working out those details in advance.

These guys screwed up - if they didn't want their compensation packages messed with they could have managed their companies well so they didn't need bailouts.

[www.facebook.com/profile.php?id=568328097]

@STH: "Adam Smith was an idealist, and he was wrong, get over it."

While I don't agree with @James Miller (I could give a rat's ass if we "betray the ideals of Ayn Rand", I missed the part in history class where the American experiment was founded on the science fiction ramblings of a crazed sybaritic narcissist), both of you take the wrong lesson from Adam Smith (it's worth noting as well that there is no Constitutional adherence or canonical prescription to the works of Adam Smith in the founding documents either, although Smith's work did influence Hamilton and Franklin, while Rand, for obvious reasons, did not).

The Wealth of Nations has become a sort of classically rooted short-hand for Hayekian free market absolutism, which is very wrong. Smith, much more than Rand or Hayek, understood and accepted the importance of the rule of law and the legitimate role of the government in regulating the market. Smith defines a particular set of tasks that he saw as appropriate for government action (tariffs, roads and bridges, and so on).

But Smith ALSO opposed intellectual property rights and trade secrets, believing that these prevented competition in production of goods. If only one company can produce a widget and that widget becomes important, then the rights holder exercises monopoly power in a way that can restrict further enterprise based on that widget. This benefits the rights holder at the expense of further innovation by other producers.

Now, you can agree or disagree with this analysis, but it happens to be Smith's and deviates from the common conception of Smith's philosophy. It's also worth noting that Smith was the author of The Theory of Moral Sentiments, a profoundly different work from The Wealth of Nations and one that exposes much more of the humanist side of Smith's philosophy.

Basically, whether or not Smith would agree with Feinberg's compensation restrictions, he would NOT approve of the concentration of power and wealth in the hands of so few people in the first place.