RSS Feed MenuThe government’s power over certain TARP companies derives in part from its status as a major shareholder. According to recent reports, the Treasury Department pay czar used this power to “renegotiate” existing pay packages for dozens of Wall Street employees. When the government leverages its power as a corporate shareholder to pursue political ends, there are long-term economic and political costs. Our economic system and corporate law however are premised on the concept that shareholders will act in their rational self-interests to maximize share value; undermining that premise is severely disruptive to capital markets and inhibits free competition between firms.
As law professor J.W. Verret details in a recent paper, our legal and political institutions are fundamentally unfit to cope with the government acting as an activist investor in corporations. As an example, Citigroup – the common stock of which is 36 percent owned by the U.S. government – acceded to the pay czar’s demand to sell its Phibro trading unit in order to avoid an employment contract with a trader. No doubt Citigroup’s management made this decision under threat that the U.S. Treasury, who is likely a controlling Citigroup shareholder, ultimately has the power to replace them.
Since the U.S. government enjoys sovereign immunity from U.S. securities laws and lawsuits brought by fellow shareholders, it is free of many of the legal constraints facing any other “activist” investor, such as a hedge fund or retirement fund. If the Treasury Department decides to exercise its power to cause the corporation to achieve political aims at the expense of creating shareholder value, fellow shareholders suffer an economic loss and have no enforceable legal remedies. Fear of such a situation drives shareholders away and further depresses the stock price. The pursuit of political ends through corporate control also is an improper aggrandizement of executive branch power because it enables the president to pursue political goals and reward interest groups while bypassing typical congressional or administrative law constraints.
While Congress did authorize the Treasury Secretary to scrutinize executive compensation at TARP recipients, the brass-knuckles negotiating tactics and shareholder influence employed by the administration helped achieve this populist political victory. As another example, in the Chrysler bankruptcy, the Obama administration exercised TARP-related influence over Chrysler bondholders to transfer wealth from the bondholders to auto unions, a more-favored Obama constituency.
While limiting executive pay at TARP recipients seems like a just cause today and may help satiate populist demands for TARP accountability, it sets us on a dangerous course. Executive pay and the automaker bankruptcies are precedents to what are sure to be many more examples of political power plays through shareholder influence.
balconesfault // Oct 23, 2009 at 5:10 pm
I think that we are all agreed that as a first principle, the Federal Government should not be bailing out large corporations.
Now we need to figure out how to fix the system so that the concept “too big to fail” is never uttered once again.
rbottoms // Oct 23, 2009 at 8:29 pm
Tell the cry babies to pay back our money and there won’t be anything to complain about.
SFTor1 // Oct 24, 2009 at 12:05 am
The problem is the opposite. The financial sector is an oligarchy. Compensation in financial companies have grown into an obscene system of enriching the few. That can’t be stopped when the companies are operating on their own dime. When they are bailed out with taxpayer money, and the state (or the people) is a major shareholder, you better believe they need to answer to demands for common decency.
Kevin B // Oct 24, 2009 at 5:44 am
The problem with expanding government powers is that even if you like the the way the current regime handles them, you might not be as happy with what the next regime decides to do with that power.
People who had no problem with the government monitoring Islamic groups to gather intelligence, will balk at similar surveillance of right-wing, anti-goverment groups.
Rbottoms: I agree with your sentiment, but I’d add “Please”. Please, before the reigns get passed to the post-Obama regime, which will campaign on limited government, but won’t be able to resist making a few “corrections” before handing the power back. Then a few more adjustments. Then they will redefine what limited government means.
Please pay the money back.
oldgal // Oct 24, 2009 at 10:12 am
“Our economic system and corporate law however are premised on the concept that shareholders will act in their rational self-interests to maximize share value” Seems like what we have just been through indicates that the major shareholders will act to maximize perceived personal gain which is not the same as maximizing share value. Voting interlocking boards of directors who lock in piss-poor management does not seem to support the premise of maximizing share value.
Claude // Oct 24, 2009 at 11:40 am
Given the many billions of taxpayer dollars at stake, the quality of the management at these institutions, not their pay, should be the primary focus. Humbling Wall Street may be politically popular or emotionally satisfying, but jeopardizing billions to initiate a dispute over a much smaller amount of money doesn’t make sense.
balconesfault // Oct 24, 2009 at 1:36 pm
Given the many billions of taxpayer dollars at stake, the quality of the management at these institutions, not their pay, should be the primary focus.
How much do you really trust someone who would quit, or do a worse job, because they didn’t get a 10 million bonus while their company has been dependent on the government teat to stay alive?
It seems that the quality of management has been the problem – management whose primary focus has been their own enrichment, and not the long-term health of their company and of the larger US economy.
Reason60 // Oct 24, 2009 at 5:58 pm
First, I am wondering why the “We need to pay top dollar to ensure we get the best talent” argument doesn’t apply to civil servants, or UAW workers.
Demanding that the government (of ,by, and for the people) become an investor, then complaining that this investor is acting in accordance with the political will of the people, is a bit bizarre;
In fact, it is as bizarre as Robert Maplethorpe demanding a grant from the government, then acting surprised when politicians object to his content as not being in keeping with American morals. And we all remember how conservatives came down on that one.