RSS Feed MenuMay I associate myself with the remarks of the esteemed Professor Bainbridge?
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.
First it was the AIG bonuses. Then the Chrysler and GM bondholders. Now executive compensation.
From the New York Times:
Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.
The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.
Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks.
The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.
It’s unsurprising that a public that has had to pay billions to rescue firms from bad investment decisions would resent paying big checks to senior executives. It’s certainly conceivable that the form of compensation imposed by Ken Feinberg – more stock, less cash, with delays in the date the stock can be sold – might have encouraged more responsible behavior had it been in place beforehand.
But as Bainbridge puts it:
[M]any (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.
Maybe an analogy helps. 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.
And the consequences of this wrong action will reverberate through a whole economy. Suddenly all creditors, suppliers, and contractors have to factor into the other uncertainties of business a new risk of arbitrary government abrogation of their legal rights. Suddenly the awful Chrysler case looks less like an emergency exception to an otherwise reliable rule, and much more like a harbinger of danger to come.
Instapundit » Blog Archive » DAVID FRUM: Will The Rule Of Law Survive Obama?… // Oct 22, 2009 at 11:47 pm
[...] DAVID FRUM: Will The Rule Of Law Survive Obama? [...]
Porkov // Oct 23, 2009 at 12:07 am
Greed and envy are opposite sides of the same coin.
What this administration is doing to a few bankers is nothing compared to what it proposes for all medical practitioners. Of course, doctors are supposed to be motivated by altruism and embrace their financial ruin for the greater good.
24AheadDotCom // Oct 23, 2009 at 12:24 am
GM is an American icon, and it would send the wrong message if it goes under. The psychological impact (helping global opponents + lack of confidence) has to be factored into any “market” prescription. (It’s odd how many ignore factors of the “market” that aren’t convenient to whatever argument they’re making).
As for the post title, wake me when the GOP establishment cares about the rule of law. Most of them seem to be more concerned with finding ever-more-creative ways to mask their support for illegal activity. While I could give many, many examples, here’s just one:
http://24ahead.com/bank-on-california-illegal
Don’t try the RINO excuse, I’ve got plenty more.
OregonJon // Oct 23, 2009 at 12:40 am
The 21st century equivalent of allowing the multitudes to cheer while feeding Christians to the lions. Our financial debacle was not caused by executives taking long term risks for short term rewards, the debacle was created by the perverse incentives created by the political elite.
Add to that not only the shredding to contracts but that for a number of firms top executives are new, installed either directly by our all knowing government or with its tacit approval. The multitudes may cheer, the political elite may celebrate the brief rise in their popularity, but the long term effects will only be to prolong an otherwise very solvable crisis.
If only there were a way to allow the political elites to endure the short term pain that comes when markets are cleared without government intervention rather than this Kabuki dance which may entertain, but where the outcome is known. Oh well, politicians are masters are pushing problems into the next election cycle, which is what this is all about.
And apologies for the mixed metaphor.
ButterflyDragon // Oct 23, 2009 at 2:20 am
balconesfault // Oct 22, 2009 at 10:04 am
So if we understand this correctly – the position of the Republican Party should be that collectively bargained compensation packages for autoworkers making on average $28/hour should have been slashed as a precondition to any federal bailout of the auto industry … but that the guys who created the current mess by leveraging their companies into a position that required a bailout about 60x the size of the auto bailout (between Fed money poured into the banking industry last year, plus TARP, the bill is close to 3 trillion) shouldn’t have their $10 million bonus checks touched?
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You bring up a valid point if it was a similar situation. The auto companies that were bailed out went through bankruptcy. During a bankruptcy the contracts can be renegotiated or just put down as a primary debt they need to be relieved of and the contracts are voided.
None of the banks you refer to went through bankruptcy.
You are comparing apples to elephants. At first blush they look like the same thing, but legally speaking, when you throw a bankruptcy into the mix, it changes EVERYTHING with contracts and their status.
President Thalidomide « Natural Fake // Oct 23, 2009 at 7:55 am
[...] nation with the rule of law twisted, it’s very Constitution [...]
Koblog // Oct 23, 2009 at 7:59 am
GM was losing $1 billion PER MONTH before the current “crisis.”
How many cars would they have to sell just to get to even, much less make a profit? And then there’s the little problem of paying back the bailout.
Ain’t gonna happen.
GM is bankrupt. Period. To pretend otherwise is silly.
Then again the government owes, what, $13 trillion?
$1.4 trillion deficit this year and for as far as Obama can see?
Koblog // Oct 23, 2009 at 8:19 am
“Rule of Law.” Ha.
Obama has already told us he’s not satisfied with the Constitution. Too “restrictive.”
Obama wants to be king. He wants his word to be law. FDR had the same problem. But in those days “But what you want to do is unconstitutional!” meant something.
Now the idea of the Constitution is rather quaint . Sort of like the Ten Commandments. Good idea in principle, but gets in the way of my will.
Rahm Emanuel told us also that the “crisis” allows him to do things he normally couldn’t do.
“Rule of law” is for suckers and Republicans. King Obama and his satraps know better.
But beware: when contracts large or small are no longer honored, we are done with.
Failure of contracts is why nothing can be done in Africa or South America. Who will invest in a place that will not honor contracts?
Kevin B // Oct 23, 2009 at 9:20 am
Rahm Emanuel told us also that the “crisis” allows him to do things he normally couldn’t do.
“Rule of law” is for suckers and Republicans. King Obama and his satraps know better.Why not? They learned from Mr. Cheney and The Decider, who learned it from Billary, who learned from Daddy Bush, who got it from The Gipper.
WillyP // Oct 23, 2009 at 9:59 am
robottoms, get a clue. Jobless claims go up and up and up and up more each time, always higher than expected. We’re in month 13 of the government’s intervention, and we’re sinking quickly. By the time we start seeing double digit inflation
As you clearly have no understanding whatsoever of finance or economics, it’s not worth a reply. Why don’t you begin by reading “Economics in One Lesson” by Henry Hazlitt?
I think that any party that sits around planning business activities is going to end up as tyrannical. We should have our federal government stick to its Constitutional limits, and avoid what we have here: a complete mockery of political discourse, descending as it has into several personal opinions on how multibillion dollar companies can and should run according to, at best, very peripheral knowledge. Don’t you central planners have any modesty?
balconesfault // Oct 23, 2009 at 10:10 am
oregonjon: Our financial debacle was not caused by executives taking long term risks for short term rewards, the debacle was created by the perverse incentives created by the political elite.
Really? It was perverse incentives created by the political elite that caused investment firms to deal in derivatives and credit-default swaps until firms like Bear Stearns had a debt-to-equity ratio of 33-1?
That didn’t have to do with risk taking and greed?
WillyP // Oct 23, 2009 at 10:21 am
balconesfault,
greed is a sin, a vice. it is stuck with humanity forever.
the best we can do to address these sins is provide incentives to behave. political masters that pervert the incentive basis destroy society just as much as greed itself.
balconesfault // Oct 23, 2009 at 10:26 am
the best we can do to address these sins is provide incentives to behave. political masters that pervert the incentive basis destroy society just as much as greed itself.
I’m sorry – I still don’t understand what “incentive” government provided for executives to take such extraorinary risks with their companies futures.
Even Alan Greenspan was stymied – “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,”
I guess that underregulation and lack of enforcement can be called “providing an incentive” – but that seems to me as perverse as blaming anyone who doesn’t have a home alarm for “providing an incentive” to house robbers.
WillyP // Oct 23, 2009 at 10:40 am
you’ve asked the germane question: what were the perverse incentives?
1) Easy money from the Fed
2) Community Reinvestment Act
3) Implied immunity from bankruptcy via the “discount window” by the Fed
In other words free access to money, legally enforced extortion from the forcing of bad loans, and a moral hazard created by being declared “too big to fail.”
If banks were responsible for making their own profits or going broke, we’d be in a lot better position right now.
balconesfault // Oct 23, 2009 at 1:21 pm
First, the CRA is a cipher in this context. Loans made per CRA were some of the best regulated, and had a much lower default rate than other loans up and down the system. Blaming poor people just won’t work here.
Meanwhile, the whole “too big to fail” thing came at the tail end of the crises. By the time that became policy, the economy was already in the crapper. In fact, it became policy because the economy was in the crapper, and the Fed was desperately trying to keep the tank from being flushed.
Easy money from the Fed? Yeah – without that easy money there probably would have been just a steady decline in the economy under Bush, but I’ll agree that it was a problem. I fully expected Greenspan to jack up interest rates when the money supply was expanding so rapidly thanks to the deficit and to all the paper transactions … but the Fed decided to play along. Then again, there was tremendous political pressure on the Fed – had they not played along, and the economy stagnated under Bushinomics, they would have gotten the blame.
Again, however, we’re talking enabling – not encouraging. The Fed wasn’t inceitivizing people to overleverage their companies. That was pure, unadulterated greed. Bad acting en masse.
A funny anecdote – other day I heard someone say that the reason stuff like this hadn’t happened in the past was because in the past the Financial Sector wasn’t run by the smartest of the smart … but by a middle tier of guys who just wanted to make a good living and enjoy their week each summer in the Hamptons and send their kids to an Ivy League College. However, in the last decades the smart guys moved in, and they wanted to be bazillionaires and own estates in the Hamptons and buy new dormatories for Ivy League Colleges. And so they started creating financial products that the regulatory community wasn’t able to even understand, much less regulate, and they were basically making bigger and bigger bets against one another to try to be master of the universe … and they all were playing with house money, until the housing bubble burst – an inevitibility because housing bubbles always burst – and nobody could pay the house back.
But it wasn’t because Wall Street wasn’t filled with enough smarts – it’s because Wall Street no longer had the stodgy gatekeepers who had guarded the institutions for so many decades.
Reason60 // Oct 23, 2009 at 1:27 pm
The housing crisis was created by a perfect storm of aligned interests:
CRA benefitted community activists and liberals since it appeared to help poor and minorities get loans; but in fact, only 255 of the banks fell under its purview; most subprime loans were made without CRA;
Easy credit was wildly popular with just about everybody; homeowners, banks, realtors, homebuilders, furniture and durable goods manufacturers….the list of trade associations and interest groups that pushed constnatly for lowered barriers to home loans is widespread and bipartisan.
Conservatives liked it because of the idea that homeowners would become part of the “ownership” society, more stable, taxpaying (and more likely GOP) voters; liberals liked it because it allowed poor and minorities access to the middle class.
Nearly everyone profited from the spectacular rise in home ownership and prices; Some more than others, but trying to pin this on this politician or that regulation is absurd.
In retrospect, TARP appears more an more to have been yet another con job by well connected insiders, evidence of Naomi Klein’s “Shock Doctrine” at work.