AMERICA’S BIG BUSINESS: "WHEN YOU COMMIT THE CRIME, YOU GOTTA DO THE TIME"

…The US Treasury: home of the new “Washington Paymaster”.


Wall Street and big business knew better about taking big risks, but they just couldn’t seem to help themselves.

I have never been one to support any country’s government getting into managing the business of the country’s private corporations. However, based on the craziness of what has been going on for the last three decades, it came time for someone to inject some basic commonsense approaches back into the boardrooms of major American corporations. Unfortunately, when the Boards of Directors of public corporations stop being the ones to use good business sense in managing their operations, it is then left to either the “Rule of Law” or the US government to re-establish and install some basic business management commonsense.

There is one prime example that promoted the misconception that major corporations should take more risks in the management of their organizations. That example was when American corporation’s BoDs developed executive compensation programs that basically said “OK Mr. Chief Executive, from now on, the more risks you take, the more money you can make”.

One would have thought that when this country was being run by the so called “party of fiscal conservatives”, this risky operational concept would not have been considered. (It certainly wouldn’t have been run that way during the GOP’s Goldwater era.) Unfortunately, it was those “conservatives” that eventually spent the US government into Trillion dollar deficits. In addition, based on recent history, we now know that the corporations that took American taxpayer funds from the Troubled Asset Relief Program (TARP) , and are now unable to pay back those emergency loan funds, it was their management teams that showed that they were the worst of those that operated under those same aggressive and risky conditions.

Unfortunately, this approach to corporate management began way back in the early 1980’s. Prior to the Reagan administration, corporate CEO’s pay was 50 times the salary of an average American worker. By the end of the Reagan & the Bush I administrations in 1993, the average CEO salary was more than 100 times that of a typical worker. Now, at the end of the “W” Bush Administration, that same CEO salary figure is more than 250 times that of the average American worker.

And all of the major corporations supporting these kinds of executive CEO comp programs were focused on "high risk-based management programs” for major increases of their corporate profits.

Well, the first steps have now been taken to stop these corporate management approaches. This week, the US Treasury Department appointed a well-known Washington lawyer, Kenneth R. Feinberg, to oversee the compensation of the highest paid employees at the seven companies that are in this group of TARP users that are unable to pay back their loans at any time soon. These seven corporations include: American International Group (AIG), Citigroup, Bank of America, General Motors, and Chrysler. The financing arms of the two automakers are also included.

Mr. Feinberg will now have broad discretion to set the salaries and bonuses for these corporation’s five most senior executives and for their 20 most highly paid employees.

The new plan also calls on Congress to adopt legislation that would let shareholders vote on pay levels and require public companies to strengthen the independence of board panels that set executive pay.

For most US companies, both those receiving taxpayer support and those that are not, the rules reveal a strong reluctance among President Obama’s advisers to intrude more deeply into corporate boardrooms. In addition, 10 large banks that have said that they will be repaying (with interest) the TARP funds they had previously received, will be allowed to exit the bank rescue program and will not face mandatory changes to their current compensation structures.

Now, specifically for all the Republican politicians and the right-wing radio talkers, the president does not have a desire to nationalize companies or for the government to run private corporations. But when these major corporations become so out-of-line in their own management that they must come to the American tax payer for relief, there are few alternatives for getting them back on track. FDR had to do it durimg the Great Depression, and Obama is trying to avoid that same occurrence this time around.

The new rules now illustrate the humiliating downfall of these deeply troubled companies which were once the proud giants of American business. They are now the “wards of the state” whose leaders’ compensation will be set by a Washington paymaster. In his office in Room 1310 of the Treasury building, Mr. Feinberg will serve as the “Special Master for Compensation”. Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America.

The list of three of these visionaries include; Vikram S. Pandit, the head of Citigroup, whose total pay came to $38 million in 2008; Kenneth D. Lewis, the CEO of Bank of America, who last year received $9 million in total compensation; and Fritz Henderson, the CEO of GM, who received $8.7 million last year when he was president of the company.

Per an article in the New York Times:

The Obama administration’s sweeping new proposal to restrict executive pay is likely to be a humbling exercise for seven of the nation’s largest companies, which have received billions of dollars in federal assistance to survive the economic crisis.
While there is no salary cap at the seven companies, the plan offers an incentive for companies to adopt a voluntary cap. If they limit executive pay to no more than $500,000, Mr. Feinberg’s approval will be automatic.

Mr. Feinberg will also have the right to review the compensation for the 100 most highly paid employees and any other executives.

For other financial institutions that have received federal assistance, Mr. Feinberg will play an advisory role in establishing the overall compensation structure, but without setting the exact level of pay. The goal is to reduce excessive risk-taking by executives whose compensation is tied to company performance.
Mr. Feinberg will also determine whether it would be in the public interest to force executives at companies receiving assistance who might have been overpaid — for example, if their pay was based on revenue and profit that turned out to be illusory — to return the money.

“This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage,” Timothy F. Geithner, the Treasury secretary, said Wednesday.
“By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system,” he added.

Rather than decide compensation levels at the seven companies himself, Mr. Geithner decided to appoint Mr. Feinberg, a mediator whose last major assignment was putting a financial value on the lives of victims of the Sept. 11 attacks.
Under the new rules, the seven companies will have 60 days to submit the pay packages of the 25 top executives. Mr. Feinberg would then have 60 days to review those plans.

The latest plan tries to satisfy public demand for controlling excessive pay while not spooking Wall Street, which the administration is relying on to help buy the troubled mortgage-backed assets at weaker banks.

Mr. Geithner told reporters on Tuesday that financial institutions remain worried about “political risks” including more government regulation of compensation, if they participate in the Public-Private Investment Program to buy those assets.

The announcement is the third effort by Washington to respond to public outrage over outsize pay packages. On Feb. 4, the Obama administration announced a proposal to set a $500,000 cap on cash compensation for the most senior executives at troubled companies getting “exceptional assistance,” and restrictions on cashing in stock incentives.

This latest legislation has also barred US top executives from these seven corporations that are receiving public funds from receiving bonuses exceeding one-third of their annual pay. Moreover, any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the company has repaid the government loans.

As I had said, I don’t like the idea of the US government getting involved with private businesses. But in the cases where public funds were needed to keep the organizations alive, “when you commit the crime, you gotta do the time”. And it’s time for America’s big business to “do the time, and to get their operations back in line”.

Copyright G.Ater 2009

Follow me on Twitter: gater01