Thursday, February 05, 2009

The Stupidity of Compensation Caps

The Wall Street Journal has done a great job covering the ongoing evolution of TARP, from its genesis at the collapse of Lehman Brothers up to and including today.  What I find amazing is how the government decided that it is now in their best interest and within their power to put in place whatever caps they deem fit for companies.  There is the much publicized $500,000 salary cap for executive pay for companies who take any additional TARP funds, but there are also revelations like the Treasury doing everything they could to force Bank of America to take on Merrill Lynch, regardless of Merrill's financial health. 
Then there's also the hand wringing about Citigroup's jet, BofA's fleet, Citi Field, apartments, junkets for high performers, and so on.  While I agree that some of these things are superfluous, some are necessary for their business.  Take AIG, the (now) government owned insurance and lending giant.  We hear about junket this and business trip that, and how can they afford to do that, they've lost billions.  Yes, they have lost a lot.  At the same time, the units that had these lavish parties - American General insurance, ILFC (a major aircraft lessor) - are units that are very profitable.  If that's the case, is the cost of these junkets really that big of a deal?  If the executives of these units feel that there is a good return on investment as a result of this (and knowing a thing or two about ILFC's chief Steven Udvar-Hazy, there is), shouldn't the government do what any good shareholder would do - shut up and let the managers manage? 
Ultimately, the way these bailout stakes are structured is as investments - ownership of large blocks of stock.  The #1 rule of stock ownership is to not write a letter to the CEO of the company you own every time something happens.  If you don't like the job that the CEO is doing, you get enough votes together to have enough board sway to replace the CEO.  That won't happen under the current structure in part because from the sound of things, nobody wants to have the government up in their business.  These leaders would be happier without the TARP money and are trying to get it paid back as soon as possible so they can take off the handcuffs and get back to doing business the way it should be done, rather than as a bloated, incompetent bureaucracy says it should.
Let's put this another way: who should we trust, people who year after year are trained to maximize profits and thus shareholder return in order to increase their company's share price, market cap, and market share...or people who continue to put money into a half a million dollar outhouse in Pennsylvania or the $650 toilet seat?


Cheeth said...

The only real lesson from this is that the government (sorry, gubmint) needs to stay the hell out of the markets and let them thin their own herds.

If the government is going to interfere, though, it can surely attach whatever conditions it wants to its (nationalization) "investments".

Sorro said...

Oh, the gubmint can do whatever it wants...the better question is should it? If they want their investment back, I'd recommend against it.
If they force banks to participate (a la BofA and JPM Chase in the last round of TARP), that should be a no-strings attached investment.