Bail out corruption

When I first heard the bail out plan, I was a sceptic, to put it mildly. A proposal to transfer billions of dollars of taxpayer money to the lords of Wall Street sounded like another Republican program to benefit their constituencies under the umbrella of economic patriotism. The last 8 years have shown over and over again how the GOP is not a party of ideology, but one to whom socialism and the large hand of government are easily accommodated when in the service of their partisans (military, oil companies, seniors, the very wealthy among others).

I became supportive of the plan as the financial explosion seemed to call for aggressive measures and due to Congressional improvements to the bill, such as ensuring that the public takes part in any financial upside through bad asset purchases at fair value and the acquisition of warrants (rights to purchase financial ownership) in the institutions supported.

A plan to limit executive pay in the supported institutions proved attractive as well. However, since then, a revelatory WSJ article (which has barely received any media attention) has greatly disturbed my faith in the integrity of the plan and its potential efficacy:

http://online.wsj.com/article/SB122360084563521627.html

"Mr. Kashkari [overseer of the Fed's $700B bailout program] told participants in the call [to Wall street executives] that lawmakers' interest in limiting executive compensation was "emotional" and "probably the most difficult part of the negotiation" with Congress. When one industry participant said the caps might discourage participation, Mr. Kashkari noted their limited scope, which he called "a pretty modest hindrance to you coming into the program."

Millions of Americans who had no role in the financial meltdown, i.e. paying homeowners not employed by the sector, have been willing to support the package due to the indusputable fact that we are all in this together. In contrast, incredibly wealthy millionaires who brought this crisis upon us and who face no real future hardship in any real sense of the word balk at making any sacrifices. Note that we are simultaneously asked to believe by Mr. McCain that these same ultra-wealthy folks are deserved of a tax cut due to their dedication to building an economy that benefits all. While I am not one for class warfare rhetoric, anecdotes such as the above certainly play better to a far left view that acquiring great wealth is just as often done by non-value add exploition of the current system.

As troubling to me is the lack of incentive alignment between those running the companies and their equity holders. Most would agree at this point that the greatest source of the current financial crisis stems from the agents of speculators and lenders putting vast amounts of capital on the line while the agents themselves have no skin the game. I.e. 1) The mortgage broker fudges the paperwork to get a loan approved and thus gets his commission, 2) the mortgage underwriter then focuses on the sale-ability of the asset not its inherent value and is able to find a securitization buyer among investors, thus earning his commission. Both of these operators had compensation upside by getting loans made, with none of the downside of ownership when the loans go bad.

In the case of whether bank executives choose to have their companies participate in the bail out, for some, the decision may appear as whether to gamble at keeping a $50M package accepting that their bank may or may not fail, or choosing to take the bail out and a smaller comp package that assuredly benefits the survival of their company.

It's time for the shareholders and their board representatives to put an end to this extortion. Let's really start to question the matra that boards need to pay their executives excessive amounts in order to attract the talent needed for a prospering company (rather than the pushback that executive use their insider positions to bully and extort the shareholders). In fact, I have a suggestion to the bank boards. My propsal will allow them to save enormously on CEO compensation in a way that ensures that the shareholders achieve added value immediately. I offer myself, at a measly pittance of one million dollars, to come in and seize the reins of leadership and ensure that I squeeze out every dollar of government subsidies for the shareholders.

Board members, feel free to leave you contact information in the comments below and I'll get right back to you.