The less noticed story

It has been little noticed, but the federal government is looking to control executives’ pay not only at the firms which accepted the government TARP bailouts, but even at banks which did not:


Federal Reserve Unveils Plan To Police Bank Pay


By Frank James, National Public Radio

Halloween is apparently coming early for the financial-services sector. At least, that’s the way a lot of bank executives are likely to view federal moves to restrain some of their industry’s pay packages.

Fed Chair Ben Bernanke. Not only is the Obama Administration cracking down on executive pay at the seven financial firms that received the most federal bailout money, the Federal Reserve said Thursday it planned to review the pay and compensation policies at the thousands of banks it oversees to try and derail the process of bank executives taking excessive risks in order to earn big bonuses.

Under the central bank’s proposal, it would have special reviews of the top 28 too-big-to-fail financial firms, putting their pay and compensation policies under special scrutiny because a major mistake by any of those companies could have severe consequences for the entire system.

The pay policies at the rest of the thousands of banks not considered too-big-to-fail would be assessed as part of the regular bank examination process.

An snippet from the Fed’s press release:

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Federal Reserve Chairman Ben S. Bernanke said. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

Federal Reserve Governor Daniel K. Tarullo noted that the proposal on compensation practices is an important part of the Federal Reserve’s ongoing effort to improve financial regulation.

“Today’s proposal is but one part of a broad program by the Federal Reserve to strengthen supervision of banks and bank holding companies in the wake of the financial crisis,” Tarullo said. “In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system.”

Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve’s guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.

This story came out at about the same time as the much bigger news, that the Administration was enforcing big pay cuts on the top executives of the seven major firms which were bailed out under the Troubled Asset Relief program. As much as I don’t like the idea that the government can tell companies what they must and must not pay, It’s difficult to criticize such actions concerning the firms which accepted federal relief; they took the money, and in taking the money, they accepted stringent federal controls. Too bad, so sad, must suck to be them!

But I do have a problem with the idea that the federal government can regulate the pay of the companies which did not need or accept a federal bailout. Their pay policies ought to be none of the government’s business.

Now, I first noticed this story yesterday, and was annoyed then, but yesterday was a busy day. When I started to research the story today, I found surprisingly little on it; I guess that much of the media were concentrating on the bigger aspect, the fact that seven bailed out firms were having their executives’ pay slashed.

Then, today, I got this story from Gretchen:


Why Did The Pay Czar Ignoring TARP Recipient General Electric?

This week Kenneth R. Feinberg, popularly known as the White House Pay CZAR, announced his plan to cut the pay for the top 25 earners at seven companies that received federal government help. On average cut total these executives had their compensation cut 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.

One company was mysteriously missing from the list, General Electric. GE has been regularly protected from the TARP rules. By taking advantage of its ownership of two tiny banks in Utah, GE was able to issue $80 Billion dollars worth of federally backed loans about one out of every four dollars available in the federal loan guarantee program.

A lot more at the link, but the author, blogger Sammy Benoit, concluded with:

The nation’s 7th largest bank¹ gets federal aid with out having to submit to the same checks and balances as its competitors. Its top staff does not have to have their compensation restricted like their competition. Is it because of some loophole in the law, or the fact that GE head Jeff Immelt and their news networks are part of the President’s propaganda team. Either way there are some questions that need to be answered by the “transparent” Administration.

So, General Electric, ranked by Forbes as the world’s largest company, isn’t really a bank, but as Mr Benoit and The Washington Post documented, GE (and some others) sent lobbyists to the FDIC, and got definitions of eligible institutions broadened to include “affiliates” of FDIC-insured institutions, and suddenly GE Capital was eligible — and took the money.

Yet, while the Obama Administration was announcing with some fanfare that the evil executives of the seven bailed out financial; institutions would have their pay cut, and the Federal Reserve told us, with somewhat less attention paid, that the Fed would seek to regulate executive compensation at banks which did not need help, a huge corporation which includes many media holdings — including NBC and the liberally-oriented cble news network, MSNBC — that did take government help is not going to have executive pay capped.

How ’bout that?
_____________________________
¹ – GE may be better known for light bulbs and home appliances, but GE Capital is one of the world’s largest and most diverse financial operations, lending money for commercial real estate, aircraft leasing and credit cards for stores such as Wal-Mart. If GE Capital were classified as a banking company, it would be the nation’s seventh largest.

17 Comments

  1. The nation’s 7th largest bank¹ gets federal aid with out having to submit to the same checks and balances as its competitors. Its top staff does not have to have their compensation restricted like their competition. Is it because of some loophole in the law, or the fact that GE head Jeff Immelt and their news networks are part of the President’s propaganda team. Either way there are some questions that need to be answered by the “transparent” Administration.

    It seems that one way to keep the Pay Czar out of the executive compensation books is to pay neverending homage to President Obama. GE owns both NBC and MSNBC, which are unquestionably devoted to all of Obama’s endeavors.

    We have seen how President Obama “punishes” those (like the employees of FoxNews) who sometimes review and question his edicts and policies. Conversely, apparently President Obama and his Pay Czar have found a way to “reward” GE executives for their unquestioning loyalty to All Things Obama.

    Obama promised Americans “change” during his campaign. Perhaps more American voters should have questioned the kind of changes the mysterious and virtually unknown presidential candidate had in mind.

  2. Dana, Gretchen: Both of you are speculating on the apparent bias in favor of GE, then attacking your speculation, classic straw man, therefore absolutely meaningless!

    Blogger Sammy Benoit, in Dana’s post, asks the right question, to wit: “Is it because of some loophole in the law, or the fact that GE head Jeff Immelt and their news networks are part of the President’s propaganda team?”

    There are other questions as well, see discussion below. Let us find out the answer, then discuss it.

    Another point to make: On the surface, it appears that GE may be making better use of TARP money in contrast to some of the other recipients who are getting back into the derivatives business with their bundled credit default swaps, the same old same old all all over again, not to mention also their wish to reward their executives with outrageous bonuses of the order of some $40 billion, a concern of Ben Bernanke, who observed (from Dana’s post): “Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Federal Reserve Chairman Ben S. Bernanke said.”

    Could it be that GE is using it’s TARP money the way Bush-Obama intended? “By taking advantage of its ownership of two tiny banks in Utah, GE was able to issue $80 Billion dollars worth of federally backed loans about one out of every four dollars available in the federal loan guarantee program.”

    I think the answer is ‘yes’!

    Anyone who does not see the need to “strengthen supervision of banks and bank holding companies in the wake of the financial crisis”, either has not been paying attention or has been allowing ideological propaganda to muddy their thinking.

    PS: Excellent post, Dana, providing lots of information, much food for thought on critical financial issues still facing us a year after an almost complete collapse of the global financial system based principally on our lack of oversight and control, and based on corporate greed! There’s the cause, there’s the obvious answer! Ben Bernanke understands!!

  3. Could it be that GE is using it’s TARP money the way Bush-Obama intended?

    Well, GE is certainly using it the way Obama intended. NBC and especially MSNBC have become the propaganda arm of the Obama Admin. Nice little quid pro quo there!

  4. Eric wrote:

    Well, GE is certainly using it the way Obama intended. NBC and especially MSNBC have become the propaganda arm of the Obama Admin. Nice little quid pro quo there!

    [snort!] Why do I think that this isn’t what Perry meant? :)

  5. Dana Pico:
    Eric wrote:

  6. Well, GE is certainly using it the way Obama intended. NBC and especially MSNBC have become the propaganda arm of the Obama Admin. Nice little quid pro quo there!
  7. [snort!] Why do I think that this isn’t what Perry meant?

    Perry meant GE, Imelt, TheNBC’s are pure as the driven snow. Afterall GE has an ECO Division. How can that be bad and certainly raises them past a stature any mere bank would have. Nevermind that the financial arm of GE got TARP money.

  8. Who elected Feinburg? He wasn’t nominated, vetted, or approved by the Senate. Who the hell is this guy and where did he get the legitimacy to rule by imperial decree?

    This is still a representative government, or was till Obama took over, and Feinburg certainly doesn’t have the approval of the voters, or the approval of our elected representatives in Congress. He’s nothing more than Obama’s cats paw, a hatchet man, operating without Constitutional authorization, and outside the scope of Executive branch authority.

    Now, CZARs are nothing new, FDR had advisers that he referred to as “CZARs.” But Obama has pushed the concept to absurd heights. The problem here is Obama’s CZARs operate outside the legitimate powers of his office as enumerated in the Constitution. Obama is conducting a power grab, consolidating authority in his office by encroaching on the Legislative Branch, all the while using CZARs to insulate himself from direct responsibility.

    Feinberg’a position as Obama’s Pay CZAR is clearly without Congressional approval. Not to be misunderstood, Obama can invite the opinions of advisers, that’s not at issue. Advisory opinions are regularly provided to a chief executive.

    However, it is the executive’s responsibility to make decisions. In short, advisers make recommendations, but only executives make decisions and must therefore take responsibility for those decisions. That’s the rub here, Obama lacks the personal integrity to face up to the responsibilities of his office.

    If Obama wants to cut the pay of TARP company bosses, let him come out from the shadows and in the full light of day and take responsibility for the decision. Hiding behind Feinburg’s skirts is not only cowardly, it’s destructive of the office of POTUS, and it undermines representative government.

  9. Ropelight asked:

    Who elected Feinburg? He wasn’t nominated, vetted, or approved by the Senate. Who the hell is this guy and where did he get the legitimacy to rule by imperial decree?

    For the answer to that, I’ll reference Sharon’s article on her own fine site: The White House Doesn’t Want Us To Know What His Czars Do, in which she lists the various tsars, with their positions, and notes that the White House isn’t going to allow these White House officials to testify before Congress:

    (CNSNews.com) – The White House is not going to allow the president’s newly created “czars” to testify before Congress.

    White House Counsel Greg Craig has indicated that he will refuse to allow any of the 18 new “czar” positions created by President Obama to testify before Congress, according to Sen. Susan Collins (R-Maine), the ranking Republican on the Senate Homeland Security and Governmental Affairs Committee.

    And, more in line with the original story, Sharon also noted that high ranking execs at the companies scheduled for pay rate controls are leaving to go to firms which (supposedly) won’t be subject to such measures.

  10. Dana, thanks for the info. I don’t question Obama’s need for advisers, lord knows he could use some guidance. My problem is with the wrongheaded notion that individuals appointed to advise the president are now making policy decisions and are exempt from the standard safeguards which maintain the separation of powers of our governmental structure.

    Greg Craig, The White House counsel, “argued that the positions (CZARs) are protected by executive privilege, since they serve as advisors to the president.”

    Thanks to Obama and Craig, we now have unvetted, unapproved, exempt, policymakers lodged within the Executive Branch which are unaccountable to the Congress. This isn’t OK. I’m not saying Obama can’t have advisers, he’s welcome to as many as he sees fit to appoint. I’m saying advisers are not allowed to make policy or issue decrees under the force of law.

    That’s a clear violation of the system of checks and balances which serve to keep one branch of government from dominating the others. Fundamentally, it’s so unAmerican, as to be considered tantamount to a high crime. This is the way republican forms of government degenerate into dictatorships. Read your Plato.

  11. ropelight wrote:

    My problem is with the wrongheaded notion that individuals appointed to advise the president are now making policy decisions and are exempt from the standard safeguards which maintain the separation of powers of our governmental structure.

    Depending upon the individual president, we have seen more or less power concentrated in the White House vis a vis the various executive departments. President Nixon, for example, almost completely cut out Secretary of State William Rogers, trusting more to the National Security Advisor, Henry Kissinger. Yet, when Mr Rogers resigned, President Nixon appointed Dr Kissinger to become Secretary of State, so that power balance then changed. There was constant tension between Secretary of State Cyrus Vance and National Security Advisor Zbigniew Brzezinski during the Carter Administration.

    The difference that I see between how President Obama is doing things is that he seems to have policy-empowered advisors in the White House covering a lot more cabinet-level functions than any of his predecessors. I’m not sure how this will play out yet, but my initial guess is that the “tsars” will wind up making more of the policy, while the confirmed department secretaries will be more chief administrators than policy leaders.

    There have already been a few stories concerning whether Secretary of State Clinton is being undercut by the White House.

  12. Dana: Sharon conveniently left out of her discussion of this issue, and you as well, the important comments on this issue of Republican Tom Ridge, former Governor of your great state of Pennsylvania, who has been there done that under George W Bush, in Sharon’s citation, in which he stated: ““I think there’s a natural tendency predictable within any president’s office for his general counsel to protect his widest possible range of prerogatives, and at some point in time, perhaps in negotiation with the legislative branch, that would be narrowed,” Ridge said.

    Ridge had told the committee that as Homeland Security “czar” he was not allowed to testify.

    “It was at the instruction of my president that I would not testify; typically and historically assistants to the president did not do so . . . but many in Congress took exception to this,” he said.”

    So for you Repubs to now complain about Obama’s policy on this issue is the pot calling the kettle black.

    That said, I do agree that this policy does not meet Obama’s commitment to transparency. Therefore, I think he needs to explain himself, recognizing that no matter what he says, you folks won’t accept it.

    I’m curious: Did you or Sharon criticize Bush or Cheney when they claimed executive privilege, protecting people like Karl Rove from answering a Congressional subpoena?

    On the executive pay situation, my understanding from a discussion on Meet the Press this morning, from Erin Burnett of CNBC’s Street Signs, that pay czar Kenneth Feinberg is trying to set a policy where total executive pay would be unchanged, only the ratio of cash to stock in the bonuses would change, to more stock options and less cash. I like this idea, because this creates a new incentive for these execs to perform. If they underperform, the stock price will reduce their compensation. Great idea! Then the execs who leave are those not willing to step up with confidence to do their jobs effectively. Good riddance to them!

    Regarding some executives leaving, we need more details before rendering a judgment, details that do not appear in the WaPo piece that Sharon referenced. Did they retire, were they underperforming, …?

    You people are sometimes very quick to render judgment based on inadequate information.

  13. Perry, the difference is that President Obama seems to be concentrating power in the office of the President on a much wider range of things than ever before. For the most part — though certainly not entirely — President Bush had a cabinet government, the biggest exception being Condoleeza Rice when she was National Security Advisor, but even she wound up in a confirmed cabinet position. Executive Privilege is something recognized, and I think it applies, but if the purpose here is to reduce the cabinet secretaries to simply administrators with little policymaking role, then I think that the distinction of degree gets pretty obvious.

    Moreover, some of these advisors are being given authority in areas in which the government has never had — and should never have — authority, such as the control of people’s pay.

  14. Dana just said: “The difference that I see between how President Obama is doing things is that he seems to have policy-empowered advisors in the White House covering a lot more cabinet-level functions than any of his predecessors.”

    I don’t know how a distinction can be made between an adviser who makes policy and one who does not. If his/her advice is followed into making a policy, is this to be considered wrong or even illegal?

    I would also remind you that Kenneth Feinberg gave a news conference to which all the media, FoxNews included, were present.

    Eugene Robinson, in his column in today’s WaPo, makes an interesting point about the Wall Street problems:

    “But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown — and, if unaddressed, will lead inexorably to the next crisis.

    Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy — by allocating capital most efficiently to the companies that could put it to best use — into an institution whose primary mission was to serve itself. “

    I’d like to know when Obama and Congress are going to do something about this before we have another financial collapse on the brink, since Wall Street obviously is not interested in policing itself!

  15. The function of a private corporation is to make money for itself, period.

    Mr Robinson’s article had the snarky line, “Tying pay to performance: What a concept.” Yup, that sounds like the way it should be, but it shouldn’t be the function of government to enforce this.

  16. Dana, control of people’s pay comes with the territory when it is yours and my money that has bailed these companies out!

    On the Czar issue, like I mentioned before, Obama has to explain his policy on this at some point in the near future.

  17. Perry wrote:

    Dana, control of people’s pay comes with the territory when it is yours and my money that has bailed these companies out!

    That much I conceded in the original article. I just don’t like the idea that the federal government would try to control the pay of people who work for companies which were not bailed out.

  18. The function of a private corporation is to make money for itself, period.

    Are private companies allowed to kill people or steal in order to make a profit? Can I start a company offering murder for hire and justify this as “making money”?

    Or can it be that companies exist within society, and it is reasonable to restrict their activities when those are against the good of that society?

    Now go back to the story – “the Federal Reserve said Thursday it planned to review the pay and compensation policies at the thousands of banks it oversees to try and derail the process of bank executives taking excessive risks in order to earn big bonuses

    Gee – have you noticed any reason for society to be concerned about bank executives taking excessive risks recently? Think hard – it’ll come to you…

  19. The Phoenician wrote:

    Now go back to the story – “the Federal Reserve said Thursday it planned to review the pay and compensation policies at the thousands of banks it oversees to try and derail the process of bank executives taking excessive risks in order to earn big bonuses

    Gee – have you noticed any reason for society to be concerned about bank executives taking excessive risks recently? Think hard – it’ll come to you…

    Obviously, if they didn’t fail or didn’t require bailouts, then they haven’t put themselves in the position the Fed says it’s trying to avoid; the Fed would be judging them all; guilty, pre-emptively, and penalizing the executives for not having failed.

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