Friday, September 26, 2008

Oppose the $700 Billion Bail-Out

By W. Sherman

At about 4:00pm yesterday, I sat down at the Village Bean, a coffee shop in Des Moines’ East Village, to type up this point. Reading the Wall Street Journal, this is what I learned that Congress had reached an agreement on what is now, the infamous bail-out. I learned that Treasury would get $250 billion immediately, and an additional $100 billion if necessary. I learned that the Treasury would get the remaining $350 billion upon Congressional approval. Finally, I learned that companies receiving these funds would be forced a host of provisions, including restrictions on executive compensation and allowing the federal government to take an equity interest in such companies.

And then things blew up.

The Journal reports that throughout the day, Congressional Republicans devised a plan that would create a government-sponsored insurance program for mortgage-backed securities. Under the plan, banks would pay a premium to the Treasury Department to insure the investments. Additionally, Senator Richard Shelby, an Alabama Republican, proposed allowing the Treasury to make loans to the banks, rather than buying up the bad debt on the banks’ books.

Like many conservatives, I believe that House Republicans were right to oppose this bail-out. First, the government is freeing these failed banks from owning up to their bad decisions, by putting the taxpayers on the hook for the losses. As Steve Chapman stated in his Chicago Tribune column, the plan “nationaliz[es] the money-losing part of the financial sector, to the benefit of capitalists who have made spectacularly bad decisions—fostering more bad decisions in the future.”

Second, the bail-out will put too much discretion in the hands of the government. John Paulson, in his column in today’s Wall Street Journal, poses shows that the bail-out leaves unresolved the questions of who will receive the taxpayer subsidies and at what price.
Third, accepting the bail-out means accepting legislation packed with tons of election-year gimmicks. The most widely reported gimmick, of course, is the cap on executive compensation. Regardless of what one may think regarding the reasonableness of CEO pay in this country, the government should not be setting the compensation of executives in private companies. Additionally, as Charles Krauthammer states in his column, “artificially capping the pay of people brought in to lead these wobbly companies back to health is a fine way to tell talented executives to look elsewhere for a job.”

During 2008, we have seen several investment banks, their insurer (AIG), and two mortgage giants fall. For all of their financial woes, an injection of $700 billion in taxpayer funds is not warranted. When banks make bad decisions, they need to take responsibility for those decisions—even during election years.

2 comments:

edpoe said...

Agree with most of this..but don't you see a contradiction in saying the banks, investment companies, etc. that made the bad decisions need to take responsibility and the opposition of "golden parachutes?" I'm not saying cap their normal compensation but their should be some regulation in place (or fix the loophole currently being exploited) that allows CEO's to make horrendous decisions that sink not only companies but economies and then make out like bandits on the deal. That's not accepting responsibility. It is just a de facto shift to the taxpayer, albeit indirectly. Either way, until those who made the bad decisions are forced to bear some of the consequences, no plan should be acceptable.

With that said, I'm still against he bailout, but I hope everyone realizes exactly how much it will cost them to stand on principle on this subject. Taxes will still go up, goods will still cost more, more rogue nations will pounce on what they see as a weakened America, the EU will continue to grow bollocks, and Mexicon will continue to displace its problems here. America is in for a substantial struggle that will not go away soon.

W. Sherman said...

Edpoe, I'm not arguing that the executives that drove their companies into the ground should get off with a golden parachute payment. If I were a shareholder in one of those companies, I certainly would not be happy.

What I am saying is that I think there are those in Congress who want to use this bailout as an opportunity to expand the scope of government control over the internal decisions of American corporations. Regardless of what we may think about these golden parachute payments--and again, I am certainly not advocating that these executives should receive such payments--the idea of allowing the government to come in and say that such payments are illegal is certainly the less preferable option (espcecially when it comes with $700 Billion of taxpayer funds). Additionally, it makes the risk of government limits on executive pay--read: wage ceilings--all the more likely.

When a company hires an executive, the compensation package should be negotiated between the Board and the prospective executive. Perhaps the use of excessive severance packages is a product of a decrease in bargaining power on the part of the corporation. If this is the case, maybe more government regulation is needed (the specifics of such regulation is a subject for another post). But as things stand now, as long as the negotiations are part of a (relatively) fair negotiating process, the Board's decision should be respected ... and if it turns out to be a lousy decision, then the shareholders should let these directors hear about it at the next annual meeting.