The Banking Queen — The Swamp — The Epicurean Dealmaker — NYT (The Deal Professor) — Flopping Aces — Business Roundtable — CBO Analysis H.R.3269
The Banking QueenOooooooo, Oooooooooo You can build. You can buy. Any house your heart desires. Oo zero down. Financing. I am the banking queen. Friday night and your cash is low. I know a place that you can go. Oh, get your house and use it. Go ahead abuse it. You can do anything. Go out and have a fling. I am the banking queen. Old and sweet didn’t do a thing. Banking queen. Don’t complain or you’ll hear me scream oh yeah. You can build. You can buy. Any house your heart desires. Oo zero down. Financing. I am the banking queen.
Listen To Paul Shanklin’s parody to Abba’s Dancing Queen As You Read Below…
by Richard Simon
Responding to the public furor over bonuses paid to executives of Wall Street firms bailed out by taxpayers, the House today voted to give shareholders a bigger say over compensation in the first piece of President Obama’s overhaul of financial regulations.
The largely party-line 237-185 vote sent the Corporate and Financial Institution Compensation Fairness Act to the Senate, which is expected to take up executive pay this fall as part of broader financial regulatory legislation.
“If the last year has taught us anything, it’s that the compensation practices of some of our largest corporations have gotten completely out of control,” said Rep. James P. McGovern (D-Mass.).
“We’ve got to act to prevent the next financial meltdown,” added Rep. Brad Sherman (D-Calif.)
Rep. Pete Sessions (R-Texas), in a comment echoed by fellow Republicans, assailed the measure as “unprecedented government intervention in the free enterprise system.”
“This bill is an invitation for political meddling at its worst in the private confines of companies that are trying to work hard to create jobs,” complained Rep. Peter J. Roskam (R-Ill.)
The “say on pay” measure would give shareholders of public companies an annual advisory vote on executive pay and “golden parachutes” and make compensation committees more independent of management. It would empower federal regulators to limit risky compensation practices at financial institutions if they threaten the stability of the companies or the economy.
“What this bill explicitly aims at is this practice where people are given bonuses if the gamble pays off, but don’t lose anything if it doesn’t,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee and the bill’s chief author.
But Rep. Jeb Hensarling (R-Texas) said sarcastically, “Why doesn’t this do anything about Hollywood stars who make $25 million for a movie, yet the movie loses money?”
The action came as lawmakers head home for their summer recess, eager to show voters they responded to their anger over bonuses paid to employees of American International Group, Inc. after the government rescued the insurance giant.
The vote came a day after New York Atty. Gen. Andrew Cuomo released a report showing nine large bailout recipients, including Bank of America, Citigroup and Merrill Lynch, paid out billions of dollars in bonuses last year.
Republicans returning to their districts appear certain to portray the legislation–coming as Democrats work to overhaul health care–as the latest effort by the Democratic-controlled Congress and White House to expand the reach of government.
“The Democratic majority has a great desire to have the government everywhere in our lives,” said Rep. Tom Price (R-Ga.).
The National Assn. of Manufacturers, which along with the U.S. Chamber of Commerce and Business Roundtable opposed the legislation, objected that it would be “excessively burdensome and disruptive to companies at a time when they are facing significant economic challenges.”
In 2007, the House approved legislation to provide shareholders with an advisory vote on executive compensation. But the measure, which was opposed by the Bush administration, never came up in the Senate.
The Epicurean Dealmaker
“Forsan et haec olim meminisse iuvabit.”
Carol Connelly: “Hey, we all have these terrible stories to get over, and you—”
Melvin Udall: “It’s not true. Some of us have great stories, pretty stories that take place at lakes, with boats and friends and noodle salad. Just no-one in this car. But a lot of people, that’s their story: Good times, noodle salad. What makes it so hard is not that you had it bad, but that you’re that pissed that so many others had it good.”
Envy, Dear Readers, is an ugly thing.
It may be a powerful, ancient motivator for people to improve their station and situation in life—as real estate brokers, car salesmen, and cosmetics companies from time immemorial can attest—but it is corrosive, base, and potentially destructive as well. It can transform a person who otherwise feels content with his life into a shrill, grasping, dissatisfied shrew, just because he notices that someone else has something he does not. It can lead to all sorts of chronic social ills, like celebrity magazines, reality shows, and regularly recurring profiles of Donald Trump on national television.
It is usually blind and farcically selective, as well. We envy our neighbor’s new Ferrari without realizing he bought it with life savings after learning he has six months to live. We envy the thin, wealthy, and fabulously connected Upper East Side socialite without knowing her hedge fund manager husband is an abusive, philandering stranger and her children hate and despise her. We envy the famous, the rich, the beautiful, and the better or more [insert your preferred adjective here] than us without understanding either the price they pay for such gifts or the gaping holes in their lives where we possess advantages they can only dream about. We envy advantages for which we do not understand the price, and we envy possessions and qualities which we would not be willing to sacrifice what is necessary to achieve them even if we knew what it was.
Envy is the weak and lazy sister to its hardworking sibling, ambition. It is a futile, foolish, and low emotion. And it is a favorite target for populist demagogues and pandering politicians alike…
…“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”
Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them.
Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.
Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers.
The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.
All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion…
July 31, 2009
From: The Deal Professor
To: New York State Attorney General Andrew M. Cuomo
Re: Doing more than providing compensation “porn”
I read with great interest your report on compensation at the original nine financial institutions receiving government funds under the Troubled Asset Relief Program. What particularly piqued my interest was the title of your report: “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.”
I thought that this was the hard-hitting government study we needed into investment bank compensation and its relationship, if any, to the financial crisis. But I was ultimately quite disappointed.
Instead of an in-depth report on the compensation practices at Wall Street firms, both past and future, the only thing we got was compensation porn.
The report listed the number of people at each bank who got more than $1 million in 2008 bonuses and the amount of TARP money each institution received. You simply noted these facts, but your main point appeared to be that the aggregate amount of those bonuses made no sense in light of the losses the banks incurred in the prior year. The media and the blogosphere have eaten it up, and I have no doubt you did the career-services offices at the major business schools a service.
Clearly, the report was designed to trigger outrage and affect the political debate about the compensation bill being voted on in the House today. But you could have done so much more with your access to the banks’ records and executives. You could have created a workable study for legislators, regulators and the general public.
What do I mean? Well, General Motors last year lost $30.8 billion. The number is not public, but they certainly also paid billions of dollars in compensation. Why no outrage there? The answer would be something along the lines of, “silly fool, you need to pay salaries to function, and G.M. did not pay 500 people more than a million dollars apiece.”
However, your study misses a principal point, which is that in investment banking, bonuses are at least partly viewed as salary — and so annual salaries are kept lower than they otherwise would be. The aggregate amounts may be different, but this is the prism through which the issue needs to be examined.
To show just how the brute force of your report missed an opportunity, and to underscore the difference between G.M. and the banks, I offer these suggestions of what you actually could have done:
1. Reviewed past bank compensation. The report might have reviewed and compiled the compensation in prior years of the executives and employees at the investment banking units responsible for the bulk of the 2008 losses. What were they paid last year? What were they paid in the good years, and in what form? What amount of their compensation was deferred and affected by the crisis? Was any of it clawed back? How many of these people are still employed at the firm?
2. Reviewed the methodology of the 2008 bonuses. These questions could have been asked: In paying the 2008 bonuses, what kind of reforms were put in place? Are there new features designed to align the employees’ compensation more closely with the future performance of the investment bank? If there are significant future losses at the banks, what is the effect on the employee? In particular, what happens if his or her conduct (or the conduct of his or her business unit) causes a loss two years later?
3. Reviewed the banks’ rationale for the 2008 bonuses. For the employees who received the largest bonuses in 2008, how was their performance? Did they contribute over and above what they received? Was their salary in greater proportion to their contribution or less? Was their profit in part subsidized by government guarantees or other assistance? Here, it is important to note that these are enterprises with multibillion-dollar revenues, and some units were profitable. It may be that these bonuses primarily went to the profit-making units.
In other words, you could have provided a comprehensive study of what went wrong with executive compensation on Wall Street as well as a road map to changing it. Instead, we received only jealousy-inducing numbers. Or perhaps they should be described as depressing, as our best and brightest college graduates once again flock to Wall Street for the money.
You also could have attacked a bigger issue that your report hints at, but does not directly discuss.
The decline of the partnership model of investment banking has meant that individual bankers are now mainly looking out for themselves and not the greater good of their institution. This has led to compensation that focuses in part on each individual’s performance, divorced from the performance of the firm itself. One of the central issues in investment banking compensation is whether and how to restore this alignment.
In other words, a fundamental question you raise but do not discuss is this: How closely should a banker’s pay be aligned with a firm’s overall performance? After all, at these megabanks, an M.& A. banker could be quite profitable and care not a whit that the commodities trading desk loses a few billion.
But they should be forced to care, if these megabanks are kept intact.
The second, and equally important, issue is ensuring that individual compensation rewards merit, but also is clawed back for poor performance arising later from actions taken or approved while the employee or executive was at the bank. Instead, the trend on Wall Street has been the opposite — raising the salary component of a banker’s pay and reducing the bonus proportion. But salaries have no bearing on performance. Here is another area where your report missed the mark. How do the compensation policies of the banks, in general, work these days? What recommendations do you have to change them?
In the end, I hope that you (or someone else with authority to really find answers) returns to the compensation well. The current bill in Congress does not address these issues. Instead, it primarily provides for a “say-on-pay” requirement, a nonbinding shareholder advisory vote on compensation for top executives.
I suppose this can’t hurt, as it will bring some sunshine and put some pressure on the compensation issue, but this has nothing to do with the financial crisis and its causes. The financial crisis, as Floyd Norris notes, was primarily caused by other defects in the system.
Looking at that part of the system is much less interesting, requires harder work and offers fewer political rewards. But it is much more important for all of us. You should therefore return to the compensation question, but if you want to do a public good, you should do it after focusing intelligently on these bigger issues to the extent it is within your authority.
The actions taken by your predecessor, Eliot Spitzer, suggest your jurisdictional authority is quite broad. Be more than just a purveyor of compensation porn.
Posted by: James Raider
As you shelter yourself in a cool closet from the hailstorm of healthcare promotion, Congress and the President are sliding into home plate with compensation controls in the senior offices of financial firms, … for starters. The new Corporate and Financial Institution Compensation Fairness Act will provide no other than the SEC with the ability to establish the rules on how executives are paid, and will enable government agencies to effectively control the “inappropriate risks,” practices of financial companies. Institutions with less than $1 billion in assets will be exempt. This further intrusion into the fiber of corporate America by those who have completely failed in carrying out their responsibilities to the electorate is another misguided kneejerk reaction.
This bill will empower government bureaucrats to control compensation plans that will threaten the safety of financial institutions, or adversely impact economic conditions or financial stability. Have no fear, the newly hired experts will figure this part out, what it means and how to implement it, and they will diligently look after your interests.
… Sweeping expansion of government incompetence into corporations is an invasion that will not be reversed. Other more intelligent policies should be considered instead of launching clusters of bureaucrats to invade company offices in all corners of the country. One could consider implementing laws against monopolies, but it would be more effective to start with segregating the large banking institutions into more pure line of business sectors. It really comes down to reinstating certain portions of the Glass-Steagall Act that was repealed in 1999. Hundreds of millions were expended by the large banking institutions to achieve the repeal of the Act, therefore a reversal would be very difficult. Given the present climate of Washington dependence on Wall Street cash, even “difficult” might be a stretch, however, such reinstatement would bring back some peace of mind to taxpayers in the long-term…
FOR IMMEDIATE RELEASE CONTACT:
July 28, 2009 (202) 496-3269
“We have serious concerns with the approach taken by the committee today. Government mandated actions as a substitute for decisions made by shareholders takes us in the wrong direction. This policy – implemented on an annual basis – may only exacerbate the focus on short-term gains at the expense of long-term economic growth and job creation, a factor identified as a cause of the financial crisis,” said John J. Castellani, President of Business Roundtable.
“Business Roundtable has long supported pay for results and transparency about executive compensation. For shareholders who believe a say on pay vote is necessary at their company, they may submit shareholder proposals requesting such a vote. Advisory votes have been implemented at a number of companies that received shareholder proposals on this topic.”
“Following today’s meeting, it is critical that the committee keep in mind that a one-size-fits-all approach is not appropriate for compensation issues.”
“Business Roundtable also has a strong record of supporting corporate governance and disclosure reforms, pre-dating Sarbanes-Oxley, the securities markets corporate governance listing standards and SEC executive compensation disclosure rules.”
Pursuant to H.R. 3269, financial services firms would be required to submit practices and plans for incentive compensation for employees to their appropriate regulator. The regulator would then have the authority to approve or disapprove such plan, as well as take action for violations. In many firms, because incentive compensation plans range from the CEO to the receptionist, these provisions would place the federal government in the position of regulating compensation for all, or a vast majority of, employees in a company. This would be particularly intrusive when coupled with the provisions of H.R. 3126 which would allow the proposed Consumer Financial Protection Agency to regulate the compensation of employees who interact with consumers, regardless of industry, such as real estate agents, or even cashiers who accept credit cards. Taken together, these two proposed bills constitute an unprecedented governmental intrusion into matters that have historically been addressed by private actors. Accordingly, the Chamber recommends that Section 4 be removed from H.R. 3269 and would support any amendment that does so.
Currently, the bill requires an annual advisory vote at every company in the United States, regardless of size, industry, history, and governance. Rather, Congress should require such an advisory vote every three years, thereby tracking the typical life-span of an average executive compensation package. This change would give shareholders a more informed voice in the executive compensation policies of a company. The Chamber also believes that adding an opt-out provision is warranted. For example, if two-thirds of shareholders vote for a 5 year opt-out of “Say on Pay” votes, small and mid-size companies would be able to mitigate the undue costs and distractions associated with an annual vote.
H.R.3269 (Uploaded @ Docstocs)(View without Downloading)
Title: To amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions.
Sponsor: Rep Frank, Barney [MA-4] (introduced 7/21/2009) Cosponsors (11)
Related Bills: H.RES.697
Latest Major Action: 7/31/2009 Passed/agreed to in House. Status: On passage Passed by recorded vote: 237 – 185 (Roll no. 686).
House Reports: 111-236
CONGRESSIONAL BUDGET OFFICE – COST ESTIMATE (Emphase mine)
H.R. 3269 Corporate and Financial Institution Compensation Fairness Act of 2009
As ordered reported by the House Committee on Financial Services on July 28, 2009
H.R. 3269 would require all companies whose stock is traded on public exchanges to allow shareholders to approve, in nonbinding votes, the compensation received by executives and certain compensation agreements between executives and an acquiring entity. The bill also would require certain institutional investment managers to report at least annually on how they voted on any company’s shareholder votes regarding compensation. H.R. 3269 would establish standards to ensure the independence of members of a company’s compensation committee and the consultants and other advisors that provide support to such a committee. In addition, H.R. 3269 would require financial institutions to disclose to federal regulators the structure of any employee compensation agreements that include performance incentives.
The bill would require the Securities and Exchange Commission (SEC) as well as the federal financial regulatory agencies—the Federal Deposit Insurance Corporation (FDIC), National Credit Union Association (NCUA), Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Housing Finance Agency (FHFA), and the Federal Reserve—to develop regulations to implement the bill’s requirements, including regulations to restrict the use of certain employee compensation structures if they would pose a risk to a financial institution or to the economy. The bill also would require the Government Accountability Office (GAO) to conduct a study to determine whether there is a relationship between companies’ compensation structures and their risk-taking behavior.
Based on information from the SEC and GAO, CBO estimates that implementing H.R. 3269 would cost about $1 million in 2010 to develop regulations and prepare reports to the Congress, and less than $500,000 per year thereafter for the SEC to monitor compliance by companies affected by the regulations. Such spending would be subject to the availability of appropriated funds.
Any additional costs to the OCC, the OTS, and the FHFA as a result of enacting H.R. 3269 would be recorded on the budget as direct spending and offset by income from annual fees collected by those agencies for their administrative expenses. Similarly, the FDIC and NCUA would recover any added costs when they adjust the premiums and fees paid by insured depository institutions. Thus, CBO estimates that enacting the bill would have a negligible effect on net direct spending over the 2010-2014 and 2010-2019 periods.
The budgetary effects on the Federal Reserve would be recorded as changes in revenues (governmental receipts). CBO expects that implementing H.R. 3269 would not have a significant effect on the workload of the Federal Reserve and anticipates that existing resources would be used to comply with the bill’s requirements. Therefore, we estimate that enacting this bill would not have a significant effect on revenues.
H.R. 3269 contains no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments.
The requirements of H.R. 3269 would impose several private-sector mandates as defined in UMRA on publicly traded companies, financial institutions, institutional investment managers, and national securities exchanges and associations. Because the cost of some of the mandates in the bill would depend on federal regulations yet to be established, CBO cannot determine whether the total cost of those mandates would exceed the annual threshold established in UMRA for private-sector mandates ($139 million in 2009, adjusted annually for inflation).
The CBO staff contacts for this estimate are Susan Willie (for federal costs), Barbara Edwards (for federal revenues), and Brian Prest (for the private-sector impact). This estimate was approved by Theresa Gullo, Deputy Assistant Director for Budget Analysis.
Related Uploaded Files: (Uploaded to Docstocs)(View Report without Downloading)