Sunday, August 2, 2009

Federal Power Grab: Executive Pay

Virtually unnoticed, on Friday, the House of Representatives passed a bill giving the federal government the power to regulate executive compensation at public companies. This bill, sponsored by Comrade Barney Frank, passed 237 to 185, largely along party lines.

Not only is this an amazing seizure of power by the federal government, but the bill’s proponents have been misleading the public about what the bill does. They have sought to give the impression that the bill only requires non-binding votes by shareholders and that it applies only to TARP recipients. Neither contention is true.

What The Bill Does

The bill in question is called the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269). According to the introduction to the bill, the bill amends 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.
Note the second clause, after the word “and,” this is the part of the bill the supporters want you to ignore.

Whenever the bill has been discussed, its supports address only the first part of the bill, and in those discussions they make the claim that the bill “only” requires (1) that shareholders be advised of executive pay arrangements and so-called golden-parachutes, and (2) that shareholders be allowed to vote, in a non-binding vote, on whether or not to approve those compensation agreements. And that is exactly what Section 2 does. So what’s the problem?

The problem is Section 4, which they always fail to mention. Section 4 contains the following legalese:
The appropriate Federal regulators . . . shall prescribe regulations that prohibit any compensation structure or incentive-based payment arrangement . . . that the regulators determine encourages inappropriate risks by financial institutions or officers or employees of covered financial institutions that
(1) could threaten the safety and soundness of covered financial institutions; or

(2) could have serious adverse effects on economic conditions or financial stability.
Let’s put that into English. The Federal government can prohibit any pay practice that the government thinks could harm the company, the economy or the financial markets.

And to whom does this bill apply? It applies to any bank that participates with the FDIC, any credit union, any broker-dealer registered under the SEC, any investment advisor, and “any other financial institution that the appropriate Federal regulators. . . determine should be treated as a covered financial institution.” In other words, the “appropriate federal regulators” will figure out who is covered -- and if the TARP and TALF are any indication, a great many non-financial companies will be surprised to learn they are now financial companies.

So who are the appropriate federal regulators: (1) The Federal Reserve, (2) the Office of the Comptroller of the Currency, (3) the FDIC, (4) Office of Thrift Supervision, (5) the National Credit Union Administration Board, and (6) the Securities and Exchange Commission. Together, these agencies regulate virtually every large company in the country.

And for the record, nothing in this bill limits its application to TARP recipients, as Rep. Jeb Hensarling (R-TX) made clear during a CNBC interview.

What The Public Was Told

So what has the public been told? The Chicago Tribune mindlessly echoed the bills supporters, when it stated:
Say-on-pay votes would be non-binding, would take place months after compensation is handed out and wouldn't force companies to alter the payouts.
They failed to mention Section 4.

The New York Times, on the other hand, grasped the second part of the bill, but only after the bill was passed:
The bill, introduced by Representative Barney Frank, Democrat of Massachusetts, enables regulators to ban payments that give workers what the legislation calls “perverse incentives” to take risks that could hurt the nation’s financial system.

The bill gives the Securities and Exchange Commission, among other federal regulators, nine months to propose rules for regulating compensation packages at institutions whose assets total more than $1 billion.
Before the bill was passed, the Times was a good deal less clear on this point, though they did mention it. That article began:
The bill does not set pay limits. Instead, it gives shareholders the right to vote on pay and requires that independent directors from outside of management serve on compensation committees. The shareholder votes would not be binding on company management.
And then way down the page, they added:
The measure also gives regulators the authority to prohibit inappropriate or risky compensation practices for banks and other regulated financial institutions.
Close. But then they added:
Democrats led by Mr. Frank also agreed to . . . reduce[] the authority of regulators by giving them power to restrict only incentive-based pay arrangements instead of any kind of compensation.
This is a stretch. Section 4 states that the regulators may “prohibit any compensation structure OR incentive-based payment arrangement.” An “or” generally means multiple choices, and rarely means “only.” Thus, claiming that only incentive-based pay arrangements could be restricted was not exactly accurate. Also the use of the word "inappropriate" implies that such practices were already improper, not that they would be made improper by the new regulation. Indeed, reading this article, it's not clear that much of anything would be done by the regulation.

In any event, the real lying was left to Democratic Congressmen like Rep. Gregory Meek, D-NY. Meeks told CNBC prior to the vote that all the bill did was to require disclosure of pay schemes to shareholders and require “non-binding” votes by shareholders. . . it does not cap pay or prohibit the use of incentive-based pay in any way, he assured viewers. And he managed to maintain this lie for some time during the interview, until the anchors confronted him with the wording of the legislation itself.

At that point, he dissembled and rephrased his answer to state that the point of the bill was not to cap executive pay or to take away incentive-based pay, and that “most of the votes is [sic] non-binding.” But then, the point of communism was to make a better world, not to kill a hundred million people, as the practice turned out.

So Does Obama Support This Bill?

You would think there would be no mystery about whether or not Obama supports this bill. But on August 1, the New York Times reported that while Obama has advocated nonbinding votes for shareholders, “the White House has not suggested that federal regulators curb incentive-based pay for risk-taking.”

Of course, this contradicts the New York Times’ July 29th report, which stated that the legislation “closely resembled an Obama administration proposal seeking to impose new restraints on executive pay.”

But it played along nicely with the “we haven’t decided” game played by White House spokesman Robert Gibbs, who stated that no decision has been made yet whether the President will support this bill or not. . . apparently he is “not familiar” with the whole bill.

Sadly for Gibbs, Tim Geithner did not get the obfuscation memo, and he rushed out to issue a statement that said of the legislation:
This is a positive step forward to increase accountability and transparency in executive compensation, and to help ensure that pay encourages long-term performance, not excessive risk-taking.
That sounds like support. It also sounds a bit like central planning. . . comrades.


LawHawkSF said...

Andrew: Swell. Barney Frank (Mr. "Fannie Mae and Freddie Mac are sound") actually thinks he or any government official is capable of deciding what's appropriate compensation for executives. I've been caught up in one way or another with this governmental interference in corporate compensation since the Tax Reform Act of 1976 (aka The Lawyers and Accountants Relief Act). And the sad fact is, there's nothing that big business can do that big government can't do worse. Thanks for the clarification on the "non-binding" rules which are apparently very much binding. This is far more intrusive than TRA '76 since there it was only an indirect attack by way of higher taxes on "excessive" executive salaries. This is a direct assault.

AndrewPrice said...

It's interesting Lawhawk, but I've been hearing about this and it's always been "non-binding" and "only affects TARP". Who can object to that, right? So I wondered why the Republicans would be fighting this. That's when I decided to look into this, and suprise, it's much more than we've been told.

ArmChairGeneral said...

Keep the people who work on keeping the business afloat and sacrifice their time and money into the business from making any profit. Sounds like communism to me.

Tennessee Jed said...

To me, this all goes back to the notion that Obama has about economic equality somehow being part of the American Dream. So many signs now point to this administration and congressional leadership being so far to the left, nobody could have imagined (well many of us did, I suppose.) Just as with healthcare. both Obama and Barney Frank have admitted to favoring single payer. Pelosi wants to limit pay for health insurance executives. It is disheartening.

Just thought of a suggestion and I'll mention it here since I don't know how far back you go to check comments on older articles. Suggestion for possible new stuff at Commenterama: A mechanism for ad hoc commenting, so to speak (maybe a function similar to an open thread. Commenter sugested movies for group review/discussion. This is simply stream of consciousness stuff. Top of the morning!

StanH said...

Andrew good catch! This is typical leftist dribble that’s been around for a hundred years in America. This could have been spewed by Woodrow Wilson, to F.D.R./Huey Long “The Kingfish,” move forward thirty years to L.B.J./Saul Alinsky, and again forty years to our Barry Hussein, and his leftist minions. They’re playbook never changes, look back and you can guess what’s coming. The good news is that they’re getting pushback like they’ve never seen, and not by Republican politicians for the most part, but the American people. We stay vigilant much of this gobbledy-gook can be stopped in the senate and vote regular and often 2010 : )

AndrewPrice said...

General, You have to wonder about any plan that says that the government knows what a company should pay it's employees. When has that ever worked out?

Stan, Thanks. I've been seeing this for several days, and no one seemed to have noticed. I think part of that is that BHO has spammed us with policy, and part of it is that the media never digs deep enough to figure out if they should be concerned about something. In any event, this is another one of those that we need to hope the Senate stops.

AndrewPrice said...

Jed, This is definitely old school command economy. Combine this with the government taking over specific companies, handing out money to favorites, capping what insurance companies can charge, creating government run health care, and the rest, and it is a lot like the modern version of the New Deal.

On the open thread idea, we've been trying to figure out how to do something like that other than just posting an open thread. Any suggestions would be appreciated.

Writer X said...

The funny thing is that I bet a lot of people in these companies voted for Obama, maybe even campaigned for him. Wonder how many wish they could turn back the clock now.

I agree with Stan. Those voters that had stars in their eyes are finally waking up from their drug-induced coma. Let's hope.

AndrewPrice said...

Writer X,

Think about this. Obama's biggest supporters were (1) financial companies, (2)"rich" people (i.e. workers) in the tech industry, (3) Hollywood, and (4) unions.

All he's offered the financial people and the unions has been greater regulation and lost jobs. Even giving the unions GM was a pyrrhic victory. He's done nothing to stop pirating of software, films, or movies -- in fact, he's letting China off the hook. And he's raising the taxes of everyone in groups (1,2,3) who are shocked to discover that they are rich.

I can't say that I don't find the irony funny.

Writer X said...

Andrew, good point. And acceptance will be the first step in their grieving process. I have a couple of liberal friends and they are currently behaving like accident victims--shocked, but unfortunately still awed.

Regarding Jed's suggestion of an open thread, I'm not sure there's much to it than that: simply opening up a thread at a certain time (e.g. as a movie/show is playing.) Kind of like a webinar but without the "inar" and more fun.

AndrewPrice said...

Writer X,

The modern liberal mind goes through phases. First, it hopes, without reason. And it denies all prior experience. Then it gets arrogant, because it's sure that it's the way to do the thing that 10,000 of human experience haven't been able to do. Then it goes into shock when things don't work out and it claims that no one could have known. Then it demonizes, because there was nothing wrong with the idea. . . so someone must be behind the failure. Then it turns on the leader who was unable to deliver the promised goods. And then, just as you'd think they have no choice but to face the fact that reality doesn't dig their thing. . . they find a new messiah.

Obama/Pelosi are entering the demonize phase.

So I'm guessing there is support for an open thread? Hmmm.

StanH said...

This country is pissed off, not just at Democrats, but all of Washington IMO, as witnessed by the Tea Parties. The first real fissure in the two party system was exposed in ’92 by Ross Perot. This scared the hell out of the two party system and they’ve been in consolidation mode since. Republicans in Washington are lovers of big government as well example: McCain, Grassley, Snowe, Collins, Graham, Rino’s in general. I see 2010 as an opportunity, a beginning if you will, to finally neuter the corrupting power of Washington one representative at a time.

Open thread would be fun.

LawHawkSF said...

Andrew: One of the newly-rumored Czardoms to be created by the Financial Protection Agency Act of 2009 is the Financial Regulatory Czar who will determine if the financial offers the banking and lending institutions are making are "fair." Theoretically, the government will design a set of "standard" financial products that financial-products companies will be forced to offer. And the agency will have the power to forbid financial firms from making any competing offers if the government deems these products to be harmful. Further rumor is that the man Obama wants to pick as the Czar is Cass Sunstein, famous Professor of Law at the University of Chicago and now Harvard Law, and intimate of the President. What better way to set up the man I predict as a future Obama Supreme Court nominee than to put him in charge of a federal agency with high public visibility? Particularly when it purports to protect the hapless consumer from "unfair" lenders.

Post a Comment