Friday, March 20, 2009

Being a Mouthpiece is One Thing....


But abandoning any shred of dignity in the process? Michael Gerson recites from the latest party memo:
The most famous piece of legislation passed by the 111th Congress may have nothing to do with health care or energy. It could be the Dodd amendment, also known as the Geithner amendment, or perhaps the low-level-anonymous-staffer-everyone-can-safely-blame amendment, reading in part:

"The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . . " AIG executives were foolish to use this loophole to "retain" employees, some of whom nearly destroyed the American financial system. But the company did not act with deception or secrecy.
Yes, that's the part that's widely circulated. And, as party hackery goes, Gerson's use is "correct" - he's using it to suggest that the goal was to "protect" excessive compensation going backwards, as opposed to limiting new compensation agreements going forwards. But it's exceptionally misleading to suggest that the provision was meant to reach the masses of employees at a company such as AIG, as opposed to the executive suite:
(b) Executive Compensation and Corporate Governance-
(1) ESTABLISHMENT OF STANDARDS- During the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, each TARP recipient shall be subject to--
(A) the standards established by the Secretary under this section; and

(B) the provisions of section 162(m)(5) of the Internal Revenue Code of 1986, as applicable.
(2) STANDARDS REQUIRED- The Secretary shall require each TARP recipient to meet appropriate standards for executive compensation and corporate governance.

(3) SPECIFIC REQUIREMENTS- The standards established under paragraph (2) shall include the following:
(A) Limits on compensation that exclude incentives for senior executive officers of the TARP recipient to take unnecessary and excessive risks that threaten the value of such recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(B) A provision for the recovery by such TARP recipient of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees of the TARP recipient based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate.

(C) A prohibition on such TARP recipient making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(D)
(i) A prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition developed under this paragraph shall not apply to the payment of long-term restricted stock by such TARP recipient, provided that such long-term restricted stock--
(I) does not fully vest during the period in which any obligation arising from financial assistance provided to that TARP recipient remains outstanding;

(II) has a value in an amount that is not greater than 1/3 of the total amount of annual compensation of the employee receiving the stock; and

(III) is subject to such other terms and conditions as the Secretary may determine is in the public interest.
(ii) The prohibition required under clause (i) shall apply as follows:
(I) For any financial institution that received financial assistance provided under the TARP equal to less than $25,000,000, the prohibition shall apply only to the most highly compensated employee of the financial institution.

(II) For any financial institution that received financial assistance provided under the TARP equal to at least $25,000,000, but less than $250,000,000, the prohibition shall apply to at least the 5 most highly-compensated employees of the financial institution, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(III) For any financial institution that received financial assistance provided under the TARP equal to at least $250,000,000, but less than $500,000,000, the prohibition shall apply to the senior executive officers and at least the 10 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(IV) For any financial institution that received financial assistance provided under the TARP equal to $500,000,000 or more, the prohibition shall apply to the senior executive officers and at least the 20 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.
(E) A prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.

(F) A requirement for the establishment of a Board Compensation Committee that meets the requirements of subsection (c).
(4) CERTIFICATION OF COMPLIANCE- The chief executive officer and chief financial officer (or the equivalents thereof) of each TARP recipient shall provide a written certification of compliance by the TARP recipient with the requirements of this section--
(A) in the case of a TARP recipient, the securities of which are publicly traded, to the Securities and Exchange Commission, together with annual filings required under the securities laws; and

(B) in the case of a TARP recipient that is not a publicly traded company, to the Secretary.
Is it conceivable that the Secretary would have been asked to review the bonuses under this legislation, to determine if it should be applied to employees outside the 25 highest paid individuals as contemplated by the legislation? Sure. Is it likely that the Secretary would have found it consistent with prevailing wages in the industry, the intent of the legislation, or the treatment of employees in other bailed-out organizations who had already received similar bonuses, so as to merit extending the prohibition to everybody at AIG? Not at all.

Gerson carries on,
Concerns on the broader compensation issue were serious enough to ensure unanimous Senate passage of an amendment to the stimulus bill sponsored by Sens. Olympia Snowe and Ron Wyden that penalized bailout bonuses in excess of $100,000.

But the Snowe-Wyden amendment disappeared into the misty bog of a House-Senate conference committee, only to be trumped by language that grandfathered in AIG's retention bonuses.
I've quoted enough legislation for the moment, and the Snowe-Wyden language is somewhat opaque - let's let Wyden put it into simple terms:
In an interview with the Huffington Post, the Oregon Democrat noted that during the crafting of the stimulus package, he and his Republican colleague from Maine introduced a provision that would have forced bailout recipients to cap their bonuses at $100,000. Any amount paid above that would have been taxed at 35 percent. The language made it through the Senate, but during conference committee with the House, it was inexplicably removed.
Note, the 35% tax would be payable by the company, not by the employee. And nothing in the Snowe-Wyden language would have prohibited or voided the bonus. Yes, under this proposal, a bonus contract negotiated after January 1, 2008 would have been covered. But if AIG is correct, as seems to be the case, that it was contractually bound to pay the bonuses, it would have had no meaningful impact on the present conflagration. The bonuses would have been paid, and AIG would owe an additional $60 million or so in taxes, all of which would still have effectively come out of taxpayer contributions to AIG. Would that have made you feel better about it?

Gerson carries on,
President Obama vowed to "pursue every legal avenue to block these bonuses," when the proper "legal" avenue was to write a responsible law - a process his own administration apparently undermined.
If you actually look at the legislation back when it contained the Snowe-Wyden language, it didn't just cap bonuses - it retroactively capped pay to an amount not "in excess of the amount of compensation paid to the President of the United States". It did not prohibit or invalidate bonuses - it instead imposed a corporate tax on bonus payments in excess of $100,000. You shouldn't have to be a very strong thinker to recognize why that would trouble the Treasury Secretary who is trying to bring sanity back to the financial industry, as there's every reason to believe that arbitrary salary caps of this sort would have been destabilizing. (Having made the "conservative" case for wage controls, what's up next? Price controls?)

Gerson next imagines a hedge fund manager having to justify a huge return on a purchase of toxic securities.
"Perhaps the witness can explain to us how he justifies such windfall profits with the people's money? Have you no shame? Give us the names, addresses and phone numbers of every millionaire you enriched at public expense so we can leak them to the press."
If Gerson took the time to find out what he's talking about, rather than doing stenography from the party memo, he might have seen the following in the Snowe-Wyden language:
(C) BONUS PAYMENT- The term `bonus payment' means any payment which--
(i) is a discretionary payment to a covered individual by a financial institution (or any member of a controlled group described in subparagraph (D)) for services rendered,

(ii) is in addition to any amount payable to such individual for services performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate, and

(iii) is paid or payable in cash or other property other than--
(I) stock in such institution or member, or

(II) an interest in a troubled asset (within the meaning of the Emergency Economic Stabilization Act of 2008) held directly or indirectly by such institution or member.
Such term does not include payments to an employee as commissions, welfare and fringe benefits, or expense reimbursements.
If he imagines a popular uproar over a subsidized giveaway of troubled assets to hedge fund managers, why does he think there would be no such uproar over the giveaway of the same assets at fire sale values as bonuses to the leaders of bailed-out companies, as would have occurred under the Snowe-Wyden language he endorses?

Gerson concludes,
What sane money manager would want to partner with a government that blames others for its mistakes, urges the violation of inconvenient contracts and threatens to tax benefits retroactively?
No doubt, the lack of effective regulation and oversight of the financial industry, most crucially under G.W. Bush,1 constitutes a government mistake - but is that what Gerson means? Even if so, it hardly exculpates the financial industry. Also, you don't need to look past the auto industry to recognize that, if it means walking away with billions in your pocket, people are willing to eat a lot of crow (both deserved and undeserved) in front of Congress.

But Gerson's suggesting that it's Obama who "urges the violation of inconvenient contracts"? No, that would be Gerson himself. Although some pretend otherwise, as previously noted, not even the Snowe-Wyden legislation would have abrogated the AIG bonus contracts. The final legislation didn't retroactively modify or abrogate contracts, and instead applied only to new contracts - and that's the very part Gerson finds objectionable.

As for threatening to tax benefits retroactively? I think the new tax on bonuses is bad policy, and I've said so, but give me a break. The entire mechanism by which the Snowe-Wyden amendment sought to reign in "excessive bonuses" was through a tax, retroactive to January 1, 2008.
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1. I have sympathy for the argument that most of the policies preceded Bush, but none for the argument that this somehow excuses the Bush Administration from its responsibility for perpetuating those policies, or failing to notice the walls crumbling all around them.

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