A firestorm of criticism was unleashed from Washington at bonus-reaping-while-Wall-Street-burns bankers, with President Obama deigning to join in the fray. The tone was unusually heated:
President Barack Obama fed a swelling populist revolt against Wall Street bonuses, calling it “shameful” that banks doled out $18.4 billion as taxpayers bail out companies and the U.S. remains mired in a recession.The bonuses are “the height of irresponsibility,” Obama said today before meeting Treasury Secretary Timothy Geithner and Vice President Joe Biden at the White House. Firms need to “show some restraint and show some discipline,” Obama said.
And the funniest, or most pathetic, depending on your point of view, was this:
The president joined politicians such as Senator Christopher Dodd, who today called for using “every possible legal means to get the money back.” The bonus pool for 2008 by New York City financial companies was the sixth-largest ever amid record losses in the securities industry,…“I’m going to be urging — in fact not urging, demanding — that the Treasury Department figures out some way to get the money back,” Dodd said. “This is unacceptable.”
Now this blogger is as irate about the payment of largely unwarranted bonuses as anyone. In any other industry, firms losing money on a survival-threatening scale would have eliminated them or targeted them far more selectively, well, save for the auto industry, which serves to prove the point.
However, the Congressional hyperventilating is a shameless diversionary tactic. Let us turn to philosopher Rodney Dangerfield:
If you steal $1000 from a convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and called bad names for ten minutes.
The tongue lashing might go on a little longer this time, but the general observation holds.
If Congress wants to assign blame, it might start by looking in the mirror. It has made a ritual of occasionally getting exercised about executive pay, calling some hearings and trying to make high fliers squirm, and then proceeded to do nothing, That makes it abundantly clear that they intended to do nothing, giving the perps to continue as before.
For those who claim that big pay is needed to motivate and reward superior CEO performance, there is ample evidence to the contrary. Studies have found that companies with the highest paid CEOs tend to underperform (one theory is that the high pay is a symptom of weak corporate governance). Similarly, Jim Collins, in his book Good to Great, found that the companies that produce consistent, long-lived superior results were without exception lead by modest and not terribly well remunerated executives.
And trying to shift blame for the TARP-funding-bonuses fiasco solely to the admittedly badly behaved but completely predictable Wall Street firms is absurd. Congressmen signed off on comp restrictions that were known at the time to be toothless, mere window dressing, so they could say they had gotten concessions from Treasury on that point. As we remarked back in September, when Treasury had the temerity to have a private briefing for members of the Securities Industry and Financial Markets Association, and not the broader public:
The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes. More detail on that point, but I don’t need more detail to get the drift of the gist.
And of course, the bill’s provisions pertained only to top officers, not to the highly paid rank and file, who received the lion’s share of the bonuses.
That rather basic point in missed by commentators. Back to the Bloomberg article:
Treasury has the authority under legislation that created the TARP to issue regulations that “claw back” excessive executive compensation, said Larry Hamermesh, a corporate law professor at Widener University in Wilmington, Delaware.“It was pretty clear from TARP I that the secretary of the Treasury was supposed to establish a provision for executive clawback,” Hamermesh said in a phone interview. “How the secretary has implemented that isn’t clear.”
The Treasury could require companies that request additional funds to repay excessive bonuses as a condition of the further financing, Hamermesh said.
Really? The TARP defines “executives” as “one of the top 5 executives of a public company, whose compensatoni is required to be disclosed pursuant to the Securites Exchange Act of 1934….and any non-public party counterparts.” So it apples to a teeny fraction of the bonus recipients in the limelight.
And even then, the clawback had little reach:
a provision for the recovery by the fnancial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate
Mind you, this language originated inthe 110 page intermediate version of the TARP legislation, the one presented to the House in September in which Dodd played a major role.
No one has said that these firms misrpresented 2008 performance. They said they had dreadful years and paid bonuses anyhow.
And some of the high profile examples are beyond any reach. John Thain gave up his 2008 bonus already; his $15 some odd signing bonus was pre-TARP, so he does not appear to have gotten any TARP funds. Thain hired Thomas Kraus from Goldman to be global head of sales and trading with a guaranteed bonus of $39 million. Peter Kraus, another Goldman recruit, who joined as of September, had a clause triggered by the Bank of America acquisition that leads to a $25 million payout.
Lawyers and comp experts are welcome to chime in, but I do not know of a legal theory by which the bonuses could be clawed back. The only ones I can think of are embezzlement and fraudulent conveyance, neither of which applies (OK, maybe a very clever attorney could devise a theory that the entire bonus process 2006-2008 at big public investment banks was a conspiracy to embezzle, but it would take a ton of discovery and would be seen as striking at the heart of capitalism, such as it is, and so would go nowhere). Fraudulent conveyance in simple terms allows creditors of a bankrupt firm to challenge and recoup certain payments made shortly prior to bankruptcy. Since none of the TARP recipients are bankrupt (the whole point of TARP was to avoid bankruptcy filings) that’s a non-starter.
The best the chumps powers that be can hope for is a few ritual disgorgements. For those who aspire to a life in the public eye, that might make sense. But Dick Grasso, whose pay by any standards was grotesque (as was his self importance, claiming responsibility for getting the NYSE running post 9/11 when firefighters and Verizon technicians, many of whom ruined their lungs, played a far bigger role) still won a pitched battle with Eliot Spitzer (who had a legal theory that I thought had considerable merit: that the comp was inconsistent with the NYSE’s status as a not for profit). So if anyone decided to put up a battle, it is hard to see how they could be compelled to return the money.
Put it another way: if Congress is unwilling to find a way to intervene in securitization agreements to facilitate mortgage mods, a far more important problem, both politically and practically, they are most certainly not going to meddle here.
Anonymous 
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Great analysis Yves! Alas I agree with you. The political posturing is meaningless. The bankers are controlling the whole process behind the scene.
P.S -I’ve come to the realization that Geithner would make an exemplary muppet. Oh, Jim Henson, where are you when we need you!