The sword of Obamacles is back

Sword of Damocles, 1812, oil painting on canva...

The Sword of Obamacles

For a moment, in the wake of the much ballyhooed bank stress tests, the markets thought that Washington was going to back off from micromanaging Wall Street. But  word that the President is debating how to restructure pay for financial services firms — whether or not they have taken taxpayer bailout funds — is reversing all the feel-good energy in the markets. The Dow is off more than 2%; some bank stocks are down two to three times as much. You can blame the unexpectedly weak report on retail sales for the pullback, but I’m blaming the return of “lemon socialism” — the stealthy socialization of the private sector.

Let me take you on a walk down memory lane: It was less than a week ago that investors went wild for the regulators’ stress tests of the nation’s too-big-to-fail banks. Only 10 of the 19 banks involved needed money — and only $75 billion! A pittance in the trillions sloshing through the bailout mashup. In a story for The Big Money, I explained that the tests were shrewdly designed to minimize the need for dramatic government intervention (again) by delivering one of the few simple messages of the crisis: All clear. Nothing, of course, had really changed. First quarter bank profits were entirely based on trading gains and accounting quirks; core businesses were in miserable shape and expected to stay that way for sometime. The 0.4% drop in April retail sales, released today, validates that  scenario.

Think of the stress tests as one giant placebo that enabled everyone to believe that the government medics were packing up their kits. Whoa! Just one minute there. Government isn’t putting away its Q-tips so fast. Just as everyone thought it was safe to invest in the banking system again, along comes this WSJ story describing plans to overhaul pay for the financial services industry. It rings true with everything that has come from the White House thus far:

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic risk to the economy.

Who can be against creating incentives that discourage bad behavior rather than encouraging it?  But that’s not quite the point. Government shouldn’t be monitoring compensation per se — boards of directors should and they should somehow be made responsible for their actions as leaders of private industry. Government, however, can create punishments for boards that make decisions that lead to the destruction of the American economy. It’s absolutely scandalous how many people have walked away from the rubble unscathed despite playing key roles in the economic implosion.

Administration sources are quick to tell the WSJ that the government has no interest in micromanaging pay. That is patently false. President Obama has shown great willingness to micromanage, right down to selecting an executive recruiting firm for basically government-run firms. Earlier this week, the WSJ reported that the White House had forced its hand-picked chairman at troubled GM to hire a search firm to replace at least half of the members of its board. And even then, Kent Kresa, the former chairman of Northrop Grumman, wasn’t free to select his own recruiter: Spencer Stuart was the one and only. Here’s how the WSJ describes the transaction:

… officials at the Treasury, which has lent GM $15.4 billion, “strongly” suggested that Mr. Kresa choose Spencer Stuart for GM’s board search, telling him that the search firm “can do it quickly,” said a person close to the matter. They told Mr. Kresa he would be contacted by Tom Neff, head of the firm’s U.S. operations, this person said.

Spencer Stuart is having a field day. The White House has also tapped it to help rebuild the boardrooms at Fannie Mae, Freddie Mac, AIG, Citicorp, and GMAC. And it doesn’t look as if it even had to compete for the business.

The stress tests placebo is wearing off and fast. Government micromanagement is the poison of the private sector. Unfortunately, the Administration of hope and change is showing little imagination in addressing the structural flaws in the system. It is hewing to an old model that assumes government can simply pull the strings of needy corporations and the chips will fall where they expect. Don’t count on it.

Even Spencer Stuart’s Neff  has implied that the heavy-handed federal interference can hurt more than it can help. (Guess the White House vetted him the way it vetted so many of its other anointments).

Shareholder panic and activism are soaring, especially when it comes to CEO compensation. There is a strong move now to put limits on CEO pay, some of which we consider ill-advised. It is a board’s responsibility to get incentives aligned with shareholders’ interests and focused on longer-term value creation.

via Why Boards need to keep an eye on value creation

Of course, the statement could just reveal that Neff has a fundamental conflict of interest: Does his pay go up if he can score richer compensation packages for the candidates that get hired at taxpayer-backed corporations?  I’m going to find out. It may take a while, but I’ll be back with this.

image via Wikipedia

(H/T to @pdelinger for the phrase “lemon socialism”)

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One thought on “The sword of Obamacles is back

  1. I was starting to feel good about the economy until yesterday and today, and now Nancy has explained why–“lemon socialism!”

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