What level of oversight should be given to TARP recipent compensation?

Great Debates
1

The debate should be how much control/influence/oversight should be given to the compensation of TARP recipients?

Obviously, there is a problem with self oversight. Merrill Lynch lost something like 18 years worth of profit in 2008, yet paid out the 6th highest bonus in the past 2 decades. The 400 people at AIG FP enabled the greatest Ponzi scheme in the history of mankind, yet the chief architect of that was getting a million dollar per month retainer for months after it all ended in tears. And you’d have to live under a rock to not see the brouhaha over the AIG guaranteed bonuses.

Management in general and the risk management people dropped the ball. I personally don’t blame individual traders, structured products gurus, aggressive sales people. Hell, they are just pushing the envelope to make the most money they can in the shortest amount of time. There is nothing inherently wrong with that if channeled in the right direction and with adequate risk controls in place. Obviously, adequate risk controls were not in place in most of the banks.

Wall Street needs to learn how to re market itself. So far, the argument for getting bonuses and guaranteed payouts can be summarized as follows:

  1. These derivatives are too complex for anyone but the ones that made them to unwind.
    I call BS on that one. Any structured products guy with a year or two under their belt could go in and reverse engineer these derivatives. (I used to do just this). Financial engineering is not nearly as difficult as real engineering. There are term sheets, there are computer models, use your brain and crunch the numbers. It’s not simple but it ain’t rocket science. (Now the guys that build and evolve the models are rocket scientists, but few people need to know how to do this). Structured product people at work every day reverse engineer their competitor offers and try to dream up an new product with a lot of margin that someone somewhere will buy.
  2. The people that caused this mess are the best ones to unwind it.
    Although is almost the next breath, AIG CEO Liddy says that "those responsible for the mess have left the company. "

Any good set of structured product people could go in there and be ready to unwind the positions in days. There are term sheets available. Teams jump ship all the time in the financial world, and a new team comes in and is ready to drive in a matter of days if not hours.

  1. Wall Streeters deserve the money because that’s the way it works on Wall Street
    When I was in the business, Wall Street paid more than almost anyone else for any job. Part of that had to do with you knew that you could be laid off any day for any reason. Bonuses generally are never ever put down in a contract form. It’s accepted practice but never ever guaranteed. The easiest way to “fire” someone on the street is to not pay them a bonus. This stuff is just wrong based on the wall street code. Merrill bringing forward bonuses a month to December before the BAC merger was completed and before announcing just how much money they had lost was at best dishonest, and I’m hoping can be proved fraudulent.

The last thing one should say is that I deserve to make more than $250k per year. $250k is what, more than what 95% of all Americans make? It’s more than the best year most Americans can ever dream of making. It’s more than what any civil servant makes. The President, makes 400K. There is zero sympathy for appealing to the plebes with this argument. Heck, the majority of people on Wall Street don’t make $250k. Americans in general are pissed off that they are being taken for a ride, and they should be.

  1. If the bonuses are not paid, that will trigger a default/instant repayment clause is the AIG FP contracts.
    That was debunked in a New York Minute.

  2. Am I missing any major points?

Rolling Stone has a pretty good overview of the whole mess in understandable language: http://www.rollingstone.com/politics/story/26793903/the_big_takeover

IMHO, what Wall Street should be saying is that they have a whole team of shit hot damage control people coming in to work for a dollar plus a shitload of stock after the TARP funds have been fully repaid.

Again the debate should be what level of bonus/total compensation oversight should be given to TARP recipients?

As an aside, what’s a good perjorative to use for TARP recipients? I’m leaning towards TARP Queens, which I hope definately conjures up images of Welfare Queens, but I’m open to other suggestions.

[Full disclosure, I was mainly ex Derivatives guy at Swiss Bank Corp (now UBS), Lehman Brothers and Nikko Securities. Left the business in 1998 after the Asia Crisis. I never made a bar but probably would have if the 97 crash had happened in 1998. I sell stuff to run their business to all the big global banks in Hong Kong, and I’ll spend the next weekend with most of them. ]

2

Given that AIG, like other companies, have separate committees to value compensation packages and it was done in full transparency I don’t see why anything needs to be changed. It shouldn’t be rocket science for qualified government agencies to sit in with the committees and knock out a contract. If they’re not accepted and the companies can’t find replacements in a timely manner than the process starts over. It’s not like we’re asking businesses to rush through a trillion dollar pay structure without reading the contract.

The problem is Congress shot itself in the foot by declaring ALL of the AIG bonus a malevolent venture. They’ve made a $1 bonus a thing of public scorn.

3

that’s an easy thing to deal with. You add a derivitive specialist to the compensation committee and create a test for those involved. At my last job I had to take a test that the department developed to weed out applicants. It wasn’t rocket science but it was designed to see if a person could do 2 hrs worth of work in an hour. You couldn’t bullshit your way through it and mistakes were pretty obvious.

4

Should the rules that apply to TARP recipients apply to all recipients of federal money? Defense contractors, hospitals, colleges?

Given the level of federal money flowing to the nation’s universities, should the government put caps on compensation to NCAA Division I football coaches?

5

I think that any company that wishes to receive government help should be placed in formal bankruptcy. This would have many advantages, among them that a company would have to be on the verge of bankruptcy or they would turn down the bailout. Fine. It would allow all contracts to be renegotiated. I always thought bonuses were based partly on personal performance and partly on general profitability of the company. If these AIG bonuses are contractural, how are they bonuses at all? They say they are retention bonuses. Why are they working so hard to retain the goons that got them there. Consider how CEOs move between companies and even industries. What is this special expertise needed? Is it how to drive a company into the ground?

Here in Canada, Nortel, a company whose stock went from over 100 at the turn of the century to 32c today, the bankruptcy referee just approved a bonus for the executives that were in charge on the ground that this would give them an incentive to turn the company around. First, why would one think that these guys had the capacity to turn the company around (and if they did why didn’t they do it?). Second, wouldn’t a better incentive be that if you turn the company around, then you will (deserve and) get a nice fat bonus? Thirdly, isn’t this the wrong signal to send to the beleagured employees who remain, maybe at lower pay?