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Executive Compensation
EXECUTIVE COMPENSATION....Should the Wall Street bailout include provisions to punish executives who were responsible for bad behavior during the housing bubble? Megan McArdle asks if this is even legal:
Here's a question: a lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally? I mean, yes, they make the law. But my understanding is that while you can grandfather in benefits, you can't retroactively punish people for behavior that was legal when committed. Can Congress reach in and retroactively void a private contract? I'm not asking for commentary on the wisdom or morality of such a move, just whether it would withstand a court challenge.
Not a chance. The Fifth Amendment prohibits the direct impairment of contracts, and Article 1 prohibits both bills of attainder and ex post facto laws. Felix Salmon adds some practical questions:
Which folks did you have in mind? The ones who ran subprime mortgage originators which have now gone bust? It'll be pretty much impossible to get money back from them. The MBS and CDO desks in investment banks? Most of them have been fired at this point, there's not much work for them any more. The senior executives at the banks? They've seen their net worth plunge along with their share prices. There might be a couple of fat-cats still around whom the government could ask to repay their bonuses. But it would be gesture politics.
Obviously this is a bummer. We can, of course, demand that executives voluntarily agree to new compensation packages going forward if they want to participate in the bailout, but even there we need to be careful. For example, John McCain, in his new role as the Scourge of Wall Street, says we should just limit all executive compensation to $400,000 or less. But who knows what that means? Does it include only direct income? Perks? Stock options? Retirement pay? Bonuses? Or is it all of the above? If it is, all that will happen is that the brightest people at these firms — which, remember, we would like to succeed since we'll all have equity stakes in them — will scurry away for more lucrative futures at small hedge funds and boutique banks. Granted, given the performance of the brightest people over the past few years, maybe we'd be better off with a few dullards instead, but be careful what you wish for.
Much better, I think, would be structural changes that reduced income for everyone in the finance industry, not just the bankrupt firms. If Democrats had a spine, that might be feasible. Under present circumstances, however, I realize it's pie in the sky. A few ritual disembowelments is probably the best we can hope for.
The WHite House ^ | September 19 | Staff
Posted on Tuesday, September 23, 2008 21:06:36 by PghBaldy
For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted. Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.
2001
April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."
2002
May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
2003
January: Freddie Mac announces it has to restate financial results for the previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
2004
February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore?should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)
February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)
June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
2005
April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America? Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)
2007
July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, The White House, 8/9/07)
September: RealtyTrac announces foreclosure filings up 243,000 in August ? up 115 percent from the year before.
September: Single-family existing home sales decreases 7.5 percent from the previous month ? the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.
December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs ? and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)
2008
January: Bank of America announces it will buy Countrywide.
January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)
March: Bear Stearns announces it will sell itself to JPMorgan Chase.
March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by ? helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)
May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.
"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)
"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that ? and Congress is making progress on this ? is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)
June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)
July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.
Yep, the tax system is the way to go. Here's my suggestion:
Here's my plan:
Pay for this with an additional 15% tax on people making more than $500,000/year, payable until whatever debt is taken on is paid off.
That way you motivate the smartest and most ambitious people in the country ? who have benefitted the most from the economy over the past 8 years ? to make sure the government:
1) does this right
2) does it fast
3) gets the most value from the crap it buys from these companies
4) makes sure it never happens again
Sure, there are all kind of inequities... lots of people making over $500k/year are valiant brain surgeons not Wall Street swindlers etc etc. But ultimately even your $500k/year brain surgeon was (on average) investing blithely in various funds and just watching execs walk away with giant bonuses and not exercising the discipline of the market by questioning whether this made economic sense. If you don't want a populist hell to descend upon the nation, then you have to get these people to police Wall Street themselves.
The WHite House ^ | September 19 | Staff
Posted on Tuesday, September 23, 2008 21:06:36 by PghBaldy
For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted. Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.
2001
April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."
2002
May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
2003
January: Freddie Mac announces it has to restate financial results for the previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
2004
February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore?should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)
February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)
June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
2005
April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America? Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)
2007
July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, The White House, 8/9/07)
September: RealtyTrac announces foreclosure filings up 243,000 in August ? up 115 percent from the year before.
September: Single-family existing home sales decreases 7.5 percent from the previous month ? the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.
December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs ? and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)
2008
January: Bank of America announces it will buy Countrywide.
January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)
March: Bear Stearns announces it will sell itself to JPMorgan Chase.
March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by ? helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)
May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.
"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)
"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that ? and Congress is making progress on this ? is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)
June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)
July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.
Yep, the tax system is the way to go. Here's my suggestion:
Here's my plan:
Pay for this with an additional 15% tax on people making more than $500,000/year, payable until whatever debt is taken on is paid off.
That way you motivate the smartest and most ambitious people in the country ? who have benefitted the most from the economy over the past 8 years ? to make sure the government:
1) does this right
2) does it fast
3) gets the most value from the crap it buys from these companies
4) makes sure it never happens again
Sure, there are all kind of inequities... lots of people making over $500k/year are valiant brain surgeons not Wall Street swindlers etc etc. But ultimately even your $500k/year brain surgeon was (on average) investing blithely in various funds and just watching execs walk away with giant bonuses and not exercising the discipline of the market by questioning whether this made economic sense. If you don't want a populist hell to descend upon the nation, then you have to get these people to police Wall Street themselves.
The WHite House ^ | September 19 | Staff
Posted on Tuesday, September 23, 2008 21:06:36 by PghBaldy
For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted. Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.
2001
April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."
2002
May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
2003
January: Freddie Mac announces it has to restate financial results for the previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
2004
February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)
February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)
June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
2005
April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)
2007
July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, The White House, 8/9/07)
September: RealtyTrac announces foreclosure filings up 243,000 in August up 115 percent from the year before.
September: Single-family existing home sales decreases 7.5 percent from the previous month the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.
December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)
2008
January: Bank of America announces it will buy Countrywide.
January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)
March: Bear Stearns announces it will sell itself to JPMorgan Chase.
March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)
May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.
"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)
"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that and Congress is making progress on this is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)
June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)
July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.
How much of the problem is caused by fraudulent loans?
How much of the problem is caused by negligence and willful negligence of people and institutions who were supposed to screen loans?
People who committed *crimes*, like fraud, would seen to be vulnerable to their companies suing them.
And if the U.S. government owns the companies....
I feel like Congress and U.S. voters and taxpayers have a right to know what the hell was the problem that caused the need for the bailout before we put up our money for anything. And I want to know if fraudulent loans was a major cause of the problem.
If fraudulent loans were the problem I want to know that there will be Old Testament justice for the people who got us into this mess, whether they are in government or the private sector. I want them to do long prison terms. I want their personal wealth wiped-out in civil suits. I want their families who profited to be pariahs.
I would be OK with outsourcing the incarceration of the convicted to places where it would be difficult for family to visit, like Siberia and maybe Abu Ghraib, after we give it back to the Iraqis.
The idea that these people can present an ultimatum to Congress (U.S. taxpayers) without even expressing contrition or acknowledging wrongdoing is morally unacceptable behavior to me. These people aren't treating us like fellow citizens.
They are treating us like I saw UN peacekeepers treat the locals in Cambodia. Some peacekeepers hated the locals, some were more nuanced or benign. But no one really respected the Cambodians as equals with inalienable rights. Cambodians were there and they had to be dealt with.
Sorry, Kevin, but the ex post facto clause has long been held to apply only to criminal, not civil, sanctions. There may be some general due process considerations, but what you're really looking for is an unconstitutional conditions-doctrine issue, and I think that's a nonstarter.
I'm not sure what she's thinking here. This is "punishment" in a colloquial not a legal sense. While I'm sure that there's plenty of lawbreaking to be found in the financial industry, the proposed limits on compensation don't have anything to do with that. Nor are the efforts to pull back previously awarded compensation aimed at something these folks did which was legal then, and illegal now.
Isn't the plan to get executives to agree to having their salary & benefits cut, by only making the bailout deal available to companies whose executives consent to this? This happens all the time during a buyout, when an employee voluntarily gives up benefits (and often their job) in exchange for cash, so why can't it happen with the bailout, with the executive voluntarily giving up benefits & salary in exchange for cash for their company?
JR, when Bush wanted tax cuts, Congress gave him tax cuts.
When Bush wanted power to spy on U.S. citizens, Congress gave him this power.
When Bush wanted to invade Iraq, a country that was not a threat, Congress gave him this power.
When Bush wanted to expand drug coverage, Congress gave him the money.
When Bush wanted retroactive immunity for spying on Americans, Congress gave it to him.
When Bush nominated whackjobs, including unqualified whackjobs, Congress almost always confirmed them.
So, I'm not buying the argument Bush was pushing for reform of Fannie Mae and Freddie Mac, but Congress blocked these reforms. If Bush was on the right side (and from what I saw of one proposal Bush's so-called reform was more about consolidating power in the executive branch than fixing any problem) he certainly didn't make his "reforms" a priority.
I think it would behoove everyone to stop daydreaming about punishment and start planning for how we fix this so it never happens again.
There used to be one way to do something about excessive compensation. High tax rates at the top end. Let's not forget the old "Death Tax" either.
They work, too - why else would the rich spend so much effort on fighting them if they didn't? If they don't like the way the government spends the money it'd collect from them, they can always give it away first. Either way, it'd keep wealth from getting concentrated into fewer and fewer hands while putting it back to work for the rest of us.
Can we legally compel executives to give up past compensation? Probably not. But we had better figure out a way to do something of the sort.
Right now the average American is angry- very angry- and mystified as to why we're going to bail out Wall Street conglomerates. That anger naturally translates to people- after all, doesn't somebody have to take the blame? If the government doesn't figure out a way to punish the individuals involved, the average American will lose even more faith in the free market.
I'm one of those who thinks free markets, properly regulated (and that hasn't happened for about 30 years), are a good thing. But if we don't punish those who have shown the most greed, it will be another nail in the coffin of capitalist democracy.
It is unquestionably legal because it's voluntary: no buy-in, no bail-out. As Matt pointed out, it's utterly essential that executives suffer losses directly as a result of their firms getting their bailout--this prevents perverse incentive for future execs and prevents a lot of banks that don't need it from coming to the trough.
But above all: the notion that there are no execs out there who have any money left to garnish is laughably, perversely absurd. I can't imagine what Salmon would have to be smoking to spout this drivel. These people have been pulling down tens of millions. When they sink the firm, they get a bonus. These folks now sitting at the kitchen table. Give me a #$@! break!
It is unquestionably legal because it's voluntary: no buy-in, no bail-out. As Matt pointed out, it's utterly essential that executives suffer losses directly as a result of their firms getting their bailout--this prevents perverse incentive for future execs and prevents a lot of banks that don't need it from coming to the trough.
This is exactly right. No existing contracts are being voided by these proposals. The companies are free to keep their contracts intact, and go broke.
More to the point: if they won't modify their contracts, they deserve to go broke.
Hey, don't disparage the beneficial effects of a few ritual disembowelments.
OK, we "punish" the failed execs. We get maybe 100 million back of the hundreds of billions we need, John McCain prances around like a tough guy, and the torches-and-pitchforks crowd have sated their indignation.
Now what?
Kevin,
As we are now a socialist country, what is to stop the tax code from, say, taxing wealth that was paid by companies that got bailed out. Eisenhower tax rates back on wealth 'created' from this mess.
There is no doubt that we could come up with a legal way of doing a damn close approximation of whatever it was we wanted to do.
The way I'd go about clawing back the compensation is to unleash a team of investigators on the various firm. I'd bet several CDOs that they could come up with an indictable wire fraud or other some sort of case. Then, a little pre-filing plea bargaining and, presto, money back as part of deal. As a matter of fact, I think CNN reported that the FBI, etc. were investigating a number of things related to some of the firms. Nothing like serving a search warrant on a CEO's office to cause some fear and trembling. CEO's are terrified of searches into every nook and cranny of his/her records (with fully-armed SWAT team). You have to draw the line somewhere: water boarding is out, but, maybe, not the threat of a lamp posts, eh?
Simple solution. 50% tax rate for incomes over $5 million. And also at the same time change the 10% tax rate. Currently everyone pays 10% on the first $7835. Leave the rate the same but increase the amount to $15,000. Tax cut for everyone except those making over $5 million a year.
There is great irony right now in the fact that it is Republicans and not Democrats today are advocating socialist policies. But, aside from that, civil penalties would not be a problem. Besides, look at all the corporate pension plans that were reworked--with governmental guidance--at the detriment to collective bargaining arrangements. Why would it be any different for individual contracts where there is a directly attributable cause? A more interesting constitutional question concerns nondelegation--Congress is not allowed to delegate its responsibilities and functions to the Executive Branch, but the proposed bailout would let the Executive spend $700 billion of the budget as it sees fit. This is is arguably not constitutionally permissible and would encounter a serious roadblock if the bill is passed in the form currently demanded by the White House and the Wall Street lobbyists.
What CaptainIndignant said. Ex post facto / bill of attainder bans apply only to criminal sanctions. Rights of property are guaranteed by the Consto, but not rights under contract. If performance under a contract becomes impossible, that affects remedies within the framework of contract law itself, but appealing to the Consto won't get anything more than maybe a pained expression and a short lecture from the trial judge.
If it were otherwise, it wouldn't take much of a draftsman to wiggle out from under any increase in tax burden, ever.
Not a chance. The Fifth Amendment prohibits the direct impairment of contracts, and Article 1 prohibits both bills of attainder and ex post facto laws.
Wrong in so many ways. The Fifth Amendment doesn't say anything about impairment of contracts, you're thinking of the contracts clause in Article 1, section 10, which is mostly about making it harder for states to get out of the contracts they make with private parties. There could be a fifth amendment takings or due process violation if it's not opt in.
The ex post facto clause is, as was mentioned above, about laws making particular conduct criminal which was not criminal at the time the conduct took place and then enforcing it against people who took those actions before the law was passed. The bills of attainder clause is about not passing bills to target specific individuals, targeting specific classes of individuals can be fine (obviously depends on how the class is drawn).
Kevin,
Judging from the thirst for revenge on the blogs, I wonder how this would play out if the Federal government had a California-style referendum procedure? :)
They would just be working under new contractual conditions. Many people have their salaries lowered under various giveback provisions, discontinuation of medical benefits, etc. Hardly a constitutional issue.
I don't get this at all, Kevin.
If I happen to want to enter into a business arrangement with a company, and say that in return for my desperately needed, cold, hard cash, I demand that the executive leadership of said company resign, possibly to be rehired at a new and lower salary... surely that is a matter that is between the shareholders, the board of directors, and myself -- even if I'm wearing a red, white, and blue outfit and call myself "Uncle Sam."
Yep, the tax system is the way to go. Here's my suggestion:
Here's my plan:
Pay for this with an additional 15% tax on people making more than $500,000/year, payable until whatever debt is taken on is paid off.
That way you motivate the smartest and most ambitious people in the country who have benefitted the most from the economy over the past 8 years to make sure the government:
1) does this right
2) does it fast
3) gets the most value from the crap it buys from these companies
4) makes sure it never happens again
Sure, there are all kind of inequities... lots of people making over $500k/year are valiant brain surgeons not Wall Street swindlers etc etc. But ultimately even your $500k/year brain surgeon was (on average) investing blithely in various funds and just watching execs walk away with giant bonuses and not exercising the discipline of the market by questioning whether this made economic sense. If you don't want a populist hell to descend upon the nation, then you have to get these people to police Wall Street themselves.
We could always take them to court for wrongdoing.
Or shame them into contributing to a special fund.
And, raise their taxes.
And, close corporate tax loopholes.
I have never been a big fan of limiting executive compensation. It just seems a little gimmicky to me. It may feel good, but I don't think that is a good reason to do it.
What do I want instead? I want people to go to jail. Given the huge numbers of transactions out there, I am guessing there about billions if not trillions of counts of FRAUD to prosecute, and I think we should exact a tax on all executive compensation with the revenue going to building several stadiums worth of prosecutors to put these guys in jail.
Real jail. Man jail. These people know how to hide billions in off shore accounts, so taking away their fun money won't work. Man jail will.
I imagine the contracts -- or at least parts of them -- could also be declared against public policy or something, which would render the relevant portions void.
But yeah, rather than doing that, forcing an agreement to cap compensation to be bailed out would probably eb easier.
Since we can't get the money back from these guys then the next best solution is to have Bush declare them "enemy combatants" and throw their asses into Gitmo. They've done more damage to the country than Al Qaeda could ever dream of.
I agree with some of the above posters that a much more progressive income tax is the way to get back some of the past excess earnings and to reduce the incentive for future multi-million dollar compensation packages.
You can get some interesting perspective by comparing past top marginal tax rates and the incomes they start at from http://www.truthandpolitics.org/top-rates.php with the inflation adjustment chart at http://oregonstate.edu/cla/polisci/faculty-research/sahr/cv2007.pdf.
For example:
In 1941 after several years of the New Deal and just before the U.S. entered WWII, the top tax rate was 81% but it only applied to income over $5,000,000 which comes to $70,422,535 adjusted 2007 dollars.
The top marginal tax rate was 94% in 1944 and it started at a much lower level of $200,000 which is the equivalent of $2,352,941 in 2007.
When, as Republicans like to keep reminding us, Kennedy suggested that high tax rates were strangling the economy, the top tax rate of 91% started at $400,000. If we take the last year that rate applied, 1963, it equals $2,702,702 in 2007.
Once Kennedy's tax cuts were fully implemented in 1965, the top rate of 70% started at $200,000 or $1,315,789 in 2007 dollars.
By comparison, the current top tax bracket of 35% started at $357,700 in 2008.
Personally, I think we need to go back to a top rate of at least 80% but that it should not start until $3,000,000-$5,000,000 and that a 50% bracket should start at $500,000-$800,000.
Note all of the income figures above were for a couple filing jointly.
My mother is an accountant who used to work for a Fortune 500 company when Sarbanes-Oxley was implemented. She said all of the executives were terrified because they had to sign off on the financial reports, and they were liable if anything in them was wrong. So I would assume if some of these companies deliberately misstated earnings, then they have broken the law. I would say it's a safe bet that at least a couple of these companies misstated their earnings.
Geez Kevin -- call a lawyer friend (or spend 10 minutes on the Google) before opining on legal matters you know nothing about. Better yet, if McMegan says it, assume it's wrong until demonstrated otherwise.
Seriously, Kevin, listen to JC. Bankruptcy courts "impair contracts" all the time -- in fact, it's kind of the point.
OJ Simpson lost his fortune in a civil suit despite being found innocent of criminal charges.
The big fat slob who ran Tyco into the ground was found guilty of tax evasion and jailed. Most of the Wall Street bankers could not withstand a combing over of their books by the IRS, which should be done immediately. The Wall Street bankers should be treated to the same scrutiny that inner city Blacks were for crack cocaine, and they should suffer the same kind of punitive penalties for even the slightest mistakes they made.
Kevin, you forget that Congress has the power to tax. They could place a large tax surcharge on anyone who received compensation of more than N million in a year, for some low value of N.
As other have said, there is a simple way to deal with this - raise taxes on the very wealthy. A huge portion of the nation's wealth sits in the top 1% (or the top 1% of the top 1% or whatever). After a quarter of century of tax cuts, that wealth has continued to accumulate at the top. It is clearly not trickling down, and in terms of investments in the economy, well, look how that turned out. Raise revenue and put that revenue to work fixing the problem.
OK, its not a simple solution for McCain, but it is a simple solution, one that is doable and constitutional (and one that points up the stupidity of the "no new taxes" approach to governing). Its also not punitive or selective, its just sound economic policy.
Going forward, how about limiting CEO pay to a multiple of average non-executive salaries -- say 100 times?
This gives the executives incentive to increase worker pay, rather than the converse under the current system.
They may not be able to anything about past compensation however the government can insist that the current crop of thieves exit the organization completely as a condition of the bailout.