published Saturday, July 24th, 2010

Big banks’ own pick-pockets

Americans rightly blame Wall Street’s and big banks’ reckless gambling in derivatives and other exotic, and often toxic, investments for the financial implosion that has wrecked the economy and spurred long-term unemployment. A report issued Friday by the Obama administration’s special master for executive compensation, Kenneth Feinberg, confirms what we have suspected about the extent of bankers’ greed that drove them to make those risky investments.

With the financial system about to go over the cliff in late 2008, a group of 17 of the nation’s largest financial institutions that had already taken hundreds of billions of dollars in TARP funds to avoid collapse quickly paid some $2 billion in mind-boggling bonuses to the group’s 600 highest-paid executives. His study showed that nearly 80 percent of that money ($1.58 billion of the $2.03 billion in question) was unmerited.

His criteria for that judgment: The bonuses were either overly generous exit packages, or there were no clear performance guidelines or other rationale for them.

Taxpayers might assume that there would be a claw-back provision to get back bonuses awarded under such questionable circumstances in the review period — from October 2008, when the first bailouts were issued, until February 2009, when the stimulus bill took effect. But that’s not the case.

Neither Mr. Feinberg nor the administration has legal grounds to demand reimbursement. Their case is diminished, as well, by the quick payback of TARP funds by 11 of the 17 banks. Indeed, it has been clear for some time that the reason for the banks’ rapid repayments of TARP aid was to eliminate the prospect of a demand for reimbursement of bonuses.

Even among the six banks that have not repaid their TARP loans, there apparently is little Mr. Feinberg can do except point out the excesses and hope Congress will come up with stiffer rules for banks. The most egregious bonus was the $100 million payout given by Citigroup to Andrew Hall and another trader in the bank’s Philbro energy trading section. Mr. Feinberg’s criticism of that bonus when he uncovered it, however, did prompt Citigroup to sell the Philbro unit to Occidental Petroleum last fall.

European banking regulators may point the way to put outsized bonuses under some regulatory guidelines. They adopted tough new standards earlier this month to rein in such abusive pick-pocketing of banks by their executives. Congressional banking overseers should follow suit.

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Gingerkid said...

I am not even sure where to start with this editorial, so I'll just go in order of the column. 1. "reckless gambling in derivatives and other exotic, and often toxic"--that is part of what financial institutions do. They make risky investments and hope to make money for their customers. Using hyperbolic adjectives to describe the investments makes them seem evil. Nobody complained when these risky, exotic and toxic investments were making money. They were just as risky and exotic then. The problem lies in the fact that the government should not be in the business of bailing out firms that engage in risky investments. Because, if they get bailed out, the risk is removed and they can do as much of it as they want without fear of losing money. 2. Why does the government have a "special master for executive compensation"? Further, are we surprised that Feinberg's study "confirms what we have suspected about the extent of bankers’ greed that drove them to make those risky investments"? Of course we aren't surprised. The federal government had a huge hand in the meltdown and in the subsequent mandated bailouts and it is very interested in making sure there is a boogeyman other than itself. Repeatedly calling financial institutions "greedy" only serves to fuel that unsubstantiated fire of hatred. 3. Now we get to the meat of the editorial--that bonuses were paid by firms that received TARP money. Two points here:(i)11 of the 17 firms that received TARP money didn't want or need the money. The feds made them take the money and made them pay interest on it. Why should those firms be prevented from paying bonuses? (ii)Most executive bonus packages are contractual obligations of the company. Further, many executives' compensation arrangements spell out that most of their pay is in the form of bonuses. So, if the firm doesn't pay an executive a contractual bonus, what happens? The firm get sued, which will end up costing far more than simply paying the execs. When the feds decided to step in and help, they knew that the funds would be used to satisfy any and all of those firms' obligations. Money is fungible. Firms took the TARP money to lesson the bleeding regarding toxic assets and that freed up funds to help them make bonus obligations.

July 24, 2010 at 8:35 a.m.
Gingerkid said...
  1. "it has been clear for some time that the reason for the banks’ rapid repayments of TARP aid was to eliminate the prospect of a demand for reimbursement of bonuses." WHAT? This editorial is fraught with faulty causation. 11 of the 17 firms didnt pay the TARP funds back so that they could pay the evil bonuses without worrying about public scrutiny. They paid the TARP funds back because they didn't need them in the first place. I'll say it again, THE FEDS MADE 11 FIRMS TAKE THE TARP FUNDS AND PAY IT BACK WITH INTEREST. MADE them take the money. I would prefer the more logical opinion 11 firms paid the TARP funds back so quickly on the first possible payback day because they didn't want to pay interest on funds they didn't need to borrow in the first place.
  2. More misplaced causation. As important as this writer feel Mr. Feinberg is, I can, without pause, promise you that Mr. Feinberg's criticism of CitiGroup's bonuses is NOT what caused them to sell to Occidental. That is absurd. As stated in your own editorial here, Mr. Feinberg's allegations had no teeth; he wasn't able to do anything to these firms. Since that is the case, Citi would only sell that if it made good business sense. The writer's overinflated sense of Mr. Feinberg's relevance is insulting to the intelligence. The only reason Mr. Fienberg has this job is to make devils out of financial institutions and the "greedy" people who work in the financial industry. The Obama administration knows his lawsuits have no legal teeth. Therefore, we are only left with the conclusion that Feinberg's entire job and his allegations are for a public perception and smear campaign, paid for by your tax dollars.
  3. Lastly, after this year's sovereign debt crisis in Europe, is anyone really looking to Europe for guidance regarding how to run a government? I think this continues to be one of Obama's glaring errors. More like Europe = more financial problems.
July 24, 2010 at 8:36 a.m.
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