Bailout bungee cords

Today President Obama set restriction on executive compensation for companies receiving federal government bailout money, (read your money.)  The limit was set at $500,000 per year.  As expected I read the Wall Street executives decrying this as a disincentive and will lead to the departure of business geniuses from corporations across the nation.  David Kotok, CIO of Cumberland, remarked, “If the limit has bite, it will be counterproductive and the unintended consequences will hurt the U.S. as skilled and bright senior managers make choices.”

Now I think most of the “bailout” money is pretty much a waste of money and political payout money, but if the government is going to waste my tax dollars handing it out to failing corporations, should there not be strings attached?  Do these companies actually expect to receive public money and then continue business as usual?  Remember these people are driving their companies into the ground.  Oh and did Mr. Kotok imply, “bright senior managers” will leave these companies?  Ah, if they are so bright, why are their companies failing and now begging for public money?

I find myself agreeing with the President on this one.  (Dang, am I becoming a Democrat?  I don’t think so. ) I think this is common sense here.  Companies desiring public money, ( and we’re not talking about a small loan,) should have to submit to the contingencies the interested stakeholders (that would be us, the citizens of the United States of America) require.  When a business in crisis approaches a lending institution or a major investor for money, the lender (or investor) may stipulate conditions the business will have to meet in order to qualify for the loan.  Such conditions might require the CEO be replaced or the Board of Directors be reorganized, perhaps even more invasive meddling in the inner working of the firm.  Jack Welch, the former CEO of GE, complained, “These people didn’t choose to do public service work…These people chose to make money.”  Then, sir, why are they begging the Federal government for a bailout?

The fact is these business people know private lenders/investors make business demands to protect their investments, but they assume the average working joe, who is more conservative than liberal, is unaware of this and is scared to death their own company might close up.  One CEO referred to the cap as “draconian.”  Draconian might have been to demand the firing of the CEO, although perhaps a better stipulation.  Draconian would have been to nationalize the business or insist government regulators take the helm.  We must remember the caps go away once the loan has been repaid, the same rules a bank or investor would impose.  I am just thankful Obama did not insist on government regulators at the board meetings and government approval on major business decisions.  At least I hope I did not miss that part.

We are all in uncharted waters, the Great Depression offers warnings against raising taxes and shows the perils of doing nothing.  These are truly scary times.  President Bush started us down a dark path through the clumsy manner in which he handled the bank failures.  Does anyone recall how AIG squadered $440,000 of our tax-payer dollars on a party only a week after winning public bailout money.  Are these companies entitled to public money without strings attached.  Perhaps you would give your children money in such an irresponsible manner but these are hardly children.  Interestingly though, many CEOs are reflecting that sense of entitlement we see commonly in teens.

When AIG plummeted, CEO Liddy agreed to $1 salary

When AIG plummeted, CEO Liddy agreed to $1 salary

It has been simply a bad business practice to guarantee CEOs bonuses in the face of poor performance and failing companies.  If I perform badly my company will ask me to leave and I will receive no parting gift.  However, if the CEO of my company performs poorly and even runs my company into bankruptcy he will leave the company and receive a parting bonus of millions.  As a stock investor, I do not approve of such contracts, yet we stockholders sit quietly and make no demands for compensation reform.  Why?  Because we are afraid that the stipulation of tying performance to bonuses would cause the “best and brightest” corporate leaders to seek employment elsewhere.  CEOs and mangers want to motivate employees to perform better, yet they desire to be rewarded in spite of the quality of their own performance.  Is this not the very sense of entitlement we scorn in our youth and societal freeloaders?  It was only after an $85B government bailout and public outcry over executive bonuses that AIG CEO, Edward Libby agreed to accept a single dollar as compensation for the next two years.  At least he did it, Merrill Lynch decided to accelerate bonuses!  Likely to beat any caps when they return for more public monies later this year.  I’d like to see stockholders stand up and demand more accountability from their CEOs.

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    • reedkeys
    • February 5th, 2009

    This is the slippery slope of government bailouts. If we’re going to allow the feds to prop up failing companies, does that mean we’re going to let them have a say in how that company is run? We just loaned a bunch of money to the auto makers. Does that mean Nancy Pelosi (who thinks we are losing 500 million jobs a month) is going to start designing cars? Using her San Francisco values? The last people who should be telling businesses how they should be run is Congress. They haven’t been able to cover their own expenses since the 70’s.

    • Tell you what. Make a personal loan for an amount greater than you can personally afford to a business that is failing. The business has no plan to turn things around but only hopes your money will float them until “things get better.” Say the business owner is a tenant in your rental property and it is unlikely you will find a new tenant should he leave. If you allow him to fail you will lose a significant portion of your monthly income, perhaps his failure will cause other tenants to fail as well. Now, if you loan him the money he stays in business and continues to pay you rent. As the lender, do you have the right to demand he present a revised business plan to stop his losses and begin to show a profit, do you have the right to demand he stop giving huge amounts of the business’ money away to poor or incompetent managers? You do. Banks and major investors do it all the time. I have heard of major investors demanding CEO firings, ect.

      Perhaps you’ve bitten the party hook a bit too hard. Think about what you are advocating. Hoover advocated doing nothing in 1929. He did nothing and things got VERY bad. Roosevelt came along and did something but in the process raised taxes and strung the depression out perhaps 6-8 years longer than it would have gone. IF we are bailing businesses out we have the right and responsibility to demand they make changes. No, Pelosi nor any government official should be running the business, but demanding revised plans, proof they can turn things around, and the cessation of waste is not only right but necessary. After all, they proved they are NOT the best or the brightest by failing.

    • reedkeys
    • February 5th, 2009

    First, I wouldn’t make that loan. Think about what you are asking me to do: “Make a personal loan for an amount greater than you can personally afford to a business that is failing.” C’mon! That’s crazy talk! Who in their right mind would ever do that?!? No matter what the greater good is perceived to be, the potential for utter catastrophe is raised exponentially.

    Second, if banks and major investors do it all the time, THEN LET THEM DO IT NOW!!! Who’s going to approve these business plans anyway? Pelosi? Dodd? Reed? Frank? Obama? IDIOTS!!! There’s nothing wrong with a pre-arranged bankruptcy. The company’s are protected, the employees are protected, the country is protected – seems like a viable solution. The reason this didn’t happen is precisely what we are talking about now: the feds want to be able to dictate business practices. If we start accepting restrictions by the feds on how big companies do business in time of emergency, it will not be long before they start knocking on YOUR door. After they have exhausted every other possible scapegoat, it will be our turn to alter our behavior for the “greater good.”

    It is an imperfect world and sometimes people have to go through hardships like bankruptcy and unemployment before they can find solid ground on the other side. It’s called growth. I’ve been through a bankruptcy and a foreclosure, but I’m feeling much better now, thank you. No one was there to bail me out nor did I want them to. I needed an opportunity to get my feet back on the ground. I’m proof that despite hard times, it is possible to come out on top (or at least in the middle somewhere).

    Third, I’m not advocating doing nothing. I’m all for government intervention in the form of removing all of their interventions. Unleash the power of the free market and awaken this sleeping giant: eliminate the capital gains tax for a year or two, cut the corporate tax to about 10%, make the Bush tax cuts permanent, and put a freeze on all taxes for 5 years. I don’t have the ability to run all the numbers but I bet you that doesn’t come out to 1 trillion dollars! And even if it does, it’s not a zero sum game. Cutting taxes always increases revenues. Maybe there is a point at which this won’t be true, but we are far from it.

  1. i like your post when i first time read your blog

    • Ionji, Thanks dude!

    • A fellow idiot
    • February 8th, 2009

    I look at the salary cap as all show. You know a really talented Biz Exec knows how to hide their real salary with scores of methods. Wait, these are the US car company execs. Never mind.

  2. The CEO’s had no need to worry since now in April the Obama Administration is busy seeing to it the businesses are able to work around the rules handed down by the democrats in Congress.
    “Administration Seeks an Out on Bailout Rules for Firms – washingtonpost.com
    “Officials Worry Constraints Set by Congress Deter Participation”

    The Obamanites are doing this by creating “Special Entities” accounts that need not appear on the firms books. The thing about these specially crafted “off-the-books” entities is that this is exactly what the financial institutions did to keep Credit Default Swaps and other dubious investments off their balance sheets! This is exactly how this whole thing got started down hill in the first place. Can you believe the Obama Administration is using the same poison arrow again?
    These “Special Purpose Vehicles” are specifically designed to keep the riskiest investments off the books of the parent company. If the phrase “special purpose vehicle” sounds familiar, it should because it’s the accounting slight of hand the thieves at Enron used.

    I have some theories as to why President Obama is encouraging companies to take government money and his “campaign speeches” in Europe at and after the G20 conference seem to back up my suppositions. Be afraid people. Be very afraid. BB

  3. has been a useful article. thanks

  4. Now I think most of the “bailout” money is pretty much a waste of money and political payout money, but if the government is going to waste my tax dollars handing it out to failing corporations, should there not be strings attached? what this say ?

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