House Financial Services Committee Chairman Rep. Barney Frank answers a question about HR 1207, a piece of legislation to audit the Federal Reserve. To say this is controversial is a masterpiece of understatement.
Posts tagged as:
Barney_Frank
As I’ve written previously although in a markedly different context, I think it’s absurd to reward corporate executives with wildly excessive compensation packages (think “stratospheric” and you’re getting close). As a shareholder I would find this issue to be troublesome, and in that role would welcome any motion before the board to cap executive compensation to some (sane) extent. As a voter, I might even support an increase in marginal tax rates to help fund some needed public investments. (yes, I said that) I wouldn’t, on the other hand, do this (Bloomberg):
House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.
“There should be a moratorium on bonuses,” Frank, a Massachusetts Democrat, told reporters yesterday in Washington. “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,” and if it causes losses “you don’t lose anything.”
The five biggest U.S. securities firms paid out a record $39 billion in bonuses last year even as the credit crisis began to affect investments in mortgage securities and leveraged loans. One of the firms, Lehman Brothers Holdings Inc., went bankrupt this year and two others, Merrill Lynch & Co. and Bear Stearns Cos., were rescued in emergency sales. The two largest firms, Goldman Sachs Group Inc. and Morgan Stanley, became bank holding companies and are receiving $10 billion each of government money.
The moratorium “ought to be for all firms” and not just for those eligible for the Treasury financial-rescue program, Frank said. The halt on bonus payments should last “until they can get a better structure without that perverse incentive,” he added.
Bad Bad BAD idea! If the government takes a shareholder stake and thinks the best way to maximize taxpayer return is to alter the compensation structure of the firms it owns, then fine. As shareholders, government has the same right as any other shareholder to put a motion before the board and let the votes decide. That’s the way things work in a free society Congressman Frank. If the government thinks it should start setting industry compensation levels, then we need to step back and take a timeout or something.
This is a hugely inappropriate role for the government. There is plenty of room to examine structural flaws in markets that apparently encourage excessive firm risk-taking, but there’s a reason we allow companies to determine compensation rules for themselves, namely, that the market is more likely to achieve the right labor force allocation and incentive structure on its own than under the hand of a central planner. That’s not only the heavy hand of the State, but also stinks of Marxism!
Arguably now more than ever, the financial industry needs to attract top talent into failing and discredited businesses. That will be very hard to do if Congress dictates the elimination of bonuses.