The Best Idea Yet

(Cross-posted at the Moose, TalkLeft and C4O Democrats)

The word on the street is that the caps on executive compensation may end up getting removed from the final version of the economic stimulus package.  Rather than abandon the idea altogether, James Kwak has a brilliant suggestion (h/t the Left Coaster):

Why not say that all bank compensation above a baseline amount - say, $150,000 in annual salary - has to be paid in toxic assets off the bank's balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. A federal regulator can decide which assets to pay compensation in; if they were all fairly valued, then it wouldn't matter which ones the regulator chose. That would get the assets off the bank's balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth. Of course, the average employee does not get to set the balance sheet value of the assets, and may not have been involved in creating or buying those particular assets. But think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations. (Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.)

A brief digression.  Years ago, I watched superstar attorney David Boies argue for federal court approval of a class-action settlement he had negotiated (for the curious, it was the Sotheby's/Christie's antitrust litigation).  Normally, courts disfavor so-called "coupon settlements" because a coupon, as opposed to cash, tends to be useless to the average class member.  Boies, however, believed that in this particular case, the coupons would have a significant cash value (in other words, there would be a secondary market for them) and thus the coupon settlement was in the best interests of class members.

How did Boies win the argument?  Much like the idea I've quoted above, he told the judge that instead of taking his attorney's fee in cash, his law firm would accept COUPONS as part of the fee - in the same proportion that class members would be asked to accept coupons.  So he was actually staking his own livelihood, not merely that of the class members, on the proposition that the coupons had value.

I cite this real-life example to illustrate that this is not just some lunatic idea off the Internet.  In fact, it really does force senior management to stand behind the valuation they attach to the bank's assets, in a very real way.  Maybe this will force a re-valuation of some of the assets, maybe not, who knows.  But at the end of the day, this solution gets a lot of toxic assets off the books, and the marketplace will have more respect for the valuation of the assets that remain on the books - knowing that senior management is staking their own personal compensation on the proposition that the valuation is accurate.

I can say with no hesitation that this is a far better idea than anything I heard today from the folks who are actually running the Treasury.

Tags: Executive Compensation, stimulus, TARP (all tags)

Comments

10 Comments

I'd love to see it tried

Just to see the terror in their eyes at having to take theses assets instead of cold hard cash!

But they are so VALUABLE! After all, they want us, the taxplayers, to give em billions for em....

by WashStateBlue 2009-02-10 02:28PM | 0 recs
Mm hmm!

Hey, if these "assets" are good enough for us the taxpayers/bank owners, aren't they good enough for them the bank executives/people who are now supposed to be our employees?

by atdleft 2009-02-10 04:43PM | 0 recs
This is an interesting idea...

...but, the value of the assets is the rub, isn't it?

Chronologically, they'd have to establish a value on the assets first, before anything was approved, in terms of a compensation package. And, maybe, after the assets were valued but prior to approving the compensation package idea, the government would maintain the option/right to buy them. (Or, a combination of the two; a hybrid as it were. Then again, they could value the assets very high, the government would take them off the balance sheet; the bank would return to somewhat normal operating procedure, and so on; and we're still stuck overpaying for them.)

In short, wouldn't the banks (and their army of lawyers) just game this like they did everything else? (I still think that'd be the end result.)

In any event, I'm going to rec this for its creativity!

by bobswern 2009-02-10 02:42PM | 0 recs
Re: This is an interesting idea...

I don't think this idea would give them an incentive to overvalue the assets, any more than they already have.  If anything, it gives them an incentive to undervalue the assets, because then the executives receive more of them in their comp package.  (Instead of getting to take home 100 CDOs at the end of the month, they get to take home 120!  Joy!)

But if they undervalue the assets, that creates an opportunity for anyone, including the government, to buy them up at bargain-basement prices.  And more to the point, the whole reason the banks aren't revaluing these assets at a lower number right now is that it would put their balance sheet into the red.  So they don't necessarily have carte blanche to pick whatever number they like.

It's true that if the government announced it would be buying the assets at whatever price the banks assign to them, the government would get ripped off - but nothing says we have to take that approach.

by Steve M 2009-02-10 03:24PM | 0 recs
Re: The Best Idea Yet

And heads explode o Wall Street :0)

by jsfox 2009-02-10 02:43PM | 0 recs
Here's a radical concept

How about, your company loses billions, you don't get a bonus at all?

Now, I know this is very radical thinking for our Harvard-Educated MBA-Packing Big-Swinging-Dicks on Wall Street and the Banks, but maybe they need to do some out of the box concepts for a change?

by WashStateBlue 2009-02-10 02:58PM | 0 recs
Re: Here's a radical concept

Not to disagree with the sentiment, but one point to bear in mind is that in many cases, the people getting these big compensation packages are the folks who were brought in to clean up the mess, not the ones who created it.  The ones who created the mess are often long gone.

by Steve M 2009-02-10 03:26PM | 0 recs
Re: The Best Idea Yet

I usually avoid discussing anything hot topic oriented at work, but someone actually said "But if we cap these people's pay who are using the bailout money then they will go overseas to work." With that argument and given how they've gouged us - uhh I'll hold the door for them.

by jrsygrl 2009-02-10 03:49PM | 0 recs
Brilliant

And funny tooo.

by Ravi Verma 2009-02-11 07:55AM | 0 recs
Re: The Best Idea Yet

And the people who made big money in the financial sector could be offered to purchase chunks of the shitpile in exchange for immunity from prosecution.

by Carl Nyberg 2009-02-11 09:29AM | 0 recs

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