Saturday, September 27, 2008

Bail Outs and Golden Parachutes

Can't say I agree with a lot of the noise about restricting pay or parachutes for CEOs from the failing or failed banks/lending institutions. I think these things come in different parts that no one seems to want to separate.

First, if one company buys another failing company, usually they purge the managers who oversaw the failure. That is normal. Frankly, I think the politicians need to require that of any bank they bail out of this fiasco. You screwed up, you're gone BEFORE we bail you out.

Then there is the notion of restricting the pay of the new management. That strikes me as foolhardy. I could care less as to what is viewed as obscene. Especially from the context of what politicians make compared to their effectiveness. Do we really want politicians defining what is just compensation? Well, I suppose many Dems/Progressives do. Personally I think the pay should be bound to performance. But that doesn't happen, because in these institutions too much of the profit is directly tied to uncertainties that the manager just can't control.
I think some of the packages, particularly the massive separation packages for failed CEOs and even those of successful CEOs ($400M for departing Exxon-Mobile CEO) are obscene.

However - and this is important here - it is more obscene, nay unconstitutional, for the federal government to be entertaining the directing pay and compensation for private sector employees not on its own payroll. Laws on minimum wage are one thing, but putting a government imposed ceiling on earnings in a capitalist free-market economy smacks of class warfare and incremental socialism.

Incremental socialism indeed. We've had that creeping malignancy clawing into this country for a long time and I don't see any push back. I'm tired of seeing the government wanting to tell everyone what to do all the time. Both sides of the aisle play the game, just in different ways. The only problem is that the citizenry are the ones that end up paying.

Then there is the idea of a profit to be made by this whole bailout scheme. (link via the GeekWife)
There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent." Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

My concern is for what will be done with the "profit." Let's see... We didn't have the money to actually pay for this bail out, and when we make a profit off of the non-existent money, not to mention the return of that money, where exactly will those funds go? I'm going to be really really cynical and place a big wager on they will SPEND it. They being the politicians. Not that we haven't seen similar things before, like say the spending of the Clinton era "surplus" which never came into existence. I understand the S&L debacle was profitable as well. Wonder where all that cash went? I certainly do. (Guess I'll have to try and search the internet for that answer. Though I have a suspicion that it was spent and not utilized on deficit reduction or anything intelligent.)

Read that article it's fairly interesting.

Then there is the rants on protecting the homeowners.
The bailout's structure must be altered. While the credit markets must be reassured, homeowners must also receive help to avoid unnecessary foreclosures. The Center for Responsible Lending projects 6.5 million foreclosures in the next several years. This will cause a $356 billion decline in surrounding property values for the 46 million families that live next to foreclosed homes.

Therefore, once the Treasury purchases distressed financial real-estate assets, I strongly urge the government to require mass modifications to owner-occupied home loans. This moderate investment might prevent thousands of foreclosures and considerable economic damage, much as the FDIC is doing with the loans it manages due to the failure of IndyMac bank.

I suppose I have some heartburn over that. Should we be bailing out homeowners who intentionally took on loans they KNEW they couldn't afford? This especially irks me because I wasn't smart enough to jump into this whole bailout scheme. I could have gone and bought a half-million dollar house on sub-prime and then gotten bailed out by the government. (Well, not really. I wouldn't have qualified for any of those loans from what I have discovered.)

I can understand whacking CEOs that frigged up the market legally since they weren't being responsible, but bailing out the bad loans from the other side is hypocrisy on a grand level. CEOs that make big bucks are held accountable, but if you were irresponsible yourself in buying that home, well, you should be forgiven.

Me I'm getting nothing out of any of this. I didn't make a bad loan and I'm not a CEO. So I'm just bitter all around.

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