Bailout Unpopular
To say that the US bailout was unpopular would be gross understatement. Despite a flood of calls, emails, and letters from constituents both the Senate and the House passed the $700 billion dollar bailout package. Part of the anger was over the millions that executives in failed financial institutions received despite poor performance. When the news broke that AIG executives had treated themselves to a $400,000 bailout party at taxpayer’s expense, demands for curbs on executive compensation were heard in congress.
Politicians Speak Out
Treasury officials ha
ve argued privately that banks that receive direct cash infusions should be exempt from the toughest executive pay restrictions. Most politicians disagree. In a letter to Treasury Secretary Paulson, Senator Charles Schumer of New York stated, “Restrictions on executive compensation will ensure that taxpayer money is not wasted enriching the same people whose poor decision-making created this crisis.”It is imperative that these restrictions, including limitations on the incentives for executives to take excessive risks and the elimination of golden parachutes, should apply to any capital injection program.” Treasury officials declined to comment on their position. Many in the US blame Wall Street for the dire economic straits the US finds itself in and fears of a recession have fx traders and investors uneasy.
Loopholes in Bailout Bill
The bailout legislation includes a provision that places a $500,000 cap on the individual executive pay that bailed out companies can deduct from their taxes. Executive pay over that cap, including pay in the form of stock options and other so called ‘performance-based incentives’, will now be taxed. Pre bailout law allows a $1 million deductibility cap on executive pay only applies to straight salary. Companies could deduct everything else no matter how high the total. While the new law sounds impressive it also contains loopholes for every restriction on executive pay.
For example the $500,000 cap on executive pay deduction only applies if the Treasury buys over $300 million of a company’s “troubled assets” through an auction process. If the Treasury buys assets directly the cap does not apply. Even the ban on ‘golden parachutes, has a glaring loophole. The golden parachute ban, in auction bailout situations, only applies to executives hired after the auction takes place. The executives who are responsible for poor performance are able to depart with millions.
Who Defines Appropriate Compensation ?
The bailout legislation directs the Treasury secretary to “require that the financial institution meet appropriate standards for executive compensation” which leaves the question of who defines ‘appropriate?’ It should be noted that Secretary Paulson, a former CEO at Goldman Sachs, amassed a personal fortune of three quarters of a billion dollars. His idea of what constitutes “appropriate” pay for bailed-out executives is probably different than that of taxpayers who are footing the bill for the bailout.
Euro Recovering on Forex Markets
Most agree that excessive executive compensation needs to be limited but by how much? One of the 20th century’s 20th century’s most brilliant business thinkers, Peter Drucker feels the25 times ratio is the most appropriate pay gap for private businesses. That means that the CEO can only make 25 times more than the lowest paid worker. Drucker believes that wider gaps produce defective enterprises. In a little publicized statement last month presidential candidate John McCain suggested that executives at bailed out companies have their pay capped at the rate of the highest paid federal official. That would be the president whose salary is $400,000 per year. It will be interesting to see just who congress listens to on this issue, wealthy contributors, or their constituents. Executive compensation aside, the bailout is likely to affect the economy and monetary policy for years to come. Investors are starting to show signs of confidence despite stock market turmoil. The Euro is recovering on Forex markets and the Dollar continues to hold its own. Some Forex traders are seeing positive results from emerging currencies and the Forex continues to offer investors returns found in no other market.
