Question From A Student:
Today, I was watching a news report that stated that President Obama has placed salary caps of $500,000 on all of the executives working for companies that received bailout money. Apparently, the reason was that the general public felt that the executives were being lavishly paid for losing billions in the financial crisis. However, this type of financial justice seems more retributive than restorative. I feel that capping the salaries of executives will only cause them to flee a company like rats from a sinking ship. A perfect example of this is when Salomon collapsed in the early 1990's and nearly brought the financial world into chaos.
According to Buffet's experience managing Salomon after becoming interim chairman, when he tried to slash $110 million from their nearly $1 billion bonus pool, a large amount high level executives, bankers, traders, and lawyers as well as midlevel bond and stock salvesmen walked out the door after receiving their significantly reduced bonus (The Snowball, p610-611). The administration's argument to this "brain drain" is that there isn't anywhere to run because most of the large financial companies have already recieved bailout funds. Thus, if an executive didn't like it, too bad you have to stay.
Also, what will happen to the bondsmen and traders, who also earn a high salary, but have little to nothing to do with the financial crisis? Should they be punished just the same as the executives as well?Unfortunately, I believe that this is an extreme miscalculation on President Obama's part. Capping the salary of executives will not prevent financial mishaps from happening. On the contrary, it may worsen the current financial crisis. First, many of these executives have enough money to buy a mansion and live the rest of their lives in financial bliss. In addition, many of those same executives could jump ship and form a new company to do the same thing all over again.
Once again, I will use Salomon as an example. Meriwether, the arbitrage king of Salomon, was fired for neglecting to supervise an employee who frauded the Treasury out of billions in bonds. After being fired, he formed his own firm, Long Term Capital, with other people from Salomon to trade in lucrative but high risk stocks and bonds. Later, his firm crashed as well, bringing another financial crisis similar to the Salomon crisis.
According to Buffet's experience managing Salomon after becoming interim chairman, when he tried to slash $110 million from their nearly $1 billion bonus pool, a large amount high level executives, bankers, traders, and lawyers as well as midlevel bond and stock salvesmen walked out the door after receiving their significantly reduced bonus (The Snowball, p610-611). The administration's argument to this "brain drain" is that there isn't anywhere to run because most of the large financial companies have already recieved bailout funds. Thus, if an executive didn't like it, too bad you have to stay.
Also, what will happen to the bondsmen and traders, who also earn a high salary, but have little to nothing to do with the financial crisis? Should they be punished just the same as the executives as well?Unfortunately, I believe that this is an extreme miscalculation on President Obama's part. Capping the salary of executives will not prevent financial mishaps from happening. On the contrary, it may worsen the current financial crisis. First, many of these executives have enough money to buy a mansion and live the rest of their lives in financial bliss. In addition, many of those same executives could jump ship and form a new company to do the same thing all over again.
Once again, I will use Salomon as an example. Meriwether, the arbitrage king of Salomon, was fired for neglecting to supervise an employee who frauded the Treasury out of billions in bonds. After being fired, he formed his own firm, Long Term Capital, with other people from Salomon to trade in lucrative but high risk stocks and bonds. Later, his firm crashed as well, bringing another financial crisis similar to the Salomon crisis.
A Response is in the Comment Section Below.
The wiping out of the financial system, a necessary function in order for the markets to go higher, requires government involvement and mismanagement. Any declines or worsening of the financial markets would not happen if we didn't have government input. Therefore, I am not surprise by the reaction of the Bush/Obama administrations. So predictable has the government's response been that it has been profitable in some instances.
ReplyDeleteObama was elected on a populist platform and he is doing everything that a populist president would do. Bush, on his way out, was trying to salvage his legacy and did everything a discredited administration would do to boost his credibility. Are we surprised at the recent actions? Nope.
When you mentioned the exodus that occurred at Salomon you're talking about a team of people who contributed to Salomon's problems to begin with. The culture of the institution wasn't built on good principles and therefore it was no surprise that people would bail on the company right after getting their bonus. Not surprisingly those same people who fled started up an institution that later became the blueprint for future hedge funds. Just take on as much risk as you can and then hopefully you'll be so big that the government will have to intervene. Those guys at Long Term Capital Manangement had no humility or respect for the markets even though they had two nobel prize economists on their team.
If it were me and my new boss was Warren Buffett I wouldn't bail for higher pay. After all, imagine the financial clout Mr. Buffett brings to the table. Deals could be done that would never take place for ordinary institutions.
Also, there are investment banks out there that pay their staff significantly less but they manage to stay in business and thrive. Not only that, these smaller investment banks can now take the business that Merrill, Goldman, Morgan Stanley and Bear Stearns were forced to leave on the table.
As I have mentioned before, aid in the form of money, is added to the system by way of the Federal Reserve and government stimulus legislation we will not see the bottom. In fact, B of A, Citi, and a whole lot of other banks should not exist right now. But the government feels compelled to prop the dead. Some people feel this is necessary to avoid a collapse of the system. I feel it only keeps the people in the game who kill the golden goose.