Thursday, September 25, 2008

CEO Pay Restriction is a Smokescreen

Although opposition to the banking handout appears to be widespread among taxpayers, Congressional Democrats are lining up to support it. Of course, they took the opportunity to criticize the Bush administration. No argument there. But rather than tell Treasury Secretary Henry Paulson that his Wall Street buddies will have to fend for themselves, the Dems agree to hand over our money. In return they want CEO compensation and that of other corporate executives limited.

Neither the government nor its financiers (that is, we the people) have a financial interest in the pay of a private or publicly-traded company's employees. That is for the shareholders to decide.

Don't get me wrong, I agree that executives who implement failed business strategies should not be rewarded, and that even those who are successful are probably overpaid, but if the money doesn't come from my pocket, then it is someone else's problem.

It's an interesting topic to be sure, and no one can fault Americans for having an opinion about who is overpaid; however, we should not allow our elected representatives to prey on these emotions. After all when inflation really hits home and one banana costs $5, will any of us truly take solace in the fact that Lloyd Blankfein (current Goldman Sachs CEO) is only making $7 million per year?

The Democrats would serve us better to focus on one particular (former) Wall Street executive, Treasury Secretary Henry Paulson. He is the principal architect of the failed business model that has thrust the investment banks into insolvency. Bear Stearns and Lehman Brothers fell apart while following the lead of Paulson's Goldman Sachs in over-leveraging their capital. We now know that Paulson's failure to balance risk and reward, and his failure to consider negative consequences have doomed Goldman Sachs. He even tells us that his actions threaten our entire economic system. Though he cannot seem to offer any explanation as to how his dire predictions would actually come to pass.

The story gets worse. He tells us that he is the man to solve the problem. The initial proposal he sent to Congress would have made Henry Paulson the most powerful person in the history of the world. I am not exaggerating.

But it is not only his tenure at Goldman Sachs that is being exposed as a failure. Since joining the government he has been wrong about everything and every action he takes makes the problem worse. Yet members of congress take his statements at face value. No one has asked him (or forced him) to give a real assessment of the problem as he sees it, he has not made the case that the handout will provide tangible benefit, and there is not one shred of evidence that this man has spent any time considering the costs of his plan.

If Democrats really want to negotiate this plan in the interest of the American people, they should not start with CEO compensation. They should insist on a new Secretary of the Treasury.

Post-script: I heard Jack Welsh, former General Electric CEO, tell an NPR interviewer, that we should all be happy that Henry Paulson has agreed to work for us at the low salary that public officials are given.

So I did some checking. In reality, we the people gave Paulson an effective $200 million signing bonus in the form of a tax-break on his sale of Goldman Sachs stock.

Turns out it's not so much of a sacrifice to take that government job after all.

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