We Will Control the Horizontal

We will control the vertical, and we will control your paycheck, says Barney Frank. Representative Frank has been quietly working on legislation entitled, Pay for Performance Act of 2009. Here is the kicker,

The purpose of the legislation is to “prohibit unreasonable and excessive compensation and compensation not based on performance standards,” according to the bill’s language. That includes regular pay, bonuses — everything — paid to employees of companies in whom the government has a capital stake, including those that have received funds through the Troubled Assets Relief Program, or TARP, as well as Fannie Mae and Freddie Mac.

Now that doesn’t sound that bad, but keep one thing in mind: some of the financial institutions that have taken TARP money are financially sound. They took that money because the government wanted them to take it so people wouldn’t know which institutions were in financial trouble. So a bank that has been “doing it right” now will have to put up with Barney Frank and his cronies. Don’t do what Barney wants and your bonuses might just go poof.

Oh I’m sure that Barney would say, “I’d never do that!” But look at laws like the RICO statutes. Those were to be used against organized crime, but now they are used in a variety of creative ways. For example, the federal government used RICO laws when going after tobacco companies.

RICO was designed to be invoked against organized crime, but nowadays it’s a standard bullying tactic by plaintiffs’ attorneys. This time, however, the Justice Department had to deal with an embarrassing admission, tucked away in the final sentence of the press release that announced its lawsuit: “There are no pending Criminal Division investigations of the tobacco industry.” After a five-year, multimillion dollar inquiry by two dozen prosecutors and FBI agents, the government came up with one misdemeanor plea against an obscure biotechnology company. The government dissected allegations that tobacco executives perjured themselves when testifying before Congress. Prosecutors plowed through documents for evidence that cigarette makers manipulated nicotine levels. Whistle-blowers and company scientists testified before grand juries. The outcome: not a single indictment of a tobacco company or industry executive.

Nonetheless, President Clinton collared his attorney general and she, somehow, conjured up a RICO complaint that accused the industry of the same infractions for which grand juries could not find probable cause. Among 116 counts against the industry, Janet Reno and her minions included all sorts of foolishness to ratchet up the pressure for an exorbitant financial settlement. Here’s one example, count number three: In November 1959, the industry “did knowingly cause a press release to be sent and delivered by the U.S. mails to newspapers and news outlets. This press release contained statements attacking an article written by then-U.S. Surgeon General Leroy Burney about the hazards of smoking.” There you have it — racketeering, in all its sordid detail.

Clinton insiders knew the charges were trumped up. Former Clinton aide Rahm Emanuel put it this way: “If the White House hadn’t asked [Reno, she] would never have looked at it again.”

In other words, if you give government power for one problem don’t surprised if they try to find new and creative ways to use that power to pursue various agendas. Oh and look, Rahm Emanuel. The more things change….

Getting back the Barney’s bill,

In addition, the bill gives Geithner the authority to decide what pay is “unreasonable” or “excessive.” And it directs the Treasury Department to come up with a method to evaluate “the performance of the individual executive or employee to whom the payment relates.”

So it isn’t just top level executive and managers, but possibly any and all employees.

Rep. Alan Grayson, the Florida Democrat who wrote the bill, told me its basic message is “you should not get rich off public money, and you should not get rich off of abject failure.”

That’s great Rep. Alan Grayson, but what sort of limitations are in this bill? What about banks that took TARP money because the government didn’t want just the financially troubled banks taking TARP money? They weren’t getting rich off public funds, they weren’t abject failures. In fact, they were doing you guys a favor, and this is how you pay them back. With friends like Rep. Grayson, watch your back, he is a double dealing snake.

When the Democrats tell you they don’t want to run companies…don’t believe them. As John Emerich Edward Dalberg-Acton wrote long ago,

I cannot accept your canon that we are to judge Pope and King unlike other men with a favourable presumption that they did no wrong. If there is any presumption, it is the other way, against the holders of power, increasing as the power increases. Historic responsibility has to make up for the want of legal responsibility. Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it.

My fear is that the language in this bill will be stretched or built upon. Soon any business that benefits from some sort of government spending would have its pay and benefits packages scrutinized by government bureaucrats. Even if you are a well run business with a “reasonable” pay/benefits structure you’d still have to go through the regulatory process. This would increase the costs of doing business, and overall that would reduce economic growth and employment from its potential. After all, we’ve seen something similar with regards to public takings of private property, e.g. Kelo. There, the public takings clause was broadened and broadened to the point where now a city or state government can take a person’s land and give to a developer for personal gain. The compensation to the initial property holder is almost always going to be what ever sale price the original property holder would normally ask. I think it is not unreasonable to think that this type of legislation, if it becomes law, would evolve in pretty much the same way.

FILED UNDER: Economics and Business, Government, ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:

    It sounds pretty clunky, but the operative phrase seems to be “a capital stake”

    […] paid to employees of companies in whom the government has a capital stake, including those that have received funds through the Troubled Assets Relief Program, or TARP, as well as Fannie Mae and Freddie Mac […]

    Conservatives seem to be phonin’ it in these days, with spacey “Fascism” comparisons, etc., but we are still talking about being stern with “bailees”

    No one is seeking out healthy businesses for control, not in this environment.

    My fear is that the language in this bill will be stretched or built upon. Soon any business that benefits from some sort of government spending would have its pay and benefits packages scrutinized by government bureaucrats.

    Just remember that the pendulum swings. As the Bushies saw, a swing was not 100 years of future rule.

    I expect this pendulum to head back, long before the government gets around to worrying what healthy and profitable private companies are doing.

  2. Steve Verdon says:

    No one is seeking out healthy businesses for control, not in this environment.

    Yes. They. Are.

    Didn’t you read this part?

    Now that doesn’t sound that bad, but keep one thing in mind: some of the financial institutions that have taken TARP money are financially sound. They took that money because the government wanted them to take it so people wouldn’t know which institutions were in financial trouble.

    Do you recall the flap over Northern Trusts sponsorship of a golf tournament after it recieved TARP money? The hew and cry was that they were using public money for a frivolous PR stunt. In reality, Northern Trust was financially sound, didn’t want the TARP money, took it so help hide which financial institutions were in trouble, and ended up giving the money back.

    Just remember that the pendulum swings. As the Bushies saw, a swing was not 100 years of future rule.

    WTFAYTA? I’m not talking partisan bullshit. I’m talking about the steady evolution of laws, regulations, and policy. My reference to the Kelo decision should have clued you in. That evolution process was largely non-partisan and/or bi-partisan.

    I expect this pendulum to head back, long before the government gets around to worrying what healthy and profitable private companies are doing.

    You are confusing partisanship with the evolution of laws and regulations. These things tend to expand over time, not contract. It isn’t whose butt is sitting in the Oval office, it is how these laws and such change over time. Your looking at the wrong target.

  3. Zelsdorf Ragshaft III says:

    Time to take up arms, go to Washington and remove these bums.

  4. odograph says:

    Now that doesn’t sound that bad, but keep one thing in mind: some of the financial institutionsthat have taken TARP money are financially sound. They took that money because the government wanted them to take it so people wouldn’t know which institutions were in financial trouble.

    Do you recall the flap over Northern Trusts sponsorship of a golf tournament after it recieved TARP money? The hew and cry was that they were using public money for a frivolous PR stunt. In reality, Northern Trust was financially sound, didn’t want the TARP money, took it so help hide which financial institutions were in trouble, and ended up giving the money back.

    That is problematic, but what is your solution?

    I don’t think we want bailed companies to do literally whatever they want, and there was a desire not to stigmatize bailees.

    Should we just revisit that part, and let the healthy companies out of the bailout? Let them give the money back?

  5. odograph says:

    BTW, I’m trying to ignore the loopy “We Will Control the Horizontal…” title on this.

  6. Michael says:

    When the Democrats tell you they don’t want to run companies…don’t believe them.

    That’s a mighty wide brush you’re using, for only referencing two Democrats.

    Should we just revisit that part, and let the healthy companies out of the bailout? Let them give the money back?

    They can’t give it back, they were told to lend it out in order to get the credit markets flowing again. They were even criticized for not lending enough of it fast enough.

  7. Michael says:

    BTW, I’m trying to ignore the loopy “We Will Control the Horizontal…” title on this.

    It’s the intro line from the “Outer Limits” television series.

  8. PD Shaw says:

    As I recall, the sales pitch for bailing out these companies was (a) the country’s money would be secured with shares in the company, and (b) the government was not going to direct the operations of these businesses. It was not even going to fill positions on the board of directors.

    Frank is proposing a degree of control that is beyond what I believe was initially promised; it’s also beyond what I would expect of a typical board of directors.

  9. odograph says:

    The pitch, as I recall it, was that the auto companies were going to trade “a workable plan” for bailout monies.

    We might wonder why that didn’t happen, or if Wagoner did try to play his poker hand too far …

    But at this point the auto companies can obviously pick up their toys and go home, right?

    Unless they need the gov, and are willing to take whatever deal they can get.

  10. PD Shaw says:

    I probably wasn’t clear. Obviously the purpose of the bailouts wasn’t to obtain secured interests in the companies with minimal oversight. It was to prevent the failure of companies that posed societal risks.

    I was merely talking about the form of the bailout. The form was an important reassurance that the companies are still doing business and haven’t been converted to governmental agencies.

  11. Michael says:

    As I recall, the sales pitch for bailing out these companies was (a) the country’s money would be secured with shares in the company

    Well, no. The sales pitch was that the country’s money would buy assets that had an unknown value at the asking price, and then hope that the actual value was something greater than zero.

    What ended up happening was that we bought capital instead of assets, leaving banks with the bad assets, and now layering on a heaping helping of electoral bureaucracy too.

    Now we’re being told that TARP 2.0 will really buy those assets this time, by letting private investors buy them with the government taking any losses. I wonder how long before the government starts putting new restrictions/taxes on investors who take that guarantee.

  12. PD Shaw says:

    michael, you might have posted before getting a chance to read my clarifications, but in any event, here is what I am getting at:

    We loaned money to AIG in exchange for stock. The government created a board of trustees, consisting of three persons appointed by the Federal Reserve of NY (i.e., not by the President or his inferiors), to protect US interests. The trust agreements states:

    to avoid any possible conflict with its supervisory and monetary policy functions, the FRBNY does not intend to exercise any discretion or control over the voting and consent rights associated with the Trust Stock;

    WHEREAS, the FRBNY anticipates that the Trustees will leave the day to-
    day management of the Company to the persons charged with such management, and will limit their involvement in the corporate governance of the Company to the exercise of the rights set forth in this Trust Agreement;

    I don’t know how or if the other bailouts differed and I’m not suggesting that any of this binds Congress from trampling over the letter and spirit of the agreement, but I think that’s exactly what Barney Frank seeks to do.

  13. Steve Verdon says:

    Dang Odograph, I thought you were older than me.

    As for what to do, Barney Fife’s approach isn’t right in that it is,

    1. Overly broad right now.
    2. Would likely become broader over time.

    Perhaps a sunset clause (5 years) requiring a two thirds vote in both houses of Congress to change? And possibly some sort of dollar limit. If a healthy bank took a token payment to help with the disinformation then they should be exempt from the effects of the legislation. Again, same criteria to change it. Still, its micromanaging and I don’t know of too many people who like working in such situations or where such approaches work.

  14. Pete Burgess says:

    Rep. Alan Grayson, the Florida Democrat who wrote the bill, told me its basic message is “you should not get rich off public money, and you should not get rich off of abject failure.”

    Is he talking about CEO’s or congresscretins?

  15. Steve Verdon says:

    Pete I think that wins the thread.

  16. Tlaloc says:

    Personally, I don’t want to run companies, but if the companies keep doing such a stupidly bad job of running themselves I’ve got no problem taking their hands of the reigns.

    See? It’s simple. If you don’t want us to take control then try to actually do business rather than run your company as an executive spa with slush fund hot tubs and golden para-sailing.

  17. sam says:

    As far as those companies who got TARP funds, even though they didn’t need them, Steve’s right. As far as the others, what’s the big deal? Government makes all kinds of demands on ordinary welfare recipients as conditions for getting the check, and their lives are micromanaged to a fare-thee-well in the process–don’t see anybody here objecting to that.

  18. DavidL says:

    I am sick and tired of congresscritters, who drive the country into bankrupcy while they personally get rich. I propose that all elected officials be required to put all their assets to a blind trust prior to assuming office and that all elected officials be taxed, retroctively, at say a ninety percent rate, for all outside income they earned since assuming office, to include any and all book deals.

    File under goose and gander.

  19. Rick DeMent says:

    I am sick and tired of congresscritters, who drive the country into bankrupcy while they personally get rich.

    And they get rich shining the shoes of the CEO’s who fund campaigns and call the shots. Funny how that works.

  20. odograph says:

    I don’t think I saw The Outer Limits in first run (I was small, but alive), but we’ve all seen the reruns and marathons.

    No, I used “loopy” because I didn’t think putting conditions on bailees was seizing control of … much of anything.

    And those older than I will remember far crazier interventions in markets, by Republicans even. Wage and price controls anyone? I missed working under those, but remember them as policy.

  21. Steve Verdon says:

    No, I used “loopy” because I didn’t think putting conditions on bailees was seizing control of … much of anything.

    Yes it is, it is just control you don’t find objectionable. However, I don’t think you are taking a sufficiently long term view nor are you considering history in how laws evolve in terms of their applications.

    And those older than I will remember far crazier interventions in markets, by Republicans even. Wage and price controls anyone?

    Yes, and most reasonable people would view those things as failed policies that exacerbated the current shortages. Your point being….? That politicians in general do stupid things from an economic standpoint to achieve political objectives? If that is so, the solution seems obvious: limit a politicians role in meddling in the economy. Also, addresses DeMents point, but I doubt it is the direction he wants to go. Frankly I don’t know what direction he wants to go, its all rather confused and muddled.

    Of course, it is politically impractical since it would prevent politicians from obtaining power and whoring themselves out.

  22. Floyd says:

    “”And those older than I will remember far crazier interventions in markets, by Republicans even. Wage and price controls anyone?””
    “”””””””””””””””””””””””””””””””””””””””””””””””
    Yes and Nixon was forced to resign, ostensibly over ;)Watergate;).

    So your saying we have both hope and precedent to proceed on?

  23. DL says:

    Odograph isn’t worried:

    “I expect this pendulum to head back, long before the government gets around to worrying what healthy and profitable private companies are doing.”

    I suppose you would have agreed that the income tax is just going to be temporary too?

  24. […] might refer to this story here. I’ve written about this before how laws and regulations evolve in terms of their applications. RICO laws are now used against […]