Wednesday, February 4, 2009

Why I Love Obama's Decree on Salaries

The President declared today that executives at companies that have received "exceptional assistance" from the US Government would not be allowed to make any more than $500,000 per year, with an exception for stock options, provided they vest after taxpayers are fully repaid.

Believe it or not, I love this move:

As part of the reforms we're announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 -- a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance.

Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives, and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of golden parachutes.

We're asking these firms to take responsibility, to recognize the nature of this crisis and their role in it. We believe that what we've laid out should be viewed as fair and embraced as basic common sense.

If the federal government, and therefore the taxpayer, is a major stakeholder in these banks, then we damn well better be directing them how to carry out their operations.

But what I really love about it is that this is the only thing we've seen so far by the government since becoming the largest stakeholder in these institutions, to incentivize these companies to actually buy back their stock.

I wrote previously about the terms of payback of these loans not incentivizing the companies to re-privatize, and the subsequent danger of a remaining socialized financial system inherent therein:

So what does this mean for you and me? It means that the only money the banks are really tied to paying back to the government is the dividend, and the dividend is never possibly going to give the government, and by correlation, the taxpayer, a reasonable payback period.

A 5% dividend on $350 billion for each of the first five years comes out to an amount of $17.5 billion dollars being returned each of the first five years, for a grand total of $87.5 billion returned to the government after five years. Each year following, the government is owed 9%dividend, or $31.5 billion. Assuming we've paid back the other $87.5 billion, that leaves us $262.5 billion, which will take another 8 years and 4 months to repay. That's a total of 13 years and 4 months, and we have purposely failed to consider either inflation or time value of money, both factors that will considerably extend that payback period. Also consider that even assuming these payments have paid back the American peoples' taxes by this point, the US Government still owns the stocks as collateral for the principle loans, meaning the US Economy would remain socialized via the government's ownership of the banks asset backed securities.

The capping of CEO salaries provides a strong impetus for these companies to install a younger type of CEO. Someone inherently fearless and ready to accept a a tough challenge. Someone with ego enough to say, "Watch this, America," take the reins, and guide a company back to a strong standing, once again free of the grasp of the US government, at which point he or she will be rewarded supremely for the hurculean task performed. This forces these companies to install someone who is a true, honest, black and white capitalist at heart. Someone with strong ideals and real morals. Any other type of person in this position is destined to fail and drive these companies further into the ground.

But then again, I simultaneously hate the announcement made today.

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