Do as I say, not as I did: Part 2, what I did
[Continued from yesterday's Part 1.]
Yesterday we had brave words and sound logic from Kenneth Feinberg, Treasury’s ’special master for compensation,’ who as quoted in the Wall Street Journal (quotes in blue Times Roman), hopes his new standards “will be voluntarily picked up” throughout corporate
You’ll pick it up if you know what’s good for you
He might’ve tried starting with Freddie Mac:
The government-controlled mortgage finance company is giving CFO Ross Kari compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.
It cannot be a coincidence that there are no publicly available pictures of Ross Kari
Would you want your face splashed across the front pages?
There can be no doubt Freddie Mac needs a highly capable CFO, and soon:
The
Hideous though the circumstances are, the need to get the best is an argument to pay the necessary price.
Freddie Mac is not just another company. It’s alive today, and nearly 80% owned by the government, only because almost $51 billion in taxpayer funds were pumped into it over the last year. More bailout money also may be needed in the quarters ahead as losses from its troubled mortgages mount.
An excellent argument to get the best bomb-defusers we can. Wonder what Mr. Feinberg thinks of it?
You should do it for what I say it’s worth
Perhaps Mr. Feinberg was seeking to give more optics, and less substance?
Some bankers and outside experts said Mr. Feinberg was overstating the extent of the cuts. Many bankers will continue to enjoy seven-figure pay packages, including one who will receive $9.9 million.
Stock isn’t cash, but stock has value, especially in a liquid and public traded company. Even if the stock is restricted, or the options do not vest for a period of time, they are money and value.
Of the 136 employees whose pay Mr. Feinberg reviewed, 29 are on track to collect total 2009 pay of at least $5 million, according to documents released by Mr. Feinberg.
So are Mr. Feinberg’s rules a big cut, or aren’t they?
And his calculations of 50% cuts in total pay for the top 25 at each firm from a year before depend partly on departures of certain highly paid employees.
Clever, that: It’s 50% less than the overpaid people who are now gone.
While some highly paid executives are exiting, at least one other is entering:
Leave banking and go into burgers?
[Mr. Kari's] cash signing bonus totals $1.95 million and will be paid out in semi-monthly installments over the year.
What makes Mr. Kari worth a signing bonus, the sort of inducement normally associated with star athletes?
You paid a lot for this hat
That money is supposed to cover what he forfeited in stock options and grants when he left Fifth Third Bancorp, where he served as CFO since last November.
Mr. Feinberg and the regulators can no more stop the market than they can deny economic gravity. If the top-quality financial CFOs are worth $1.5 million a year, then anyone who takes a vow of financial chastity has made the decision not to be a top-quality organization. Particularly when asking someone to leave his home and walk away from previously-agreed deferred compensation.
“You expect me to solve everything?“
Freddie Mac also said it would immediately allow him to sell his home to the company, waiving a 60-day offer period that is required for other executives. It did not, however, specify which of his homes would be covered; Kari has residences in
Hence a trap of aligning incentives via extended deferred compensation.
A better approach for Kari’s compensation would have been to require him to wait at least three years to receive a bulk of his compensation, instead of allowing him to get as much as 80% of it in cash over one year.
Someone can always come along and buy it out – and, if Freddie Mac and FHFA are an indication, someone will.
No doubt that Kari is an able executive and has a hard task at hand. Before his 10-month stint at Fifth Third, he worked in the executive ranks at the insurance company Safeco and Wells Fargo.
Freddie Mac’s regulator, the FHFA, highlighted his qualifications in a statement it made after the pay package was disclosed. The agency said the approval of Kari’s pay was done after consulting with the Treasury Department.
Treasury, it should be noted, is where Mr. Feinberg works.
“I have absolutely no idea who that man speaking is.”
When formulating his new draconian policies, he had to have known that Freddie Mac was ready to violate them even before they were announced.
The FHFA declined further comment, and the Treasury Department didn’t return a request for comment.
In its statement, FHFA also said that Kari’s hire came at a “critical time for our nation’s economy and for the company.”
That argument is no help at all. Companies always face critical times.
Had he stayed at Fifth Third, [Mr. Kari] would not have been able to cash out of his equity compensation until the bank repaid the $3.4 billion in TARP funds it received. But Carol Bowie, head of the Governance Institute at RiskMetrics Group, a financial risk management firm, notes that his cash signing bonus at Freddie Mac effectively allows him to accelerate his receipt of equity he forfeited when he left Fifth Third.
Thus we have it that Mr. Kari was already tied up in regulation, but his new employer wanted him so badly that it paid his ‘exit fee.’
Which brings us back to my initial question: are the Feinberg caps designed to realign incentives, or to punish the putative transgressors?
Some small-town bankers are resentful of the coming scrutiny by the Fed, blaming many of the foolish loans and reckless trades that led to the financial crisis on larger institutions. “We’re all having to pay for the sins” of the big banks, said Rusty Cloutier, CEO of MidSouth Bancorp Inc.,
At the current rate by which we are absolving ourselves and others, eventually we will decide that the entire crisis is the single-handed responsibility of one man, whom we can tar and feather and count ourselves righteous.
With my “securitization”
In the end, the problem is insoluble. Neither Treasury nor FHFA nor any other regulator can nullify the market’s perception of value. The best they can do is standardize regulation, insist on transparency, and try to align the incentives.
To make sure firms follow the new rules, Mr. Feinberg imposed reporting requirements on top executives and directors.
Are you trying to sneak money through security?
Regulatory reform is a process, not an event. Mr. Feinberg’s moves are a blunt instrument. I hope that, after delivering their thundering shock, they will gradually fade away.
“It’s simple – chop pay”
He said he hopes the standards “will be voluntarily picked up” throughout corporate
Fat chance.
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