Category Archives: Regulatory Risk

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Bailed Out Execs Now Have a Salary Cap

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Now that we all have universal health care (wait? It doesn’t really kick in for four more years? Oh), the White House has given us another piece of progress from the “probably should have happened a long time ago” file.

Yes, now that only a handful companies are still benefitting greatly from public assistance, the administration has agreed to cap the pay for the top 25 executives of the five companies “still receiving extraordinary aid” via bailout. And really, it’s more like three companies since it comes down to only AIG, GM and its financing company GMAC, and Chrysler and its financing company Chrysler Financial.

Feinberg’s announcement was the administration’s latest effort to deal with public outrage over bonus payments provided to executives at companies receiving billions of dollars in taxpayer support.

Detailing the 2010 pay rules, Feinberg said cash salaries would be capped at $500,000 for 82 percent of the top 25 executives at the five firms. These executives would have to receive any further compensation in stock. Feinberg is seeking to link the executives’ decisions more closely to the success of their companies.

In addition, “pay czar” Kenneth Feinberg is also mandating that 419 companies that benefitted from bailout money before February 17, 2009, give detailed information on any salaries in excess of $500,000 paid to executives in late 2008 and early 2009. What exactly Feinberg plans to do with this information eludes me, but companies have 30 days to comply.

Under the law, Feinberg cannot require executives to return any compensation such as 2008 bonuses that he deems excessive. But Feinberg said he would review the compensation paid during that period to see if any of it could be deemed “inconsistent with the public interest.”

I think many interested members of the public could tell Kenneth their thoughts on that topic immediately, but it’s nice to know that he will have some more detailed info into the matter next month.

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Before the cap, he would have been carrying three bags.

Top 10 Risks for 2010

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Well, according to Eurasia Group, the number one risk for 2010 is U.S.-China relations.

In their annual “Top Risks” report, the firm’s president, Ian Bremmer, and head of research, David Gordon, announced their top risks today, which states that “2010 is likely to be much more turbulent geopolitically than 2009, when the world was preoccupied with coping with the global financial crisis, but saw no big geopolitical crisis.”

  1. U.S.-China relations — The firm sees the relationship between these two powerhouses deteriorating significantly due to China’s reluctance to take more of a leadership role, as was seen during the Copenhagen climate conference. Other issues affecting the relationship include Beijing’s economic partnership with the U.
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    S., the resulting higher tariffs on Chinese exports, differences in cap and trade beliefs and issues involving cyber-security, among others.

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  2. Iran — Eurasia Group points to Iran as the biggest “purely geopolitical risk in 2010.” The report focuses on the country’s struggling government, its nuclear program and its reaction to ensuing sanctions. “The Iranian regime looks increasingly like a cornered, wounded animal,” the report states. “In 2010, it’s likely to act like one.
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    “

  3. European fiscal divergence — It seems the fiscal challenges in Greece, Ireland, Spain, Portugal and Italy have created a massive area of financial risk in Europe. Eastern Europe faces escalating risks as well, especially if European Central Bank liquidity measures are curtailed.
  4. U.S. financial regulation — Eurasia Group feels 2010 will prove to be a more difficult year for Obama than 2009. The firm points to unemployment remaining high, very challenging financial regulatory reform and mid-term elections affecting this reform. “Both the Americans and Europeans are aware of the risk of driving the financial industry into the ground with too much (or too drastic) regulation or taxation,” the report states. “But as reform becomes an election-year domestic battleground, the need to serve political interests will be increasingly at odds with the need to create an efficient framework for regulatory reform.”
  5. Japan — Japan has had to endure sweeping political change and the new Democratic Party of Japan’s (DPJ) efforts to “limit the influence of bureaucrats and industrialists” has created an atmosphere of higher policy risk. Other concerns regard the uncertainty of the DPJ and the party’s less favorable disposition toward the business community, which is likely to harm financial confidence, further affecting economic woes.

The remainder of their top 10 list can be viewed here. It’s interesting to note the “red herrings” section listed at the bottom, which includes information on Iraq, the Persian Gulf, Russia, the dollar and New York and London.

After the Fall: One Year Later, Still No Regulations

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President Obama gave a speech on Wall Street today that sent a strong message: We must learn from last year’s financial collapse and improve our national regulatory system to fix its underlying weaknesses.

“Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” Mr. Obama said in a speech at Federal Hall in Lower Manhattan.

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“They do so not just at their own peril, but at our nation’s … I want everybody here to hear my words. We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.

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Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.”

These are the strongest statements I have heard from the president on how better risk management — internally at banks, systematically from the regulators and philosophically from those working on Wall Street — must be embraced. With Obama using so much of his political capital and “mandate for change” on health care (albeit with little progress), it remains to be seen if he will be able to spur Congress to enact any progress on reforming the financial industry. The White House certainly hasn’t been able to get Capitol Hill to do much thus far.

From the Wall Street Journal:

Mr. Obama’s planned overhaul would dramatically rewrite the rules of the road for the U.S. financial sector, with new protections for consumers and safeguards against the potential collapse of more big banks. But it is unclear if Congress can unite behind a revamp on Mr. Obama’s timetable, given the time-consuming debate over health care and disagreements between lawmakers on the major components of the overhaul.

The Atlantic ran its piece today to mark the anniversary of the collapse, looking at “5 Reasons to Worry.” In their first reason, they warn against the fact that “in the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” according to Joseph Stiglitz, a Nobel-winning economist and the former chief economist at the World Bank. Among the other four reasons to worry are: continued federal subsidies, unchecked greed and unregulated derivatives.

Those in the risk management industry are unfortunately accustomed to having their advice ignored. Twelve months after the largest collective failure of financial risk management to occur in my lifetime, however, it remains shocking that so little has been done to fix the problem.
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