White House Pay Czar Slashes Pay For Wall Street Execs...Its About Time

(Scolding Wall Street: The president calls for finance executives to help out with reform on Wall Street during a fundraising trip to New York City. NBC’s Savannah Guthrie reports.)

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White House slashes pay for Wall Street executives


The Obama administration stunned Wall Street on Wednesday by ordering massive pay cuts for top executives at seven financial firms that still hold billions in U.S. government bailout funds.

The move – which would lower average cash compensation by 90 percent — means the administration is making a frontal assault on Wall Street’s gold-plated compensation culture at a time of growing public anger over the firms’ massive pay and bonuses.

And the plan by pay czar Kenneth Feinberg comes in a week in which the White House has been increasingly aggressive in calling on Wall Street to stand down in its opposition to its regulatory reform proposal for the financial industry.

At the seven firms, total average compensation for many executives would be cut in half, according to an administration official. At AIG, no top executive will receive more than $200,000 in total compensation – a humbling comedown for the once high flying insurance executives at the firm.

Along with AIG, the firm affected are Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers, GMAC Financial Services and Chrysler Financial.

The news came on a day in which President Barack Obama said big Wall Street banks no longer need federal help – signaling he plans to wind down the $700 billion Troubled Asset Relief Program and tighten the screws on the companies that remain inside it.

The development, first reported by the New York Times, caught the financial industry by surprise. On K Street, financial lobbyists were scrambling to figure out what exactly the plan meant for their clients, and how best to respond to it.

“I don’t think that’s healthy, and I don’t like it,” said Camden Fine, president of the Independent Community Bankers of America. “These are decisions for boards of directors to make, not the government. I think this is a very slippery slope.”

And the announcement also prompted concern in the auto industry that car makers are being swept up in the administration’s attempt to squash Wall Street’s high living.

Auto officials cautioned that they want to see an official proposal before responding in detail. “We are currently in discussions with Mr. Feinberg's office regarding executive compensation,” said Greg Martin, the director of policy and Washington communications for General Motors. “We will have further information and comments once those discussions have concluded.”

One longtime critic of steep executive pay praised Feinberg’s move.

“We commend the pay czar and the administration for telling the people who crashed the economy that they need to make the same sacrifices main street and real America have been forced to take on as a result of the economic crisis,” said Dan Pedrotty, director of the AFL-CIO Office of Investment. “The American people are fed up with watching Wall Street play by a different set of rules and pretend like the economic crisis which they created is for everyone else to suffer through and not them.”



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Sources: Politico, MSNBC, Google Maps

Will US Supreme Court Decide How Execs Are Paid?...To Hear Case This Fall

NY Times----


Last summer, Richard A. Posner, a federal appeals court judge, issued a surprising and prescient dissent. Executive pay is out of control, he said, and the marketplace cannot be trusted to rein it in.

Judge Posner is a conservative with libertarian leanings, and he is a leader of the law and economics movement associated with the University of Chicago. He often relies on economic analysis in his judicial decisions, and he believes that many questions are best sorted out by the marketplace.

But corporate America has insulated pay decisions from market discipline, Judge Posner wrote. “Executive compensation in large publicly traded firms often is excessive,” he added, “because of the feeble incentives of boards of directors to police compensation.”

The Supreme Court will hear the case this fall, as anger over huge bonuses paid to the executives of failing firms continues to grow. The case, Jones v. Harris Associates, may turn out to be the court’s first significant statement on the corporate culture that helped lead to the Great Recession.

The case arose from the enormous fees mutual funds pay to their investment advisers. A three-judge panel of Judge Posner’s court, the United States Court of Appeals for the Seventh Circuit, in Chicago, threw out a lawsuit brought by the investors in three Oakmark mutual funds who said the funds had overpaid their investment adviser, Harris Associates.

The panel decision, written by Chief Judge Frank H. Easterbrook, another leader of the law and economics movement, said the marketplace can be trusted to regulate fees. Judge Posner, dissenting from the full court’s decision not to rehear the case, said competition had not been effective in the keeping compensation under control.

Before last year’s market collapse, the mutual fund industry held more than $11 trillion in retirement and personal savings, and it paid advisers perhaps $100 billion in fees.

Mutual funds are odd enterprises. They are typically formed and run by their investment advisers, which select the fund’s board of directors. That board then negotiates the adviser’s fees.

Here is how Warren Buffett analyzed the situation in his 2003 letter to shareholders: “Year after year, at literally thousands of funds, directors had routinely rehired the incumbent management company, however pathetic its performance had been. Just as routinely, the directors had mindlessly approved fees that in many cases far exceeded those that could have been negotiated.”

The plaintiffs in the case before the Supreme Court claimed that Harris Associates had charged their funds twice as much as it charged its unaffiliated clients, like pension funds.

The Oakmark funds paid Harris Associates 1 percent of the first $2 billion in assets; independent clients were charged roughly one-half of 1 percent of the first $500 million. One percent of a billion dollars is nice work if you can get it.

“Mutual funds rarely fire their advisers,” Judge Easterbrook acknowledged. But, he continued, “investors can and do ‘fire’ advisers cheaply and easily by moving their money elsewhere.” A 2007 study from John C. Coates IV and R. Glenn Hubbard supported this conclusion, finding that mutual fund fees are kept in check by the movement of investors’ money.

But a brief supporting the plaintiffs filed in the Supreme Court by three economists, Ian Ayres, Robert E. Litan and Joseph R. Mason, questioned that study. New research in behavioral economics, the brief said, showed that most investors have a very poor grasp of rudimentary truths about probability and a disproportionate aversion to taking losses.

Mutual fund investors thus tend to look at past performance rather than fees. And they have a tendency to sell winning investments too early and hold losing ones too long.

Even if mutual fund investors could be counted on to act rationally, the economists’ brief said, they do not have ready access to the information they need to make sensible choices.

Instead of counting on investor behavior to keep fees in check, the brief concluded, courts should look to how much advisers charged independent clients like pension funds. A supporting brief from the federal government made the same point.

There is academic research to support this view, too.

“In contrast to mutual fund investors,” Diane Del Guercio and Paula A. Tkac wrote in a 2002 study , “pension clients punish poorly performing managers by withdrawing assets under management and do not flock disproportionately to recent winners.”

But Judge Easterbrook questioned the value of such comparisons. The two kinds of clients, he said, may have different needs. In its brief urging the Supreme Court not to hear the case, Harris Associates added that the Oakmark funds had outperformed “virtually every fund in their peer groups.”

Still, the tide seems to be turning toward skepticism about outsize compensation. In April, a month after the Supreme Court agreed to hear an appeal from Judge Easterbrook’s decision, the federal appeals court in St Louis allowed a suit against another investment adviser, Ameriprise Financial, to go forward. It was the first ruling in favor of unhappy mutual fund investors suing over advisers’ fees since Congress imposed a fiduciary duty on advisers in 1970.

Judge Easterbrook said the law had only a minor role to play, requiring no more than making sure that advisers “make full disclosure and play no tricks.”

But when public sentiment, economic research and even Judge Posner argue for more vigorous judicial examination of whether compensation is fair, the Supreme Court may just agree.



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Sources: NY Times, Flickr, Google Maps