Going Galt

The Obama administration orders huge pay cuts:

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.

And for the 25 best-paid executives, the total compensation, which includes bonuses, will drop, on average, by about 50 percent.

The companies are Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers.

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?    

Addendum: Larry Ribstein has an excellent post on this issue and see Max Fisher for an interesting explanation of the timing and a good roundup.


>>Will the administration then order people back to work? >>

Why would you want to order back to work people who lost billions of dollars and nearly destroyed the economy?

If there is a large market for incompetent executives, you could be right. Even so, I'm not sure it would hurt the companies much, as I am sure there are other incompetent executives available.

You seem to be assuming that the skill of these executives is strongly correlated with their pay. I am dubious that this is actually going to negatively impact the performance of the companies.

I have a hard time seeing how this is going to work. If the goal is to get people to quit, then sure, seems great. But I don't think that's the goal. Is it?

"If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere"

That's the problem with this strategy. If they really want to do this, they should pass legislation imposing an income tax rate of 100% on all income above, say, 250K, on anyone who was an employee at a firm when it received bailout money, regardless of where they subsequently work, until that money is paid back.

On the surface, this does seem like a pretty draconian measure. But, don't such conditions incentivize repayment? No?

Anyway, I think populist momentum for this kind of action has probably subsided, but good luck generating outrage for the executives of companies being bailed out.

Still, I'm sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.

Awesome! The government forcing the some of the most competent people in the world to work for peanuts! What does that say to the young children of this country? What a great message! A sure road to incentivizing growth and prosperity forever! Thanks Obama!


This isn't the government imposing pay limits on the private sector, why on earth should the new owners (us) continue paying high wages when the original justification that they were necessary to get people who could run the company well is so patently false. These people were massive failures, the fact they performed so poorly should be an illustration of the fact that it is very difficult to choose good executives. In light of our newly discovered lack of ability it makes no sense to pay very high wages since our choices are probably not up to the job.

Insofar as these are, in large measure, now government-owned corporations, it makes a certain sense to compensate their executives at rates comparable to those high-ranking federal employees receive. Perhaps Secretary Geithner, with a salary of $191,300, who supervises a department employing 116,000 with a budget of $11 billion, simply doesn't think those with comparable responsibilities should be paid disproportionately.

Isn't this one way to solve "too big to fail"?

Still, I'm sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.

Aren't about 50% of Obama voters outraged that Obama isn't the radical leftist commie socialist that would nationalize everything from health care to energy that Sarah Palin promised he was?

if the readers of *marginal revolution* are reacting this way how do you think the populace as a whole feels right now? simon johnson is right, people feel the system and crooked, and without trust, there goes the system.

If we assume that these people were rewarded in the past for their mis-management then why are we going after future income instead of past income. I'm guess these people didn't spend everything they earned and thus impounding their assets, and even going so far to as "reset" their social security, would impose an appropriate punishment for causing the bailout situation and would go to recoup that money much more quickly. Then, if they truly are talented they can use those skills to obtain gainful employment that will quickly replenish those reserves that were impounded.

Also, as far a mechanics go, we already have procedures in place to recoup money for reasons such as alimony and child support - those mechanisms should theoretically work for this as well.

And haven't we learned that someone owning stock in a company does not lead them to make good long-term decisions but merely decisions that maximize their return over the timeframe they expect to own the stock. Also, if they leave now they own stock but have no control over how it performs (though it could be said that their leaving would cause a new increase in the stock price...)

Galt would have said "Tough luck for you." and would have let them go belly up without a bonus or deferred comp. Get real.


You're an ideologue with nothing interesting to say. I desperately wish Tyler would drop you from MR. In all honesty, your posts vitiate the rest of the blog. For instance, this post could come from any Cato Institute intern. What benefit does it have to MR readers of any political persuasion?

I hate to be harsh but you really ought to realize you're out of your depth.

Jason H.

Why does everyone believe that these execs were/are failures? They were incredibly successful at convincing Congress and two administrations that they desperately needed $billions. Anyone else who wants to belly up to the trough is going to want this kind of well-connected talent. Crony Capitalism not only did not leave town in January, but it sent for its family.

I also relish, in common with many other comments posted above, the prospect of testing a banal Randian's predictions. No matter what the outcome, though, if this goes through, it's all good.

What this post is most useful for though is as an inadvertent expose of what the devoted Randian views as the highest skill of all, and thus worth unlimited immediate compensation: screwing United States citizens, via the federal government, out of all of their money.

Finally, I actually figured this was Alex while reading the RSS feed. But it was too fun to pass up. Well worth the subscription price (Alex's other posts scrolling past my eyeballs). Thanks so much, Alex.

Did taking TARP money make an entity beholden to administrative dictat in the future? If not, this isn't even legal. Firms will just give back the TARP money.

Not that the execs have anywhere to go. They are overpaid with respect to other industries. The firms themselves are probably on board as the bondholders and shareholders, maybe, will benefit. Only non-tarp firms could hire these guys away.

Wall street has only its self to blame. There are no justifications for the BODs willingness to allow such absurd compensation systems -- without payouts based on paper profits in any given year and no requirement to repay with interest when those paper profits get written down the following year. That insolvent banks are paying all sorts of comp when they could replace their people at 30% of the price, tomorrow, is amazing to me.

kudos to obama!!! these douchebags were incompetent idiots.

oh, come on commenters. there is no way that exactly these executives were involved directly in the bad decisions that tanked their companies. Would you fire the top 25 generals in the US army for the disaster of the Iraq war, even the ones who voted for Obama, spent the war in South Korea, or who were being sidelined for complaining about Rumsfeld?

The top 25 at these companies will include some highly profitable traders in still successful businesses (like the commodities trader whose group is being spun off from Citi); top compliance and legal execs whose skills are in rapidly increasing demand across the economy; and some relationship people who can take key clients with them to new firms.

I just finished reading Charles Ellis' book "The Partnership" about the history of Goldman Sachs. What is interesting is that back in the days when the firm was still legally a partnership, employees of the firm would actually experience a drop in pay once they were made partner. The idea was that the long-run growth potential of the firm was always seen to be so high that this would more than compensate for the cut in salary. I don't have to tell anybody here that Goldman never had much of a problem in retaining its most talented partners.

The reality is that this isn't some crazy socialist government plan. It's what one of the most successful investment banks in history did for decades in order to build loyalty within the firm.

The best method of exposing a dumb regulation is to enforce it.

(1) The potential for a talent exodus would be more worrisome if pay cuts had been implemented at the outset of the crisis, when these executives had more options. At this late stage, however, most of the executives who had better prospects elsewhere have already jumped ship. The survivors at these companies, like the employees of a company that has gone through several rounds of buyouts, are likely the ones holding on for dear life.

(2) The caps make more sense on a company-by-company basis than they do in the abstract. There is little reason to think that GM and Chrysler are stocked with brilliant, irreplaceable executives, or that their rivals are getting ready to poach them. At AIG, anyone from financial products who is looking to leave will have to persuade their new employer that he/she was one of the *good* employees, and not just someone who wrote swaps on the assumption that home prices could never go down. There doesn't seem to be anything unique about GMAC that would require it to retain all of its current execs. Citi and BAC are harder cases, but they were built by making acquisitions and cutting headcount; there ought to be a reserve army of laid-off executives standing by to fill their old jobs.

(3) If CEOs like Fuld, Wagoner, Thain, Nardelli, etc. were worth every penny at the time of their downfalls, why hasn't anyone hired them now that they are available? If, as seems indisputable, these people were overrated and overpaid, then we should suspect the same of their successors and underlings.

(4) We don't know yet what criteria the special master used. I have a feeling he took some surveys confirming that talent can be bought at a cheaper price.

(5) Many people who are against cutting pay for GM executives seem to have been in favor of cutting pay for GM autoworkers. If you are one of those people, then the burden is on you to explain why cutting blue collar pay would not have the same adverse consequences as cutting white collar pay.

(6) If nothing else, this experiment is worthwhile to test the "I'll go start a hedge fund" claim. This claim, which usually comes up whenever financial industry pay is discussed, is that every foot soldier on Wall Street goes to work fully expecting to quit that day to make easy money by starting his or her own hedge fund, only to be lured with bonus money to reluctantly work another day for the shareholders. We should get a pretty fair test of that claim.

One poster asked where could the employees go and named Canada. Canada has #1 ranked banking system in the world with lower paid employees. USA is 40th, behind Namibia and Croatia. Maybe these Wall Street "wizards" could improve Chad's financial system, but Canada certainly doesn't need them.

In a just world, the salaries/bonuses from the financial employees/shareholders would be clawbacked to avoid future moral hazard problems of this type.

This strikes me as no different than something a majority shareholder might demand. My company (of which I'm a minority owner) caps my and other executives' pay too. Partly because our main investor demands it, but also because it just make sense that our overall compensation should be tied to profit, not whatever we vote ourselves. (We could outvote him if we wanted.)

"Will the administration then order people back to work?"

Don't have to. For $200K I'll take the job. Its also a bit of a stretch to say the CEOs of Chrysler, GM, and AIG were anything remotely like Galt, more like criminally incompetent boobs that not only destroyed their companies but almost took the country down with it. Destroyers of capital and country they be.

Calm down Gary. Imagine those mints on the bed at teh South Pole. It's the details, remember? The things that make you, I can't avoid this: special?

And back to Alex's great post, shouldn't these noble heroes have gone Galt back when their companies started taking government money? Then through sheer strength they could have created their own car companies and financial institutions from scratch. Of course these rugged individualists would go on to crush their weaker competition. They are just so strong and robust.

It's sad to see people with a comic-book-level understanding of the world. It's especially sad to see supposed professional "experts" with a comic-book-level understanding of the world.

Go Galt, Wall Street, Go Galt!

Please, we beg you. You've done enough already, thank you.

One presumes that the executives in question have contracts of employment.

So if current executives are competent they will quit and the only replacements for them will be of lower quality. If they won't quit, then you've stuck with bunch of failures and no one better to replace them. What a grand idea.

several of these companies (GM, AIG) look to be ones where we'll never recoup our investment. i doubt there's a big marginal return on competence, you just want someone who is capable of gently winding down these failures. these are public utilities now, they should be run like them.

I have to agree with badger, its banana republic style propaganda.

I don't see any numbers. Some questions: (1) Are these jobs are still paying over $1 million per year? (2) Do these managers have a rare and irreplaceable skill?

My guesses are Yes and No. It seems like there would be a large pool of talented managers who earn less than that and are willing to give it a go. Not to mention that it would be a good stepping stone towards working for another firm that pays far more; effectively they're a feeder for other company's corporate ladders as people get hired away.

So I'd guess that they get management that's nearly as competent, but high turnover, as people in the top positions get hired away by other firms after a relatively short tenure.

Or maybe they'll eventually find people who aren't in it solely for the money.

The real question is whether it's legal, moral, and ethical for the Pay Czar to enact and enforce the pay cuts.

aren't we beyond that point? a world where there's justice questions of justice are legit and warranted. in a world of socialized losses and privatized gains screwing people of those gains seems a rather abstract question. legally we can't screw goldman sachs et. al, but we can screw these folks.

also, am i the only one who thinks it's ludicrous to call these CEOs "galt"? isn't galt working in R & D pulling in 100 K?

Alex - Good article and commentary. Thank you.

To the populist posters - My My! Bring out the torches and pitchforks. Obama has succeeded in creating a monster for the populous mob to blame and villainize for these problems.

Ignore, as SNL put it, the Jack and the Squat that this HOPE and CHANGE administration has executed beyond the nationalizations.

Certainly we will see a flight to quality whereby the high quality folks in these companies will leave to others.

This will leave the low quality folks in charge, to do the moocher bidding of the Obama administration.

I second the request to track this in actuality. Who of the top 25 leaves by each anniversary for better jobs? Who stays and how does the company perform?

This slow steady creep into increased government control and socialism continues.

Wake up frog, the water's boiling soon.

We are so far beyond the reach of the market (whose tender mercies would have decreed extinction for these companies) that this is quite justifiable.

And really, BS. The captain is responsible for the conduct of his men. So yes, these titans of industry are responsible for what happened on their watch. Either they were complicit and deserve to be sacked ASAP, or if they didn't know what people under them were doing, then they were negligent in their duties and deserve to be sacked. "Incentivizing" sad excuses for leadership to leave is a win, so the public would win either way, irregardless of what comes afterward.

And no, getting your company on a federal IV does not count as a success.

Nice testable prediction, isn't it ?

Or maybe we should just consider that as a cost center cut.

The real question is whether it's legal, moral, and ethical for the Pay Czar to enact and enforce the pay cuts.

Well, let's say times had been more normal and they could file for bankruptcy and get financing from the private sector. In that case, would you question whether it was legal, moral, and ethical for a government technocrat known as a bankruptcy judge to terminate employment contracts and enforce pay cuts?

The idea that filing for bankruptcy doesn't mean the government takes over is willful ignorance.

No, bankruptcy does NOT mean the government takes over.

Just to be clear, as a voter and a taxpayer the government does not have my permission to take my money and use it for stupidity, bribes and bailouts without conditions (real capital conditions such as haircuts for bondholders and debt for equity swaps, not stupid conditions like pay cuts). Even these expeditions are a failure of government to have a faster, more organized bankruptcy system on the books. They do not have my permission to then change the rules after the money is given so they can extort those bailed out to implement stupid ideological policy.

The other failure of government is that they do not have a fast foreclosure system where home mortgages are speed re-negotiated. Foreclosure is an incentive EXCEPT in times like these. In these times we need debt restructuring and the government didn't do it. If you really don't believe the government is a monolithic entity then maybe you don't blame Obama for being unprepared and not knowing what needs to be done. But I do. He's off screwing with healthcare for one thing. And doing the wrong thing is never the solution to not having done the right thing. You kept the management in place. There is no point in making their jobs harder.

Jason H. Econ PhD, pay cuts are not ideological? Do you have a substantive problem with Alex's economic analysis?

Are you willing to start a prediction market on this? I'm quite convinced it won't be the case.

These people are overpaid and tainted, they aren't going Galt or anywhere else. These firms should be in bankruptcy. I am an Objectivist and agree with mulp's point about the bankruptcy judge.

LOL. You think Atlas Shrugged is real. That's cute.

The pay cut is temporary. They're not going to quit.

I have to say most of the comments about seizing these people's assets are infantile. With the miraculous powers of government that somehow could not see this coming we are really proposing to:
(1) Discern who is genuinely talented and does / did a good job; or
(2) Seize assets from all of them regardless (tantamount to taking away a restaurant manager's savings if the restaurant goes bust)
(3) Set pay levels going forward for the workload and skill base required for hundreds or thousands of jobs and assume that it'll be "fine" because there won't be enough jobs for these folks

Let them leave, graveyards are full of irreplaceable people.

Going Galt isn't the right comparison. These people aren't the Galt/Reardon types, but rather, the Jim Taggert types. It won't surprise me at all if they don't quit. They should, but they won't, because as long as they're in the political game they still have a chance to twist it to their advantage.

Another one of Alex's testable predictions.

Like his claim 'fundamentally there was no housing bubble' or people who wanted stricter credit standards were 'credit snobs'.

Riding on Tyler's coattails all the way...

I don't agree with the prediction that these "highly skilled" executives will leave for green pastures. Who would want them?

As for the myth of "we must pay more or we will lose talented people" Seth Godin took that on a few months ago when this idea was first being discussed:


So, people who used to make $10 million a year are going to be forced to work for a paltry $5 million? Boo hoo. They're going to quit in droves? Where are they going to work, Lehman Brothers?

Badger is 100% correct. This is political theater. CEOs will continued to be highly compensated through other means... but it will satisfy the knee-jerk class-warfare folks with a comforting propaganda news story and those kind of folks probably won't bother to look any deeper.

Not Fannie Mae and Freddie Mac? An interesting omission.

These people destroyed billions of dollars of value and you're *worried* that they will go somewhere else? If the private sector had any ability to detect competence, people like Roubini would be running major banks (and would have steered them away from the cliff) instead of being scoffed at by eternal-bull worshippers until after the explosion. The incompetence of the management of *insolvent companies* (which is exactly what they are but for government intervention) should not really be in that much doubt.

There's no evidence that higher pay attracts more competent managers (competent at anything other than self-promotion, that is) or that most managers (other than startup-entrepreneurs-turned-managers like Gates or Jobs, and only a tiny fraction of them actually succeed to that extent) add much value in the first place. Replacing them with cheaper managers is almost guaranteed to be an improvement and the only reason the shareholders haven't already done that is that shareholders aren't actually in control of most corporations.

IMO, the main problem with this plan is that the current management is allowed to stay on at the restructured compensation; I would have preferred to fire anyone who greenlighted the 2005-06 era business practices of these institutions and replace them with someone more cautious, in addition to the pay restructuring that reduces the incentive to loot the company and run to the next victim.

This is where the blog and I depart fundamental philosophies. Implicit in your title, 'Going Gault', is that the departure of these Masters of Capitalism, forced into the shackles of oppression by the tyranny of the ignorant and spiteful mass, fundamentally hurt the economy by depriving us of their brilliance, motivation, etc.

Of course, I have not forgotten the actual real world outcomes of these folk. Not that I actually think they will leave, but if they did, I would think, based on a past track record, for this to be an admirable consequence of the plan, not as a silly impossibility. Hence my earlier comment about philosophies departing.

Even though I hate most of what the government does lately, I really don't mind this idea.

1. It will reduce some moral hazard with the Too Big to Fail idea.

2. It, in a sense, rewards all those other banks/companies that did not do poorly. ie They will be getting the skilled execs from these other companies for cheaper than they normally would have to pay them.

I don't want to depress you Obama voters too much, but under certain fairly realistic conditions, huge increases in taxation might lead to less work, less effort, and lower productivity.

"bonuses have fallen so dramatically that they might have to call a cab instead of take the company limo. "

Interesting tangent alert: My girlfriend was in Toronto for an educational conference, and, to get from the airport to her hotel, it was actually cheaper to purchase a limo than it was to pay cab fair. In my experience, cabs seem rather expensive, on a per mile basis, when compared to other transportation options (public transport, rent-a-cars, limos apparently).

The pay cut is temporary imaginary. They're not going to quit.

There, I fixed that for you!

Just like I've been saying all along, won't someone think of the Executive VPs and the CEOs?

No one here cares about the CEOs. That is your imaginary straw man. What we believe is with some knee-jerk reaction to punish a scapegoat, you could do something that is going to further hurt the economy and thus further hurt millions of innocent people. Real life isn't some cheap morality tale. Hyperbole about "gold plated yachts" and such might be good enough to fire up the lynch mob, but it is piss poor economics.

Despite what your Marxist ideology told you, the interest of the "working class" and "capitalist class" are not diametrically opposed. There is no evidence whatsoever that hurting CEOs for its own sake will create any benefits for working Americans. This is revenge fantasy, first and foremost.

Not that any of it matters. Obama and the Democrats went out of their way to explicitly ensure CEO bonuses where not touched by the bailout... they aren't going to sell out their CEO cronies now just to satisfy some temporary outrage among the plebes. They are going to concoct some political theater policy that makes it look like they are being "tough" on the CEOs, while leaving more than enough loopholes so that the CEOs will continue to be as well compensated as ever. This policy is designed to fool people like you.


What you proposed (100% tax on income over $250k for bailed out execs) constitutes at least three constitutional violations.

First is bill of attainder, since congress can't target specific people for taxes/criminal punishment.

Second is equal protection, since the tax law has to apply equally to everyone, regardless of where they're employed.

Third is ex post facto. You can't pass a punitive law after the fact of the bailout.

I also want to point out that the backlash against Alex in this comments section is testament to the state of "intellectual" "discourse" in the world today. The fact that they all seem to go for Tyler Cowen's more "harmless and bemused" style of playing with economic facts reveals that there really is only one socially acceptable way to talk politics in this day and age.

To be perfectly clear: What I mean is that many of you absolutely lose bowel control when someone suggests that there might actually be an objective right and wrong.

The world can't handle that these days. Sad, really.

fusion: Who at GM now "lost billions of dollars and nearly destroyed the economy"?

The seeds of that little disaster were sown long before the current executives were in charge - probably before most of them worked for the company at all. GM's been doomed for decades, barring the sort of action that nobody dared take.

Similar things are true of various of the financial companies; many current executives at the top were hired to clean up the current mess or after the original bad decisions about leverage and securities were made by others.

(For example, take AIG - where only one unit of the company had a problem with bad debt, and made the whole unable to get credit.

Why should someone at another division at AIG be salary-capped for actions he had not only no power over but indeed no knowledge of, starting years ago - when the other person has in fact been doing an excellent job at making real profit and real value for the company and for shareholders?

If only it were as simple as "they guys getting the bonuses caused the problem, so screw them", eh?

It's a good populist soundbite, but it's deeply flawed if presented as an actual assessment. At very least, this is true of the two cases I know much about the details of, AIG and GM.

That said I'm also not as worried about harmful outcomes as Alex.)

There certainly seems to be an assumption that the financial crisis was the result of individual incompetence rather than institutional failure due to moral hazard and mis-regulation. Bank of America was forced by the feds to go through with a purchase of Merrill Lynch in spite of due diligence that led them to have second thoughts. There is a growing literature on what happened and why. Most of it does not support this action but there is little literature outside of Rules for Radicals that supports much of the Obama program. The housing bubble was a result of government policy, not individual incompetence although some very astute people managed to avoid it.

Some people consider the destruction of the American financial system a bug.

Some see it as a feature.

Part of the plan to destroy the culture of America and turn the country into a third world semi-dicatorship... nanny state on steroids sort of thing.

Liberty and freedom be damned... we will be taken care of by the grandpoobahs of congress - and if we don't go quietly... they will destroy us.

Or at least try to, anyway.

A lot of you dimwits fail to realize that many of these companies have diverse income streams. While a limited number of these people may have failed in their positions unfortunately resulting a huge loss of money, there were parts of the company that did make, and continue to make, profits for the company.

These mindless restrictions are being placed on businesses within the company that had nothing to do with the huge losses and were/are keeping the company afloat.

The folks who lost the money are long gone. So they're just penalizing folks for being in the industry.

Citigroup recently had to sell off their oil trading business because their head trader, who was making them a fortune, was being contractually compensated for making the company a lot of money. So to punish "the industry" in general, these companies are being forced to punish those who actually are successful.

Good job, pinkos. LOL. You're just making sure these companies die off. The talent who make the money are simply going to go somewhere else where they will be compensated for the money they bring in.

All the "A" level players have long ago departed these companies, leaving "B" players at best. Now, the "B" and "C" players will depart for greener pastures. Why work hard for nothing? All that remains are the losers. Anyone who would run one of these companies for $200K per year is by definition incompetent.

I'd say it's a result of unintended consequences, but this is the fully intended result of remaking the US into a Socialist/Communist country. They know exactly what they are doing.

Hmmm. I don't see GoldmanSachs on the list....

This simply represents a new investment opportunity. Shorting these stocks will be some of the easiest money you can make. Most of you do not understand how management works at these compensation levels. (Yes, I do, because I work with people like these.) They are all getting calls now from headhunters, the really comptent ones will go first, the others will follow as they identify opportunities that have approximately equal pay and much better futures. These opportunities may be in the auto business here or overseas or may be in other manufacturing businesses. Some may retire. Yes, some will not find new positions and stick around, but do you think those will be the experienced competent ones? The government will wonder why the only management they can hire are those who have never run multi-billion dollar companies with tens of thousands of employees in a union environment. Those new managers will learn on the job and make more mistakes than the current management. We taxpayers will pay for it all as most of the companies tank and require more funding to keep the unions employed. Those of us shorting the stocks will make some money.

By the tenor of some of these comments, it would appear that they believe that the competence of the people in question bears any relationship to the trouble their companies got into.

I suppose it's possible that they haven't been following why what happened happened and who it happened to (just about everyone).

Is the head of AIG responsible for the Community Re-investment act which forced banks and financial institutions to loan money to those who, were they not so forced, they would not have -- because the lenders knew them to be bad credit risks? (This, of course, is why they had to be forced to make the loans. Had they been good loans in the first place, the banks would have happily lent the money without the necessity of regulatory pressure from the federal government or from groups like ACORN.)

Then, after being forced to make these loans, are those financial institutions to be blamed for finding a method of passing those cancerous loans off to someone else?

And, are those who bought up those loans (in an environment where housing prices seemed to just keep going up...) to be blamed for doing so when it was so profitable AND the federal government jumped in with both feet via Fannie Mae and Freddie Mac (which, if it escaped the notice of the snarky commenters, were run by Obama cronies -- some of whom currently advise Obama on economics -- are they, TOO, "incompetent?") and the banks seemed to have a federally funded "escape valve" in the event that things went sour?

Just about EVERYONE -- from Congress to the smallest banks -- had this "economy thing" figured wrong. They weren't (aren't) "incompetent" -- they were WRONG.

It happens.

Or do y'all think that somewhere there is some great gaggle of "economic geniuses" out there who are somehow more qualified than those who have risen to the pinnacle of this profession?

Yah. Sure there is.

These guys will find a job somewhere where their expertise (such as it is, since NO ONE knows ANYTHING about "economics" in the first place -- they just have EXPERIENCE in how the beast works MOST OF THE TIME) is appreciated and rewarded.


Make these bad loans, or else.
- OK.
Make more bad loans, or suffer our wrath.
- Uh, OK.
Hmmm. Bad omens. Take this phoney bailout money, now!
- OK, but...

This reminds me of a T-shirt worn by crew member of mine that said, "The floggings will continue until morale improves."

Most of these people are not incompetent (but nice talking point). I know, for instance, BofA had their arm twisted to take the deal that hurt them (they were doing fine beforehand). Other companies were basically sound but had one small division that ran the whole ship aground. On other hand, since your all such know it alls and know they'll just be fine with all new management, well, that too is a testable proposition.... and we probably will get to test it after the government runs them out of their positions. Of course, when the companies 'continue' to tank and/or die off you'll probably blame it all on the people you supported running off and not consider this action...

Mostly I think this is being done to focus our attention on the waste inherent in capitalism's excesses, and distract us from the far greater excesses of government. (The TARP Special Inspector General's report just hit, then this. Nice timing, huh?)

I think executive compensation is one of the harder things to value. Sometimes a great exec is worth way more than the mere millions he is paid, because his vision and guidance are that good. Sometimes he is golf buddies with the board, and he leads the company to mediocrity for millions.

The problem here is that this is ALL of the top 25 earners. No discernment is made for those who are leading their struggling companies out of mediocrity, the ones with vision and judgement. No differentiation between 25 at GM, and 25 at a smaller firm. It is crudely simple because the bottom line is not the point, the point is to make an ideological statement.

This is a central planning decision, and it has the deft touch and market savvy of Maoist economic administration. The problem is, in this one instance it might not be catastrophic, and so we will revisit this precedent down the road. Not good.

As for the exec's ability to jump to another firm, I think I would be reluctant to hire anyone so stigmatized. Being a friend of the government is a great asset these days, risking that for one exec seems foolish. What, you don't think they'll hold a grudge? Ask Fox, ask Ford as it negotiates with the UAW(with its stake in GM.)

Comparisons to bankruptcy just beg the question: If government is taking over and reorganizing, why didn't we just do that? Now we have this ad hoc limbo of semi-receivership, with rules made up or approved by politicians. One of the hallmarks of the rule of law is that everyone is under the same law. We should have thought, and should continue to think, about that more carefully.

The real talent will leave. And whats left will be the time servers and functionally equivelant bureaucrats. Those companies are dead men walking and eventually the government will tire of pouring money into those corpses, especially when congress changes hands. It would have been better for them to have gone in bankruptcy, shed the union contracts and worked out a deal with their creditors and suppliers.

Greed and envy are opposite sides of the same coin.
What this administration is doing to a few bankers is nothing compared to what it proposes for all medical practitioners. Of course, doctors are supposed to be motivated by altruism and embrace their financial ruin for the greater good.

These will still be high salaries after the cut, but the executives in those positions, for the most part, will find better elsewhere. Then the White House and DNC will move their cronies into those vacant positions. That is the nature of government-controlled businesses. Who do you think is at the top of the major Chinese corporations?

Y'all, I'm trying to learn something about this, and would appreciate knowledgeable comments about the role that US corporate governance played, and ought to have played, in executive compensation. Are corporate boards mere thralls to CEOs? Comparisons to successful corporations here and abroad are also of interest.

To all those here who challenge the notion that there just isnt any evidence of many going galt I have this to say about that.
Its not the type of phenomena that gets much notice as the kind of person who does so rarely feels the need to twitter about it.They just wake up one day and readjust there life in ways that get little notice by those around them. You could see this if you read the way dagny would bump into people who were actually in that mode but seemed to be going about their lives as if normal. So if you go looking for these folks and ask the right questions you may find them but dont expect a going galt group to jump out and suddenly announce the fact of their existence.Its a personal thing.

"These people were massive failures."

Really? Was the main line of business of Citibank dealing in securitized mortgages?

One or two senior execs with ownership over very risky derivative business lines, and maybe the mortgage underwriting lines at some were massive failures at each company, and a few of the people with direct oversight - the CEO and CFO, and one or two others would have been responsible. That the owners of the other lines of business - municipal bond investment, corporate finance, student loans, whatever - are somehow responsible for running the companies into the ground and deserve to be punished, is an ugly bit of populist mouth foaming. Why not just hang 'em all, let God sort 'em out? It's the same reasoning. Unspoken here is why the power to abrogate pre-existing contracts on an arbitrary basis is thought to belong to the government. Due process? Notice and hearing? Right to petition for redress of grievances? Administrative Procedure Act? I guess that rule of law BS doesn't matter once we've got the torches lit and the pitchforks honed.

Ok, Vikram Pandit is going to quit because he is only getting a couple million THIS year instead of tens of millions? Here's my response: 1) good riddance; 2) rats, he's not actually leaving

Obviously, you have overlooked the fact that these people are working at the taxpayer's pleasure. And their firms would not be extant without public money. No need for you to be a dick about it.

"most of these executives will quit and get higher paying jobs elsewhere"

Yes, because in this economy there are just SO many high paying jobs just waiting to be filled.

"Will the administration then order people back to work?"

They'd hire new people. Sounds like a great way to reduce the unemployment rate.

Going Galt
"No Jules, you're gonna be like those pieces of shit out there who beg for change. They walk around like a bunch of fuckin' zombies, they sleep in garbage bins, they eat what I throw away, and dogs piss on 'em. They got a word for 'em, they're called bums. And without a job, residence, or legal tender, that's what you're gonna be...a fuckin' bum!"
Vincent Vega
Pulp Fiction

I want to know why economists rail against cutting executives pay but are all for cutting workers pay. Won't the workers leave too?

Didn't take long for Alex's theory to be proven correct:


"Top employees leave financial firms ahead of pay cuts
Grass is greener where bonuses are sky-high

By Tomoeh Murakami Tse and Brady Dennis
Washington Post Staff Writer
Friday, October 23, 2009

NEW YORK -- Even before the Obama administration formally tightened executive compensation at bailed-out companies, the prospect of pay cuts had led some top employees to depart."

I want to know why economists rail against cutting executives pay but are all for cutting workers pay.

1. No economist supports the lowering of worker pay on principle. None. They only exist in your imagination.

2. There is no politicians and no political parties that advocate the government lowering pay for workers. None. They only exist in your imagination.

3. No economists are against lower CEO pay on principle. None. They only exist in your imagination.

4. In Marxist terms, the government consumes more worker surplus value than does capitalists. The government takes nearly half of what most people make through direct and indirect taxation, where as most corporations couldn't afford to increase pay more than a few percent because profit margins are thin. The only way to increase the pay of workers in any significant way is to tax them less.

I would like to see a study that correlates pay and performance of the company.

The world isn't that simplistic. You want some easy rule that a government commissar can use while making his five year plan for the economy. In reality, the economy is simply too complex. In some cases pay will correlate to performance, in some cases it won't correlate to performance, and in any case metrics for "performance" are highly subjective (is "performance" represented by share price? By profit margin? By absolute profits? By how many jobs the company creates? By "social good" created? By how little pollution is produces? And why should your criteria be the universal criteria that all people should be forced to follow?).

The government chiefly caused the economic damage, not the bankers. Bad government-mandated mortgage loans, cooked books of Fannie and Freddie. The creators of those mortgage-based derivatives were partly at fault, since they were buying insurance policies on things in which they had no insurable interest, but the government, usually ready to over-regulate, failed to oversee that, and Congress wouldn't let the Bush Administration enforce regulation over Fannie and Freddie.

While government has a basic responsibility to prevent fraud and abuse, it is a big mistake to assume that government officials are more moral or ethical than corporate officials. Especially this government.

What Obama, Geithner, Feinberg and company are doing is unconstitutional and disgraceful. The sad thing is that no one seems to be able to stop them, and the principal victims are probably not going to protest. Sad days.

I don't believe that this will fix anything. Sure these pay cuts will save these companies money, but this will do nothing for the actual executives. These companies were given the most assistance during the year, but most likely while they were getting assistance these top paid executives have been saving money. So I don't believe that this will hurt the executives that much and if it does they will probably quit and go elsewhere to get paid their high salaries. In the long run I think that these pay cuts will not break these executives forcing them to get another job or stop them from feeding their kids.

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