Last month we were entertained by a Financial Service Primer set in Winnie the Pooh’s Hundred Acre Wood. Since then, Christopher Robin has unveiled his big plan to reform the financial services markets. Please click below to read about financial reform through a different lens.
The Obama Administration took additional steps to rein-in executive compensation today by announcing the appointment of a "pay czar" at the White House and announcing proposed principles for regulating executive compensation where authority exists to do so. They also asked for legislation to advance the concept of giving shareholders a "say on pay." The suggested principles are not as prescriptive as some may have feared, but taken together, today's proposals and actions are generating some concerns about how the rules of the game are being changed.
Early in the day, Treasury Secretary Geithner unveiled the administration’s approach to regulating executive compensation practices at financial institutions and publicly-traded companies. In order to “encourage sound risk management” and to align pay practices with long-term corporate health, the administration laid out the following broad principles:
Occasionally, the FRW team ventures out to take the pulse of the country on key issues coming up. Based on several days talking to journalists, business leaders, and government officials in California, we bring to our readers words of caution: the fiscal meltdown in California holds no small dangers for the recovery.
When California voters on May 19th rejected the key elements of the budget deal which averted disaster earlier in the year, top officials in Sacramento were sent back to the drawing board for an approach that will stave off a budget gap of more than 15 percent. With observers of the legislature saying that tax cuts, program cuts, and layoffs are all non-starters, where lies the answer?
Continue Reading...Call it green shoots or mustard seeds or hope, but according to some of the nation's leading economic experts, the outlook for the American economy is improving. These experts are venturing the opinion that the economy has hit bottom and the recession is ending. Some of the evidence cited is the fall in unemployment claims from March to April; the first quarter increases in consumer spending and consumer prices; and the stabilization in sales of existing and new homes over the past couple of months. Even Federal Reserve Chairman Ben Bernanke sounded optimistic (for a Fed Chairman) about the recovery. During testimony before the Joint Economic Committee this morning, Bernanke said, “We continue to expect economic activity to bottom out, then to turn up later this year.” Although he qualified his statement as dependent on a restored and healthy financial system, that too could be interpreted as a positive sign since the Fed is supposed to go over stress test results with the affected banks today.
Bernanke did not comment on the test results, but media leaks suggest that ten of the 19 banks will need to find more capital. The results are not supposed to be publicly available until later this week, but markets rallied somewhat yesterday based on White House spokesman Robert Gibbs’ comments that the administration does not anticipate needing more financial bailout money from Congress and suggesting the banks will be able to raise private capital.
Since unemployment is a lagging indicator, most experts predict it will be a few months before people feel the effects of an economic upturn. If the economy is pronounced in recovery by the fall, it will be far enough into his presidency that President Obama will likely receive appreciable credit . The potential return to better times could add momentum to a major administration priority: health care reform. Despite the White House Chief of Staff’s strategy of capitalizing on a crisis, we suspect the White House will find it is much easier to score congressional victories when there is hope on the horizon rather than fear.
Who appointed the G7 (+1) to its perch? The finance ministers for the main protagonists in World War II (1939-1945) met in Rome over the weekend to discuss the world economic crisis. Does a meeting of this nature that excludes India and China truly have a hope of wrapping its collective mind around the problems and their possible solutions?
Is ideology standing in the way of the most elegant solution to the U.S. banking crisis? Give former President George W. Bush his due: when the dimensions of the banking crisis became apparent to him, he scrapped a "market guy" ideology and poured taxpayer money into the banks. Is the Obama Administration willing to take what for them would be a similar ideological leap? Is their unwillingness to do so behind the complex public-private partnership at the center of the Geithner proposal to deal with troubled assets? Is there a similar reason behind the relatively light-handed approach Geithner would take to pushing the banks to resume lending?
Continue Reading...Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.” But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.
The Treasury executive compensation reform guidelines fall into three categories covering:
On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.
Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.
Continue Reading...What will it take to jolt the U.S. economy back into shape? Congressional leaders have floated ideas for an economic stimulus package ranging from $500 to $700 billion. President-elect Obama is not espousing numbers yet but has assembled his economic team and charged it with developing recommendations for restoring economic growth and creating 2.5 million jobs. While serious rumors about his economic advisors started circulating last week, Obama officially presented the group at a noon press conference today:
In a further demonstration that the markets prefer certainty over uncertainty, the likely appointment of Federal Reserve Bank of New York President Timothy F. Geithner as the next Treasury Secretary appears to have calmed the market’s fears to some degree, since the Dow Jones Industrial Average was up 6.5 percent at today’s close. Geithner has worked closely with Treasury Secretary Hank Paulson to address the financial crisis, and insiders predict a very smooth transition from Paulson to Geithner.
The issue of Geithner’s role with Paulson on the more controversial decisions, such as saving Bear Stearns while leaving Lehman Brothers to fail, has been the only point of criticism among otherwise glowing reviews. Geithner has led the New York Fed for five years, and prior to that directed policy at the International Monetary Fund and was a senior fellow at the Council on Foreign Relations. During the Clinton Administration, Geithner served as Under Secretary of the Treasury for International Affairs. He served in various capacities at the Treasury Department from 1988 to 2001. While he represents change, Geithner brings a depth of Treasury experience that may be reassuring to many.
In other news, Congress left for the Thanksgiving holiday but first gave the Big Three automakers the homework assignment of "writing a plan for viability" by December 2nd. If the plans demonstrate that the domestic automakers would be a sensible, long-term investment for $25 billion worth of taxpayer loans, Congress will return to Washington on December 8th to pass auto bailout legislation. House Speaker Nancy Pelosi said Congress will also begin work on an economic stimulus proposal that will be ready to go at the start of the 111th Congress.
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