The Best Idea Yet

by: Steve M

Tue Feb 10, 2009 at 19:03:20 PM EST

(Cross-posted at TalkLeft, MyDD and C4O Democrats)

The word on the street is that the caps on executive compensation may end up getting removed from the final version of the economic stimulus package.  Rather than abandon the idea altogether, James Kwak has a brilliant suggestion (h/t the Left Coaster):

Why not say that all bank compensation above a baseline amount - say, $150,000 in annual salary - has to be paid in toxic assets off the bank's balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. A federal regulator can decide which assets to pay compensation in; if they were all fairly valued, then it wouldn't matter which ones the regulator chose. That would get the assets off the bank's balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth. Of course, the average employee does not get to set the balance sheet value of the assets, and may not have been involved in creating or buying those particular assets. But think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations. (Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.)
Steve M :: The Best Idea Yet
A brief digression.  Years ago, I watched superstar attorney David Boies argue for federal court approval of a class-action settlement he had negotiated (for the curious, it was the Sotheby's/Christie's antitrust litigation).  Normally, courts disfavor so-called "coupon settlements" because a coupon, as opposed to cash, tends to be useless to the average class member.  Boies, however, believed that in this particular case, the coupons would have a significant cash value (in other words, there would be a secondary market for them) and thus the coupon settlement was in the best interests of class members.

How did Boies win the argument?  Much like the idea I've quoted above, he told the judge that instead of taking his attorney's fee in cash, his law firm would accept COUPONS as part of the fee - in the same proportion that class members would be asked to accept coupons.  So he was actually staking his own livelihood, not merely that of the class members, on the proposition that the coupons had value.

I cite this real-life example to illustrate that this is not just some lunatic idea off the Internet.  In fact, it really does force senior management to stand behind the valuation they attach to the bank's assets, in a very real way.  Maybe this will force a re-valuation of some of the assets, maybe not, who knows.  But at the end of the day, this solution gets a lot of toxic assets off the books, and the marketplace will have more respect for the valuation of the assets that remain on the books - knowing that senior management is staking their own personal compensation on the proposition that the valuation is accurate.

I can say with no hesitation that this is a far better idea than anything I heard today from the folks who are actually running the Treasury.

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The Best Idea Yet | 22 comments
Tip jar (2.00 / 13)
Hey, my first diary at the Moose!

/wiggles antlers

"Economics is not a morality play." -Paul Krugman

Nice. (2.00 / 9)
I like it.  The diary and the idea.

Earth is the best vacation place for advanced clowns. --Gary Busey

[ Parent ]
It is appealing, isn' it? (2.00 / 8)

John Askren - "Never get into a pissing match with a skunk."

[ Parent ]
I think I'll just echo fogiv. (2.00 / 6)
Nice. I like it. the diary and the idea.

This is not a recession. It's a robbery.

[ Parent ]
Good to see ya, bro! ;) (2.00 / 3)
Does the 'M' stand for Moose?



[ Parent ]
Did it work out? (2.00 / 6)
I'm curious.  

Good question (2.00 / 5)
I guess I'd have to drop by David Boies' office and see if he has a bunch of artwork from Sotheby's and Christie's hanging on the wall.

"Economics is not a morality play." -Paul Krugman

[ Parent ]
Forgive me ahead of time, I have a cold and am barely functioning. (2.00 / 5)
Isn't the proposed cap for CEO's for companies that receive bail-out funds?  Didn't Obama issue an EO that would limit the same?  Is either of these correct?  Help, I'm confused.

"When Fascism comes to America, it will come wrapped in teh stupid and waving a gun" ~ Esteev on Wonkette

Let's pay everybody involved, politicians, Congressmen, (2.00 / 4)
Senators, Wall Street fatcats, investors, Bankers, lobbyists, home owners who wanted to buy homes clearly out of their reach...let's give all of them coupons...

I'm kind of tired of this (2.00 / 3)
"let's blame the home buyers" attitude. If the homes were clearly out of their reach then the banks shouldn't have made the loans. What happened is that mortgage companies convinced people that they could afford those homes. Banks then approved those people for mortgages they wouldn't be able to afford because the banks and everyone else involved thought the homes would continue to grow in value. It still comes back to the banks.

This is not a recession. It's a robbery.

[ Parent ]
sorry, I disagree. There are home buyers who got into the market (2.00 / 3)
buying up properties, thinking they can quickly flip it in a booming market. Lot of them are now stuck with those properties whose real valuations are reduced today but they are stuck making higher payments. There are folks who went from smaller homes to much bigger houses with much higher costs. It's a well known thumbs rule that house purchase price should not be more than 3-4 times one's household income. Sure there are lot of good folks who are caught in this housing nightmare who are not responsible for the situation they are in. Some have lost jobs and now have difficulty to make ends meet. But to say that all home owners are innocent and banks are only ones responsible is unfortunately not the complete picture. Sure banks are responsible, so are some of these investors who took unnecessarily high risks.

We all get hundreds of credit card applications, bank loan letters on the mail all the time. It does not mean we choose to have all of them nor do we max out on our credit cards unless we are in a pique...

[ Parent ]
Some buyers fall into the category of "flippers" (2.00 / 4)
but that's only a small percentage of the buyers. Many of them were first time buyers with no experience with mortgages or real estate. They only knew what they were told. The mortgage companies are a major culprit in all of this. They pushed mortgages on people even though they knew those people would eventually lose the home. They even laughed about it amongst themselves.

Banks are the other major culprit. Banks have been financing mortages for centuries. They have all sorts of guidelines and rules for authorizing a mortgage. They threw those guidelines and rules out the window because they thought they could bundle bad mortgages with good ones and never have to pay the price for giving bad loans.

All of those involved, including the home buyers, thought home prices would keep rising forever. They all got burned. However, the ones who were really reckless, because they knew better, were the banks. Now they are the ones getting bailed out while the home buyers are left to twist in the wind.

This is not a recession. It's a robbery.

[ Parent ]
Can't agree. (2.00 / 5)
There's plenty of guilt to go around, but excluding the consumer won't hang.  Particularly with ARM mortgages with ballooning payments.  There was an aspect of gambling in much of that, and caveat emptor in that case...

John Askren - "Never get into a pissing match with a skunk."

[ Parent ]
Yes, let the buyer beware. (2.00 / 3)
The banks that bought those mortgages were the ultimate buyers.

This is not a recession. It's a robbery.

[ Parent ]
Yep, that counts too. (2.00 / 3)
If they don't get their money, they shoulda thought before lending it.

John Askren - "Never get into a pissing match with a skunk."

[ Parent ]
Very happy to see this diary here. (2.00 / 8)
Sorry for being less than friendly before.

Spacemanspiff is fail sometimes.


Just because they are posting on a progressive site doesn't make them progressives. - John Allen

<3 (2.00 / 8)

"Economics is not a morality play." -Paul Krugman

[ Parent ]
Great diary steve (2.00 / 3)
I didn't know your writing before either. Now I do, I realised what we've been missing. As Mums always say: Write. More. Often.  

The p***artist formerly known as 'Brit'

[ Parent ]
Aw... (2.00 / 7)
Spaceman adorable when humble.

I am years behind and decades ahead. ~ Somebody else, I am certain

Heh. (2.00 / 5)
"I've got to own up to my mistake," Obama said in an interview with NBC News.

Just because they are posting on a progressive site doesn't make them progressives. - John Allen

[ Parent ]
That was indeed adoramous, wasn't it? (2.00 / 5)
Oooh, or maybe adoramoose. ; )

Come to me in my dreams, and then
By day I shall be well again!
For so the night will more than pay
The hopeless longing of the day.

[ Parent ]
Really an interesting idea actually. (2.00 / 4)
I think I rather like it.

Great to see you diarying here, Steve!

Come to me in my dreams, and then
By day I shall be well again!
For so the night will more than pay
The hopeless longing of the day.

The Best Idea Yet | 22 comments

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