Feinberg Claws Back

In yet another stunning economic folly, the Obama Administration has chosen to “claw back” the salaries of the top 25 executives at seven firms that received TARP funds last fall. In addition, the Treasury Department’s Kenneth Feinberg announced he would force American Insurance Group to restructure and reduce the $198 million contractual compensation packages at its financial products division.

In contrast to previous years, an official said, executives in the financial products division will receive no other compensation, such as stocks or stock options.

And at all of the companies, any executive seeking more than $25,000 in special perks — such as country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission. The administration will also warn A.I.G. that it must fulfill a commitment it made to significantly reduce the $198 million in bonuses promised to employees in the financial products division.

There was a much easier answer to this whole question, and it didn’t involve billions of taxpayer dollars being spent on companies “too big to fail.” That option is called bankruptcy.

Bankruptcy restructuring would have allowed AIG and the firms given TARP funds to restructure their debts and their compensation packages, without spending billions in taxpayer funds. The shock would have hurt, and hurt badly, but the result of those bankruptcies would have been far fewer taxpayer dollars being spent and the companies in the worst shape being sold off, in pieces or in whole, to the highest bidders among better companies.

Such processes have been part of the American free enterprise system for many years, and allow businesses to risk great fortunes–or to fail–while providing a transition period for assets, workers and creditors. The bankruptcy system gives businesses an incentive to pay off at least their debts, rather than renege on them entirely. It also gives business owners an opportunity to find additional private funding sources instead of entering entirely into receivership.

That Feinberg believes the answer to the financial mess is to cancel, by government fiat, the contractual obligations shows how bad is his understanding of basic economics. There is no provision in the TARP or AIG Bailout legislation that directly gives him the authority to cancel compensation packages. The firms did not declare bankruptcy. Instead, the government has come in to say simply, “We think your compensation is unfair, and we are now deciding you can’t have it.” This at precisely the time when the firms need the best possible business acumen available.

The message to anyone in business is clear: If they wish to earn a competitive salary, they cannot work for a firm that has received a government bailout. At any time, that company could become subject to scrutiny by Mr. Feinberg and his staff. No legislative wording limits him to the “Top 25” executives, so this could be extended to any and all employees (that there is no legislative language which justifies the actions of the Treasury Department notwithstanding).

How long until Mr. Feinberg decides that any company which has done business with these firms has indirectly benefited from the bailouts and so can also be regulated by his office? How long, then, until Mr. Feinberg claims authority over all compensation in the Nation? He has already reached far beyond his lawful and Constitutional authority, so why not go further? Is there a time limit on the control Mr. Feinberg has over these firms? Since there was no legislative authority given to him to control the compensation packages, it seems unlikely there is a legal time limit on his actions. Perhaps these firms and their successors will be subject to such regulation until the end of time?

Without question, this will open up the bailouts to Contitutional scrutiny. Many of these executives and others affected by the Treasury Department’s decision had nothing whatsoever to do with the decisions made that led to these institution’s downfall. Many of these firms did not want a bailout in the first place and were forced to take the funds, now subject to government fiat. These strong-arm methods by the Administration are not earmarks of a free society, but are rather reminiscent of the militant nationalism of Italy in the 1920s and 30s, Germany and Spain of the 1930s, and Argentina in the 1950s. It is certain such tactics will be challenged in Federal court, costing the taxpayers millions, perhaps billions of dollars more.

If American enterprise is to endure, the actions of Kenneth Feinberg must be curtailed. Limiting the ability of business leaders to benefit from their creation or conservation of profits (or limiting the losses, as the case may be) is just as bad as protecting them from their mistakes. Protecting these firms from the mistakes of their leaders allows those leaders to continue to make poor decisions. Limiting the benefits of being a business leader means business decisions are made by lesser and lesser leaders, since the best and most qualified eventually move to firms where they can be compensated properly for their contribution.

Think of it this way: How much loyalty would you feel toward your employer if they cut your salary not for yours or the business’ performance, but because it was the politically correct thing to do?

I thought so.

It is a poor statement that those in charge of our nation’s Treasury are so blinded by politics or ignorance or ideology that they cannot see the obvious and painful economic implications of their actions. Unless something happens to stop the course on which we are set, these firms will undoubtedly fail again. When that happens, who can imagine what mindless malevolent machinations the mediocre miscreant misanthropists in our Nation’s capital will come up with to justify their continued existence?

Out of curiosity: Just who is reviewing Mr. Feinberg’s compensation package?

Cross-posted at The Minority Report and Seeking Liberty.