Taking about 8,400 words to arrive at a puzzled shrug, Steve Brill conducts patient readers of this week's New York Times Sunday magazine through the elaborate reckonings of executive pay that have convulsed the seven firms benefiting from the federal Troubled Asset Relief Program. Brill, the former publisher of American Lawyer and able chronicler of the Washington bureaucracy's response to Sept. 11, homes in on the agons of Kenneth Feinberg, the former 9/11 compensation master now tasked by the Treasury Department with the thankless work of serving as TARP's "compensation czar."
But as Brill chronicles Feinberg's struggles, it soon becomes clear that as putative czars go, this one is quite chary of using much of his awesome power; he seems far less a sweeping, Nurse Ratched-style super-ego to the executive class than its chiding elder brother. Indeed, Brill notes in passing, Feinberg's conciliatory mien was forged on the stickball fields of his childhood; his younger brother David, partner in Feinberg's law firm, recalls that a 9-year-old Kenneth got his neighborhood pals to grant him the power to apportion talent.
That suggests the Feinberg kids enjoyed a strangely Socratic kind of childhood, but it's not at all evident that this sort of serene difference-trimming is what a wheezing, corrupt and terminally smug Wall Street needs. As Brill writes, in taking on the executive compensation issue, Feinberg has been tilting against an arena of corporate enterprise where "a culture of entitlement has apparently become the norm"-so that in pursuing the chimera of a fair wage in a series of bloated, perk-addled executive suites, our compensation czar has touched off "a kind of proxy war between Wall Street and Main Street."
If only. "Main Street" only appears in Feinberg's labors-as in much of our reining political discourse-as a lazily executed rhetorical feint, in much the same way opinion on "the Palestinian Street" was invoked during past chapters of the intifada. In negotiating with the TARP beneficiary firms, Feinberg recalls, "What I tried to make them understand, was that if I didn't do something, the public would revolt, and Barney [Frank] would surely do something more drastic that would endanger the whole system." That, in turn, empowered Feinberg to assure his charges that he was not their disciplinarian so much as their cautious enabler: "I told them it wasn't Citi or Bank of America or the others against me, it was Citi and me or B. of A. and me, against them"-â€˜them' being the public."
Leave aside for the moment that Barney Frank, who chairs the House Financial Services Committee, is currently presiding over a massive financial industry boondoggle being passed off, laughably, as "derivatives reform" and so is a rather unlikely wielder of pitchforks at the castle gate. Leave aside as well that setting oneself up against the public's putative views is a novel philosophy of public service.
Consider instead what this coy, triangulating approach has yielded-a provisional cap for many TARP companies of $500,000 cash compensation, together with a wonderland of gaping loopholes. There's the multiyear pay instrument called "salarized stock," which like earlier deferred stock plans, largely permits senior management to sidestep seeming crackdowns on pay such as Chris Dodd's provision in the stimulus law capping stock compensation at 50 percent of executive salaries at federally bailed out firms. (In the always egregious case of AIG-whose common stock was deemed all but officially worthless in house after the crash-Brill reports that this dodge worked out into a still more recondite formula: "a form of â€˜phantom' salarized stock that would reflect the value of only four AIG operating units that made money and had not been part of the company's downfall"-a system roughly akin to a foreclosed homeowner being permitted to not only retain an underwater house but to purchase another one with a no-money down ARM because, well, the kitchen in the first building was really nice.)
After all, as one AIG executive whines in reference to the now-notorious TARP-financed retention agreements permitting himself and his peers to keep 75% of his artificially inflated 2007 bonus package: "Why should I simply walk away from a contract? I earned that money, and I had nothing to do with all of the bad things that happened at AIG."
"The people who make these companies go work really hard," chimes in another anonymous Stakhanovite executive at the firm, "They think: I'm making lots of money to support my family, but I'm not with my family. I can't go to the soccer games or the dance recitals. Stop paying them well, and they'll leave."
Of course, a truly creative compensation czar could do worse than to grant these epically entitled souls-who, recall, only continue toiling at this inept, socially harmful institution thanks to $80 billion in public money-their evident wish, and tell them to see about providing for their families as a public-school soccer coach, or a 34-hour-a-week retail clerk in a ballet togs store. (Though a special set of arrangements would have to be worked out for those Wall Street titans who managed their families about as effectively as they performed in the mortgage sector: "A lot of our folks have second and third homes and alimony payments and other obligations that require substantial current cash," one nameless banker soliloquizes to Brill. )
But Feinberg kept stoutly on his middling course, allowing his TARP charges to tender outlandish demands for compensation at the top-even while not one of the firms proposed a pay package that evaluated their executives beneath the 50th percentile of their alleged executive peer groups. (Nor did the TARP companies follow directions in the slightest for their submissions.) He then was able to issue his tenuous guidelines as tough greed-smiting measures in official press releases.
The announcements "made sure that each decision first recounted in detail what the company had initially requested and then outlined all the ways he was ruling against them," Brill writes. "There was no hint of the multiple discussions that took place after the proposals were filed-after which most companies amended their demands and ultimately, if grudgingly, came to terms with the decisions Feinberg was going to tender." Still less was made of the Feinberg's unfortunate choice of the previous year's salary figures as the baseline for instituting his diminished pay scale: "Of course, 2008 was the year the firms had all gorged on bonuses and perks as though there had been no crash, so the bar for prudence was hardly high," Brill notes.
Still, Brill concludes that the Feinberg package was about the best one could hope for-and indeed, ends his epic review by wishing out loud that the corporate boards that govern big institutional investors could adopt some version of the plan. That might be a worthy start to more searching discussion of compensation packages, but Brill's recommendation overlooks the main reason that Feinberg was able to hold any TARP recipient's attention in the first place: The government had direct financial leverage-ie, real power-over the firms.
Institutional investors would have to organize their ranks in a far more concerted fashion than they ever have before-and resist the temptation to look the other way the moment that their portfolios recover much of the market ground they've lost, as is indeed presently the case. No remotely comparable force would incentivize them in the direction of greater disclosure and lower paydays for the many executives-cum-cronies who serve at the pleasure of most corporate boards-certainly not "the power of embarrassment" that Barney Frank gestures feebly at as a countervailing influence.
What could have countered Wall Street's "culture of entitlement" was a culture of, well, bank nationalization-the kind of federal intervention that permitted FDR to stabilize the nation's Depression-trashed banking system under the Reconstruction Finance Corporation, or that allowed Britain to consolidate its financial sector in the wake of the 2008 crash. Or failing outright nationalization, federal regulators could have voted their stock in TARP financed institutions, as any other shareholder does, and spared Feinberg his shadow-boxing confabs with our nation's profoundly unembarrassable executive class.
There is, as it happens, another, potentially broad-ranging experiment in financial democracy now unfolding in Iceland, which as you probably recall, was routinely trotted out as a news-of-the-weird footnote to the 08 calamity when its flailing banking system forced the country in bankruptcy. At the end of the year, the Icelandic parliament-one of the world's oldest legislatures-narrowly approved a plan originally floated in June for the nation's taxpayers to guarantee loan repayments to British and Dutch creditors, thereby clearing the way for an infusion of $4.6 billion in IMF funds set aside for a Nordic bailout.
However, Icelanders organized a mass petition drive opposing the plan, since it amounted to a public bailout of the private bank at the center of the meltdown, the online concern known by the now bitterly-ironic name of IceSave. More than a quarter of the nation's 320,000 have signed the document-enough to cause Prime Minister Olafur R. Grimsson to table the measure, for fear of his government's failure.
If he winds up vetoing the plan, Parliament will either drop it or put it to a public initiative vote-not exactly a recipe for success, since 70% of Icelandic citizens oppose it in opinion surveys. None of this is necessarily to endorse an equivalent initiative drive on our own giddy free-market shores (though it's hard to see how a public vote would have yielded a less sound rescue scheme than the seven-page draft for the TARP plan). It is, however, a useful reminder of how an engaged citizenry can insist on its own stake in high-profile financial decisions, without being caricatured as the shadowy, excitable and dangerously populist inhabitants of a mythical Main Street.
Chris Lehmann is definitely going to get a job in 2010.