The Need for Punitive Measures
I see that the Bush administration is framing its strong stand in defense of unlimited compensation for the corrupt and inept CEOs who’ve trashed the world’s financial system as an opposition to “punitive measures” in a time of crisis.
On the contrary, it seems to me that punitive measures are essential. The normal punishment for failed business leadership is that your company goes bankrupt. But the crux of the current situation is that everyone agrees that it would be unwise to simply let these financial firms fail. The spillover damage to the rest of the economy would be too great. So one way or another, they need to be saved. But rescuing companies in these kind of situations creates a “moral hazard” problem. You want to prevent the firms from folding, without creating an incentive for future executives to engage in irresponsible behavior.
In the limiting case, you could just straight-up bail out the company, but then take all the executives and subject them to a brutal flogging. Thus, financially it’s as if the problems never arose. But thanks to the harsh punitive measures, there’s still an incentive for executives to avoid misbehaving in the future. Even better, though, is to find punitive methods that also accomplish something socially useful. Forced restructuring of mortgages to help people who stay in their homes would be an example. Or having the public take over equity so that we own more of the upside. Limitations on CEO pay also, I think, fit this model. But whatever the method may be, the point is that punitive measures are essential.
54 Responses to “The Need for Punitive Measures”
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September 22nd, 2008 at 3:24 pm
This is supposed to be a happy occasion! Let’s not bicker and argue over who killed who.
September 22nd, 2008 at 3:26 pm
“If a company is too big to fail, it is too big to exist,” Sen. Bernie Sanders (I-Vt.)
September 22nd, 2008 at 3:26 pm
We need the bonuses from the senior executives and the board members from the years 2000 – 2008 returned to the taxpayers.
September 22nd, 2008 at 3:27 pm
Nice, as part of the Washington Consensus when the IMF bailed out foreign countries they imposed stringent conditions on the countries. But, apparently, when we bail out Wall Street we have to let the companies we are bailing out give fat bonus checks? I don’t effing think so.
Tom Toles cartoon from the other day still sums it up best:
http://www.washingtonpost.com/wp-srv/opinions/cartoonsandvideos/toles_main.html?name=Toles&date=09182008&type=c
September 22nd, 2008 at 3:28 pm
An equity interest seems an essential price for the money the govt will pour into the financial sector.
Regarding a limit on exec compensation or some such as adequate to balance $700 billion is nuts. We give them $700 billion, and in return all they have to do is pay less to a few individuals? $700 billion is a lot of money. Much cheaper to just legislation comp limits, if that’s what you want.
September 22nd, 2008 at 3:30 pm
To bail out is to insure that this all will happen again. To allow companies to fail and to more tightly regulate the market will insure that it won’t.
September 22nd, 2008 at 3:32 pm
I’m in favour of punitive measures BUT I’m struggling to understand how we can enforce regulations on executive pay without having the government take controlling stakes in every company that gets bailed out and using board majorities to set pay… and even if you could enforce it, who would take the positions? In my experience, bureaucrats who run government agencies at $300K/year salaries are as venal or worse than overpaid executives. Do we really need those people in charge of banks? And foreign banks and other domestic corporations who don’t need the bailout will be still be paying executives exorbitant salaries…
This is why I don’t understand populism. McCain goes on about this stuff (even though he benefits from his father-in-law’s riches) and the Democrats always talk about this… but I don’t see how to solve this problem except by raising taxes on the wealthy as Obama proposes. I can’t see how mandated salary caps will work.
September 22nd, 2008 at 3:33 pm
Funny how we can advocate for punitive measures relating to financial misdeeds yet shrink from suggesting the same approach to war’s atrocoties. Is your philosophy applicable to various Bush administration officials? Would hanging a few of them for murder, mayhem and their assault on innocent humanity dissuade future actors pondering similar actions? Judge Jackson believed so. Why don’t we now?
September 22nd, 2008 at 3:33 pm
I would also be fine with “compromising” by dropping the executive pay provisions and keeping things like the mortgage restructuring and contingent equity provisions. I just don’t see the public having a comparable stake in executive pay, and indeed the people “hurt” by arguably excessive executive pay are usually the shareholders much more than anyone else.
September 22nd, 2008 at 3:34 pm
The Dodd Proposal language on curbing exec. pay is unacceptably weak.
http://www.politico.com/static/PPM41_ayo08b28.html
If I’m reading Section 17 (page 30) on curbing excessive Executive Pay correctly, it’s not looking very strong.
It appears to leave all limitations at the discretion of the Sec. of Treasury. There are no caps on pay. The Sec of Treasury would have to actively enforce limits on executive pay on pretty arbitrary ad hoc basis for it to be effective. And we know this section will NEVER be used by any Sec. of Treasury, Republican or Democrat. They do not punish their own. Totally unacceptable.
I know this is small potatoes money-wise, but it’s a HUGE issue on principle. These outrageous pay packages must END.
If I’m reading it incorrectly, let me know.
September 22nd, 2008 at 3:39 pm
henrythefifth: Would a cap on executive pay with teeth even be constitutional? Depending on how the bailout is structured, if the government isn’t actually federalizing these companies, then it’s hard to see how that would be the case. I could see how the Fed or Treasury might make an executive pay cap part of the contract they make with the bailed-out entity, and then the congress might mandate the level, perhaps?
In general, has someone blogged / written an article about how enforceable executive pay restrictions might work?
September 22nd, 2008 at 3:41 pm
In Japan, weren’t failed business leaders required to bow deeply and apologize?
I like that. I mean, I really that.
September 22nd, 2008 at 3:41 pm
And what about a “consulting” loophole? As in, I’m an executive, I make $250K a year, but on the back-end I get a consulting contract that will let me pull in the bonus.
Or maybe we go to a signing bonus model…
In fact, what pops into my head is the various ways in which football teams have learned to manage their salary caps. (So maybe a “luxury tax” model makes more sense – and have the added benefit of raising revenue.)
September 22nd, 2008 at 3:50 pm
Populist crap intended to divert our attention from the horrendous sound of America’s middle class being sucked down the toilet. I don’t care how much a company and its shareholders pay a CEO. I do care that our government feels its necessary to give them free money. An equity stake is the least the Congress can do to compensate for this bailout. I’m all for a massive increase on income taxes for those making more than $1 million, but I guess that’s a non-starter.
September 22nd, 2008 at 3:50 pm
Punitive measures might be a good thing. And regulating executive compensation will be good for the economy apart from whatever punitive value that regulation might have.
But this is not something we have to do this week. Bailing out a dangerously tottering financial market is something we need to do now. Matt, please use your public position to help people stay focused.
The assignment of blame and punishment for precipitating a crisis is something you do after you have ended the crisis.
September 22nd, 2008 at 3:51 pm
What about new CEO’s who come in? Anyway, it looks like the market is unhappy with the Democrats proposals down 340 on the Dow…I wonder if we how many more negative 300 point days on the Dow it will take for the Dems to cave in.
Also, a company like Washington Mutual only has $5 billion of shareholder equity. If they need to sell $30 billion of loans to the government how is the government going to get $30 billion of equity in return.
September 22nd, 2008 at 3:52 pm
Re flogging: In modern days this whip’s main application shifted from the grim punitive context to voluntary use for sexual pleasures.
What exactly are you suggesting here Matt?
September 22nd, 2008 at 3:54 pm
As I understand it, the Administration is arguing that limiting executive pay would provide a disincentive to the companies to participate in the bailout?
Are they suggesting that executives would actually act against the their fiduciary responsibilities?
September 22nd, 2008 at 3:56 pm
“Dans ce pay-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres.” — Candide
September 22nd, 2008 at 3:59 pm
I like the Flogging idea.
Especially if MSNBC televises it.
With Rachel Maddow administering the flogging.
In a skimpy Dominatrix black leather outfit.
September 22nd, 2008 at 4:01 pm
The assignment of blame and punishment for precipitating a crisis is something you do after you have ended the crisis.
In my experience, the best time to do the negotiating is when you have a lever to negotiate with. If those responsible for the present situation aren’t held to account now, I doubt they’ll be held to account when their financial situation is improved.
September 22nd, 2008 at 4:01 pm
I know. I know. I also thought of Megan Fox for the job.
But Rachel’s mean streak carried the argument.
September 22nd, 2008 at 4:02 pm
You know how John McCain sounds when he goes on about earmarks? That’s how people sound when they go on about CEO pay.
Dodd’s plan requires banks to give the government stock warrants equal in exchange for pawning crap off on the public and sets up an independent oversight board, and as such is fine. The question to ask now is whether it will prevent apocalypse or just delay it.
September 22nd, 2008 at 4:02 pm
Having trouble making mortgage payments? House in foreclosure?
No? Too fucking bad, because you’re not going to get jack shit out this bailout except the bill.
Barnie Frank, Fannie and Freddie’s sock puppet, is promising help for “homeowners” as a condition for the Great Wall Street Welfare Project.
Just like I thought – the Democratic voter base will allow itself to be bought off with pennies, while the banker scum will get billions.
September 22nd, 2008 at 4:02 pm
Distrust those in whom the desire to punish is strong.
September 22nd, 2008 at 4:04 pm
The issue I see is that the punitive measures need to be retroactive rather than prospective. Imposing compensation caps on the incoming management of these firms doesn’t make sense as a way of punishing the people who screwed things up. The people who were in charge shouldn’t have their jobs any more, they should be barred from financial industry work for a long, long time, and we need to find a way to take away their golden parachutes and the millions they earned over the past decade.
Of course, we also need to find a way to make sure incoming management doesn’t have the same incentive to take crazy risks, but that’s a different question.
September 22nd, 2008 at 4:18 pm
To paraphrase John McKay:
What do you think of the bailout plan’s execution?
I’m in favor of it.
September 22nd, 2008 at 4:25 pm
Why do we need so-called “punitive measures?” Nobody’s proposing repealing the laws against white collar crime, are they? If some executive committed a crime, he/she should be prosecuted. Plus, doesn’t our constitution prohibit prosecuting people who committed actions that weren’t crimes at the time?
This talk about “punitive” measures — and to some extent the talk about bank executive compensation — strike me as non-substantive window dressing designed by Democrats to: A) Obfuscate their own pretty weighty role in the crisis (principally their support of the failed Fannie/Freddie model); and, B) Make their support of the Paulson plan look acceptable, when it reality the plan is the disastrous cluster-fuck-in-the-making described by people like Krugman and Malaby.
September 22nd, 2008 at 4:28 pm
MY, flogging probably now comes under the heading of cruel and unusual (if not kinky) punishment. Fraud, however, is a crime. This would be a different country if instead of sending folks to prison for small amounts of marijuana, we sent folks to jail (and for significant periods of time) for fraud, particulalry when that fraud precipitates the sort of financial crisis we’re seeing now.
September 22nd, 2008 at 4:31 pm
Some of you are nuts. We are intervening to stop firms from failing. It isn’t an act of charity, we are doing it to save the American economy. Now, part of the problem is that some overleveraged firms need to be recapitalized–which we are doing by overpaying for their garbage products–and some of you don’t think we should say, hey, firms taking part in the deal can’t give their executives who got us in this mess millions and millions of dollars? Uh, okay. Assuming it is legal–they would be voluntarily selling their shitty assets to us–we should say they can’t pay outrageous sums in the near-term (I dont’ think we need to make this permanent or anything). By giving up their ridiculous bonuses these executives will help, in a small way, to recapitalize the firms they sunk.
September 22nd, 2008 at 4:35 pm
Having trouble making mortgage payments? House in foreclosure? No? Too fucking bad, because you’re not going to get jack shit out this bailout except the bill.
Not true. To the extent that $1.3 trillion worth of subsidies eventually helps stabilize the credit market, the plan in theory should eventually help stem the decline in property values, and prop up the real estate market. Which is exactly what you don’t want if, like many Democrats, you’re a member of the class of people that on the whole is poorer than homeowners. Namely renters. More class warfare from both the Republican and Democratic branches of the GOP. What else is new? I confidently predict by next year we’ll eventually see government RTC-style bureaucrats directing demolition efforts aimed at tearing down “unwanted” houses to help reduce supply. Wouldn’t want anything so subversive as allowing market forces to actually help working people, would we?
September 22nd, 2008 at 4:59 pm
“…help stem the decline in property values, and prop up the real estate market…”
Nope. House prices are still far too high relative to median incomes. They will keep going down until they’re back in lines. By the way, whatever happened to all the “affordable housing” advocates that used to run around Washington?
September 22nd, 2008 at 4:59 pm
It is utterly inconceivable that any punitive restrictions could be put in place after bail out legislation is signed.
Remember, bills Democrats want to pass require 60 Senators for passage, not 51 like the Republicans need. If you have no leverage, you have no bill.
September 22nd, 2008 at 5:05 pm
I remember the good old days when trickle-down economics meant cutting taxes on the wealthy so they could invest their money in ways that might eventually help some poor schmuk somewhere down the line. Now, evidently, it requires the government to hand out money to the wealthy so that they can lend it. The more they give away, the lower an interest rate the rich can charge!
I feel all warm and trickled on!
September 22nd, 2008 at 5:07 pm
So let me see if I have this straight. If there are punitive measures some CEO might choose to have his company go under rather than take government money and hamper his paycheck for a year? Good riddance.
http://thesebastards.blogspot.com/
September 22nd, 2008 at 5:20 pm
I’m all for cruel and unusual punishments. Funny too if possible.
Waterboarding the CEOs would just be too much, wouldn’t it? Far too cruel, not unusual enough.
What about having them tarred and feathered? Maybe replacing the feathers with one-dollar notes…
What would THAT look like on HDTV?
September 22nd, 2008 at 5:42 pm
I feel all warm and trickled on!
Maybe once China and other Sovereign Wealth Funds finally buy a controlling stake in US investments, they’ll institute some “tough love” punishments for underperforming CEOs.
September 22nd, 2008 at 5:43 pm
Maybe once China and other Sovereign Wealth Funds finally buy a controlling stake in US investments, they’ll institute some “tough love” punishments for underperforming CEOs.
If they do, I for one will welcome our new anonymous overlords.
September 22nd, 2008 at 6:49 pm
Remember, bills Democrats want to pass require 60 Senators for passage, not 51 like the Republicans need.
Remember, there are several GOP Senators who either have nothing to lose, since they’re retiring, or everything, since they’re in races where the Dem is either ahead in polling or not far behind.
September 22nd, 2008 at 10:40 pm
I was just wonering if the mortgage backed securities ‘we’ are buying will be able to be restructured in a way that they can be resold as ‘clean’in a reasonable timeframe.
If so, why can the government do it, but the banks haven’t been able to do this over the course of the last year or so. I remember fairly early on some banks took pretty large write-offs to clear this debt up. Apparently they didn’t do a very good job.
Also, does anyone have a good reason that I shouldn’t be majorly upset that only the Fed knew this was coming? Seems to me that the banking chairs, lobiests, think tanks, and many, many college profs should have been talking about this for months ahead of time.
something has to be systematically wrong if a problem this big can sneek up and kick us in the ass like it is.
September 23rd, 2008 at 2:16 am
I’m all for punitive measures and intelligent regulation that forces these companies to make responsible choices when it comes to the economy at large. The “moral hazard” problem is, in the long term, the most serious one in front of our country right now, and it’s important that while we, you know, save the economy, we set things up so that this doesn’t happen again.
With all that said, limiting CEO pay seems like a bad idea. If you price cap how much CEOs get, you’ll inevitably get bad CEOs.
Yeah, yeah, the “These are good CEOs?” argument. But the truth of the matter is that being a CEO is a very, very tough job, and the guys doing the job likely were very good at it – they just didn’t have the appropriate disincentives in place against risky investments (all back to the “moral hazard” issue).
September 23rd, 2008 at 3:07 am
I seem to remember that up until surprisingly recently the Malaysian securities regulator could order people flogged (the power was, IIRC, dropped because it was felt to be inconsistent with the regulator’s power to deal out summary regulatory penalties without trial), so we’re not wholly in the realms of conjecture here.
September 23rd, 2008 at 7:29 am
The government should do what a private equity group would do: buy up failed (or failing) companies, fire the board & the C-level employees then rip the company up into little pieces and sell it off for profit. The $700 billion should not get the taxpayers a bunch of bad debt and leave the companies intact, it should get the taxpayers a huge payday and destroy the companies that have failed.
This would both “protect” the taxpayers and prevent this from ever happening again.
September 23rd, 2008 at 8:45 am
There is very specific language in the constitution against punishing someone for a crime that wasn’t illegal at the time it was committed. If they’re guilty of something, prosecute them. If not, you cannot invent a crime now to punish them for. The only real ‘punishment’ that you can legally give them, without violating the constitution, in this case, is to let their companies fail on their own lack of merit. Since we all have a vested interest in not letting that happen, it’ll have to be a forward looking agenda we have. We need to hold people in positions of power to higher standards. Perhaps require publicly traded companies to report all income and investments. ALL of it. That would do very well to all of us in the future.
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